american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 56 | p a g e the relationship between economic development and democratization dr. mei-ling chang department of economics, chinese culture university. abstract: the study of democratization is a central topic in comparative politics, particularly regarding the likelihood of rich dictatorships transitioning to democracies compared to poor dictatorships. this debate revolves around two main approaches: the "modernization hypothesis," which suggests that economic development drives democratization, and the "critical junctures hypothesis," which posits that a variety of historical factors, rather than income alone, determine political trajectories. this paper delves into these contrasting perspectives to analyze the complex relationship between wealth and democracy in different nations. keywords: democratization, modernization hypothesis,critical junctures hypothesis, dictatorship economic development i. introduction the study of democratization lies at the heart of contemporary comparative politics. one of the most heated debates focuses on if rich dictatorships are more likely than poor dictatorships to collapse and be replaced by democracies. as indicated by acemoglu et al. (2008), two distinct approaches have been applied to this problem in empirical social science. the first approach is based on the “modernization hypothesis” proposed by lipset (1959). in his view, economic development and related activities, such as education, industrialization, and urbanization, stimulate democracy. if a dictatorship becomes as rich as the economically advanced nations, then it is highly probable that it will transition to a democracy. at this point, democracy is itself endogenous, since it results from development under authoritarianism. the second approach, which is referred to as the “critical junctures hypothesis” by acemoglu et al. (2005, 2007, and 2008), and exemplified by moore (1966), considers that a dictatorship may tumble for many different reasons, because development, with all its modernizing consequences, plays no privileged role. even though income and democracy are positively correlated, there is no evidence to suggest that income has a significant causal effect on democratization. instead, it is the combination of many omitted, most probably historical, factors that shapes the divergent political and economic development paths of various countries, leading to the positive association between income and democracy. since there are only two types of regimes democracy and autocracy one emerges when the other one dies. the question would be essentially the same regardless of whether democracy emerges because of economic development or autocracy dies as a country becomes more developed. thus, this article will mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 57 | p a g e couch the discussion in terms of the breakdown of autocracy. in particular, based on the duration of a country’s autocratic episode(s), it aims to justify which hypothesis is a more likely explanation of the relationship between autocratic breakdown and income. based on the preliminary investigation, the evidence appears to show that the probability of any given dictatorship becoming democratic almost does not change when its income grows. however, if income does not cause democracy, then what does? the evidence indicates that the failure of autocracy is mostly due to the accumulated negative effects of rotten dictatorship over time. besides, this kind of effect is exogenous to economic development. this result provides some supports to the argument that the emergence of democracy is exogenous to income. the remainder of this paper proceeds as follows. section ii discusses the relevant literature and presents the propositions to be tested. section iii describes the data. sections iv presents the relationship between democratization and income. finally, section v concludes the article. ii. democratization and economic development a. modernization hypothesis. this line of argument proposes that better economic performance drives institutional change. the seminal study is seymour martin lipset’s (1959) modernization hypothesis. in his view, economic development and increasing prosperity stimulate democracy. not only development but also variables closely associated with it, such as the levels of educational attainment and urbanization, can facilitate the transition to democracy. this argument emphasizes that once a poor dictatorship becomes as rich as the economically advanced nations, it is highly probable that it will transit to democracy. thus, poor authoritarian countries will become democratic when they reach a certain level of income threshold. basically, this hypothesis emphasizes that there is a causal effect of income on democratization. democracy is itself endogenous, since it results from development under authoritarianism. examples of these studies include londregan and poole (1996), barro (1999), boix and stokes (2003), and epstein et al. (2006). the fact underlying this hypothesis is that, as autocratic countries develop, the social structure becomes complex, production processes begin to require the active cooperation of employees, and individuals turn out to be more assertive. new groups, such as labor unions and the middle class, correspondingly emerge and become crucial in determining the choice of political regime. simultaneously, education also becomes more widespread, technological change endows the society with more autonomy and information, and finally civil society materializes. at this point, the old political system can no longer be effectively controlled by a dictatorship. various groups rise against the dictatorial regime, and this inevitably marks the end of the dictatorship. the modernization hypothesis thus suggests that democracies are more likely to emerge as countries develop economically. b. critical junctures hypothesis. the second approach, which is referred to as the “critical junctures hypothesis” by acemoglu et al. (2005, 2007, and 2008), is proposed by moore (1966) and regards the breakdown of autocracy as being caused by many different factors, but that economic development, with all its modernizing consequences, plays no privileged role. for instance, some countries democratized because of wars (weber, 1950; therborn, 1977), some because of the organization of agriculture and the intensities of feudal legacies (moore, 1966), some because of the death of a founding dictator (londregan and poole, 1996; przeworski and limongi, 1997), some because of foreign pressures (przeworski and limongi, 1997), and some former colonial countries because of mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 58 | p a g e settler mortality and latitude (acemoglu et al., 2001). at this point, the dictatorships are equally likely to die and democracies to emerge at any level of development. the democratic transition or dictatorial breakdown is exogenous to economic development rather than endogenous. however, on the other hand, it is a stylized fact that democracy is highly correlated with economic development. how, then, can this hypothesis explain the fact that there are more democracies among wealthy countries than among poor ones? an interesting rationalization is provided by przeworski et al. (2000) (hereafter referred to as pacl), who claim that the development or an increase in income is not a causal factor in the process of democratization. by contrast, the positive association between income and democracy results from the reduced likelihood of democracy sliding back into autocracy once a country has “randomly” become democratic. they take lipset at his own word “the more wellto-do a nation, the greater the chances it will sustain democracy.” even if the transition to democracy (autocratic breakdown) is exogenous and independent of the level of income, the probability that such a democratic regime will survive is greater if it has been established in a rich country. one will thus observe the fact that democracies appear randomly with regard to levels of income, but they die in the poorer countries and survive in the wealthier ones. “history gradually accumulates wealthy democracies, since every time a dictatorship happens to die in an affluent country, democracy is there to stay. this is therefore no longer a modernization theory, since the emergence of democracy is not brought about by development. rather, democracy appears exogenously as a deus ex machina. it survives if a country is modern, but it is not a product of modernization (pacl 1997, p. 159).” they thus assert that their findings represent the “exogenous” theory of regime change. as indicated by epstein et al. (2006), the finding of pacl has been treated as received wisdom by the literature. however, it requires two hypotheses to be proved correct. the first one is that a democratic country is increasingly likely to stick with democracy as its per capita income grows. the second one is that a dictatorship is not more likely to die as the economy grows. boix and stokes (2003) graphically illustrate these two hypotheses in figure 1, which depicts per capita income on the horizontal axis and the probability of regime transition on the vertical axis. statistically, figure 1 indicates that the probability of a democratic breakdown is negatively correlated with income and that the probability of an autocratic breakdown is independent of the level of economic development. in one the status quo is democracy; in the other the status quo is dictatorship. in the former case, the literature has widely recognized the fact that income growth indeed increases the stability of a democracy, but it has strong doubts about the latter (boix and stokes 2003; epstein et al. 2006). in actual fact, figure 1 is consistent with the stylized fact that the probability of democratic breakdown in a country with an income of over $7,000 is “zero”, compared with 12.5% of that in a country with an income of under $1,000 (pacl, p. 161). besides, the literature also shows that a positive rate of economic growth promotes a stable democracy. for instance, haggard and kaufman (1995) report that in a collection of 462 country-year observations of positive economic growth between 1960 and 1990, democracies survive 97% of the time. economic growth thus has a beneficial effect on the survival of an already-existing democracy by reducing the frustrations and conflicts resulting from inequality or other social cleavages. however, when the status quo is dictatorship, the proposition of pacl that autocratic regimes do not transition to democracy as incomes rise has been vigorously challenged in the literature. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 59 | p a g e for instance, boix (2002) and boix and stokes (2003) argue that pacl’s findings are subject to both sample selection and omitted variable biases. the correct causal relation should be that economic development increases the likelihood of autocratic breakdown. epstein et al. (2006) also point out that the findings of pacl are incorrect in the classification of political systems. c. purpose of this article. since the first proposition of pacl that democracy survives in affluent countries has been widely accepted by the literature, it does not need any specific confirmation. this following thus instead explains that a dictatorial regime is not more likely to experience a transition to democracy as it reaches higher levels of income per capita. iii. relationship between democratization and income a. relationship between income and democratization might be nonlinear there might exist a critical threshold such that some level of development is a prerequisite for a transition to democracy. in the early stage of development, an increase in income tends to strengthen dictatorship because the dictator may make use of his good economic performance to consolidate his power and more easily rule the country by providing more basic needs to the people. provisionally, the dictator may benefit from the short-run effect of growth by keeping himself in power. the growth of income can ensure that the authoritarian regime proceeds successfully, and thus the dictatorship can survive its tumultuous youth. however, on the other hand, the dictatorship will sow the seeds of its own dissolution. once the society has already achieved a moderate level of living, each increment in the level of the economy may raise the odds of autocratic breakdown. as indicated by pennar et al. (1993), this is because continually rising incomes make democracy become a luxury good. a betterfed population tends to demand political freedom and civil rights and hence further increases in income impair an autocratic regime in the long-run. the interaction of the long-run and short-run effects of development on democracy thus results in a nonlinear relationship between these two variables. b. positive duration dependence accumulated effects of rotten dictatorship. there are various factors may affect the hazard rate for each dictatorship, and more importantly, there exists a positive duration dependence between democratization and the time span of autocracy. this means that the hazard of dictatorial breakdown is upward-sloping over time. for a particular dictatorship, the instantaneous rate of being overthrown increases with the duration of the dictatorship. this result implies that the transition to democracy is deeply affected by historically persistent weaknesses of dictatorship. the numerous weaknesses of centralization under authoritarian rule, such as a tendency toward absolute corruption, a distorted distribution of wealth, and a limited capacity of the center to handle problems in the periphery of society, will be accumulated over time as the regime’s burden and hence will stimulate a surge of demands on the part of previously quiescent and perhaps even actively repressed groups. while the dictators can repress their opponents in the short-run, such discontent from below would grow and finally culminate in a tremendously destabilizing factor in the long run. one could reasonably expect that the longer the autocracy has lasted, the more likely it is that it will end. the core insight is that institutional effects unfold over time, sometimes a great deal of time, and that these temporal effects are cumulative (gerring et al., 2005). it is the accumulated negative effects of these historically rotten legacies that ought to be of central concern if one wishes to understand the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 60 | p a g e duration of an autocratic regime as well as its causal effect on a variety of current outcomes – political, or economic. c. autocracy breakdown may depend upon previous history. regimes do not begin again de novo each year. today’s regime transition depends upon yesterday’s history. dictatorship constructs deep legacies, spanning several decades, perhaps even centuries. one has to look backwards and even forwards in time to understand the path of democratization of a country. in particular, the result of positive duration dependence means that one has to investigate the democratization through the accumulated effects of rotten dictatorship, rather than through the level of development at a particular moment in time. more importantly, this article emphasizes that this kind of time-dependent duration is exogenous to economic development. it is this exogenous duration that has a major impact on autocratic breakdown, but not economic development or income level. pacl emphasize that modernization or an increase in income is not a causal factor in the process of democratization. solely depending on a causal relationship between income and democratization might therefore wrongly attribute to development what may have been just a culmination of random hazards during the “time” of the economic development. as a matter of fact, the dictatorship most likely democratized due to the deaths of the dictators, international pressures from the us, or even geopolitical reasons, and not purely because of economic development (oyang and ma, 2011). at this point, even if economic development is significant in explaining the duration of autocracy, its causal power in bringing dictatorships down may be less than the one that modernization hypothesis claims. v. conclusion this article uses duration data to investigate whether or not economic development is the main factor in determining democratization. the result obtained supports the argument that democratization is exogenous. rich countries tend to be more democratic than poor ones is not by itself enough to resolve the relationship between income and democratization. this is because democracy can be initiated by any exogenous events at any levels of development. where does one go from here? i believe that the direction for future research is to investigate the kinds of exogenous events that can contribute to the failures of dictatorships. as indicated by londregan and poole (1996), most of these variables fall within the realm of countries’ historical backgrounds and political cultures. however, on the other hand, not only are they difficult to measure, but they are also sufficiently collinear with income to have produced the appearance that democracy is an entailment of a high level of economic development. to address this issue, i believe that the one should go in the direction of discriminating against those factors that bring about the divergent historical/political and economic development paths of various countries. this might be done by adopting a strategy of analytic induction based on a case study method that takes successive individual histories into account. i am not sure what the final conclusion is. however, i firmly believe that any theory that fails to take into account the exogeneity of democratization may lead to biased inferences regarding the causal relationship between development and democratization. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 61 | p a g e references acemoglu, daron, simon johnson, and james a. robinson. 2001. “the colonial origins of comparative development: an empirical investigation.” american economic review 91(5): 1369-1401. acemoglu, daron, simon johnson, james a. robinson, and pierre yared. 2005. “from education to democracy?” american economic review 95 (2): 44-48. acemoglu, daron, simon johnson, james a. robinson, and pierre yared. 2007. “reevaluating the modernization hypothesis.” nber working paper 13334. acemoglu, daron, simon johnson, james a. robinson, and pierre yared. 2008. “income and democracy.” american economic review 98 (3): 808-842. barro, robert j. 1999. “determinants of democracy.” journal of political economy 107 (6): s158-83. boix, carles. 2002. democracy and redistribution. new york: cambridge university press. boix, carles and susan c. stokes. 2003. “endogenous democratization.” world politics 55(4): 517-549. epstein, david, robert bates, jack goldstone, ida kristensen, and sharyn o’halloran. 2006. “democratic transition.” american journal of political science 50(3): 551-569. geddes, barbara. 1999. “what do we know about democratization after twenty years?” annual review of political science 2: 115-44. gerring, john, phillip bond, william barndt and carola moreno. 2005. “democracy and economic growth: a historical perspective.” world politics 57(3): 323-364. haggard, stephan, and robert r. kaufman. 1995. the political economy of democratic transitions. princeton: princeton university press. lipset, seymour m. 1959. “some social requisites of democracy: economic development and political legitimacy.” american political science review 53(1): 69-105. londregan, john b. and keith poole. 1996. “does high income promote democracy?” world politics 49(1): 1-30. 40 marshall, monty g. and keith jaggers. 2010. political regime characteristics and transitions, 18002010. college park, md polity iv project, university of maryland. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 62 | p a g e moore, barrington. 1966. social origins of dictatorship and democracy: lord and peasant in the making of the modern world. boston, ma: beacon press. oyang, lishu and tay-cheng ma. 2011. economic growth and democracy. journal of social sciences and philosophy (in chinese, forthcoming). pennar, karen, robert brady, dave lindorff, john rossant and glenn smith. 1993. “is democracy bad for growth?” business week 7 84-88. przeworski, adam, and fernando limongi. 1997. “modernization: theories and facts.” world politics 49(2): 155183. przeworski, adam, michael e. alvarez, jose cheibub, and fernando limongi. 2000. democracy and development. new york: cambridge university press. therborn, goran. 1977. “the rule of capital of the rise of democracy.” new left review 103(1): 3-41. weber, max. 1950. general economic history. glencoe, il: the free press. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 18 | p a g e examining the impact of interest rate liberalization on private sector credit in the waemu region dr. seraphin a. prao and dr. eugene kamalan professors-researchers at alassane ouattara university, ivory coast abstract: the financing policies of african countries' development have historically been rooted in keynesian economic theory, with low-interest rates and government control over the financial system aimed at stimulating investment and economic growth. however, these policies have often resulted in low or even negative real interest rates. this study draws on the seminal works of mckinnon (1973) and shaw (1973) to argue that financial repression is a key factor hindering economic growth in developing nations. financial repression discourages savings due to their poor performance and inhibits the efficient allocation of capital by financial intermediaries. to foster economic growth, a shift towards financial liberalization is recommended. this entails removing interest rate caps, reducing compulsory setasides, and eliminating directed credit programs, thereby allowing financial markets to operate freely and determine credit distribution based on market dynamics. this research sheds light on the detrimental impact of financial repression on economic development in african countries and advocates for policy changes that prioritize financial market autonomy and efficiency. keywords: financial repression, economic development, financial liberalization, interest rate caps, african countries. 1. introduction from independence, the financing policies of african countries development were defined in a theoretical background inspired by keynesian economies. interest rates were capped at a very low level in order to foster investment and economic growth. hence, the government controlled the entirety of the financial system and managed the development strategy of its economy. the results of these policies led to low – and even negative – real interest rates. the works of mckinnon (1973) and shaw (1973) identified financial repressions the principal cause of low performances in terms of economic growth in developing countries. according to the authors, financial repression impedes economic development in many ways. first, savings are discouraged because of their low performance. secondly, financial intermediaries are not encouraged to effectively spread savings. logically, economic growth is fostered by adopting a financial liberalization policy, because in interest rates increase will facilitate savings mobilization and more effective capital distribution. therefore, governments should cut out interest rates caps, reduce compulsory set-asides and abolish directed credit programs. it is about “freeing” financial markets from any intervention and allowing the market to determine credit distribution. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 19 | p a g e under the auspices of the big financial institutions, the majority of sub-saharan economies initiated financial liberalization programs from the 1980s. apart from interest rates liberalization, many other measures were implemented in africa as part of financial reforms (bank restructuring, abolition of direct monetary control, strengthening supervision). nevertheless, monetarist neoliberal policies did not bring a miracle solution to economic development. reinhart and tokatlidis (2003), talking about sub-saharan africa, claimed that financial reforms had only slight effects on economies. the main reason of that failure is the existence of imperfect and incomplete markets, asymmetric information and an unstable economic environment, not conducive to the private sector.after more than two decades of liberalization in waemu, globally, the situation of banks in the banking system is satisfying. the bank credit to gdp ratio went from 11.63% in 2001 to 26.73% in 2013 (bei, 2016). between 2001 and 2007, the average annual growth rate of credits ratio was at 13.7%. in the meantime, the average real interest rate of bank credits settled at 13.7% in the union, against 5.81% in morocco. from the preceding, the central issue of this study is around the following fundamental question: in what ways does interest rate liberalization stimulate credit to the private sector in the waemu zone? hence, the general objective of this study is to analyze the effect of interest rate liberalization on credit supply to the private sector in the waemu zone. specifically, on the one hand, we will examine the effect of financial repression on bank credit supply to the private sector in the face of credit request. on the other hand, we will appreciate the impact of financial savings on banks’ capacity to supply bank credit. in relation with our objectives, we formulated the two following hypotheses. first of all, financing the economy increases when the level of financial repression decreases. second of all, an increase of financial savings is favorable to credit supply to the private sector. interests and stakes do not lack in this study. in fact, the constraints of financing the economy remain a central issue in sub-saharan africa, particularly in the waemu countries where those constraints imply excess bank liquidity. the study contributes in moving forward the literature on the link between interest rates and bank credit supply in the waemu zone. at the methodological level, the study adopts the pool mean group (pmg) and mean group (mg) methods respectively proposed by pesaran et al. (1999) and pesaran and smith (1995). the advantage of these estimation methods is the introduction of heterogeneity in coefficients dynamics. by using the pmg method, the article highlights the convergence of long-term determinants on credit supply within the union, while the short-term dynamics remain heterogeneous. this hypothesis seems reasonable for the waemu countries sharing the same monetary policy and aiming at the convergence of their economies in the long run. however, the study cannot be done a priori, it must be empirically tested. we used annual data over the period from 1982 to 2015. the choice of this period is according to the availability of data. the present article is organized in the following way: section 2 is dedicated to the literature review of the relationship between interest rate liberalization and bank credit supply to the private sector. section 3 will present the methodology of the study. section 4 presents data source and variables description. section 5 will speak about empirical results, particularly those of the econometric analysis of the relationship between interest rate liberalization and bank credit supply to the private sector. section 6 is devoted to the conclusion of the study. 2. literature review mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 20 | p a g e this section revisits the theoretical and empirical literature on the relationship between interest rate liberalization and bank credit. but before that, we examine the impact of interest rates liberalization. 2.1. theoretical literature review of the impact of interest rate liberalization “financial repression” compels banks to set low – and sometimes negative – interest rates (mckinnon, 1973). it discourages savings and is harmful to the accumulation of the production capital. the analysis of mckinnon and shaw aims at showing that within the framework of a financially repressed economy, setting rates below their equilibrium value reduces savings (reduction of bank deposits) for the benefit of current consumption. such a measure reduces the quantity of funds available for investments, which is a consequence of the reduction of bank deposits. conversely, interest rate liberalization favorably acts on savings. it ensures better mobilization of resources and increased investments. thus, it permits income growth and economic development. according to financial liberalization theoreticians, underdeveloped countries suffer less from lack of financial resources than from a banking intermediation which is now ineffective due to distortions associated with the administration of interest rates. in addition, the model of shaw (1973) is based on a debt-intermediation financial system. it is a model in which investors are not compelled to auto financing, but financial intermediaries fully play their role of turning savings to investments. the initial models of mckinnon and shaw were taken up and enriched by a great number of authors (kapur, 1976; fry, 1978; galbis, 1977; mathieson, 1979). the mckinnon/shaw approach was questioned by post keynesians and neostructuralists. the interest rate liberalization approach neglected many of the most distinctive foundations of developing economies. the first foundation is highlighted by post keynesians (burckett and dutt, 1991). according to these authors, interest rates increase does not forcefully lead to credit and investments increase. indeed, according to keynesian concepts, they consider that investment does not depend on the amount of deposits but rather on the anticipated demand. hence, interest rates increase would definitely lead to savings increase, but also to consumption reduction since the substitution effect outweighs the income effect. in other words, if savings remunerations consistent enough, households are prompted to assign a part of their consumptions for the benefit of increasing their savings. so, according to the post keynesians, interest rate liberalization leads to economic slowdown due to investments reduction induced by the reduction of global demand. in addition, interest rates increase following financial liberalization will weigh down the cost of credit (davidson, 1986). the second one is related to asymmetric information suitable for financial markets (stiglitz and weiss, 1981). according to these two authors, the mckinnon/shaw approach does not take into account market imperfections. in this criticism, they pay particular attention to the microeconomic foundations of macroeconomic policies. the authors show that imbalances on the credit market do not only come from governments’ intervention but also from the adverse selection and incentive effects. they consider that, in a context of information asymmetry, it is difficult for interest rate liberalization to effectively operate through enhanced resource allocation and steering of savings towards more productive sectors. the third foundation is related to the existence of the informal sector (taylor, 1983; van winjbergen, 1983). this criticismtakes into account the existence of informal financial markets and their greater effectiveness in terms of resource allocation. interest rates increase in the formal sector leads to interest rates increase in the informal sector, which brings about higher investment credit and, therefore, an increase of the general price level (cost-push inflation). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 21 | p a g e 2.2. empirical literature review on the relationship between interest rate and bank credit there are a considerable number of empirical studies to confirm or infirm mckinnon/shaw hypotheses. demirgüç-kunt and detragiache (1998) brought to notice that interest rate liberalization policies exacerbated competition between banks, which incites to take a lot of risks, thereby leading to serious financial crises. in the same logic, guillaumont and kpodar (2006) show that interest rate liberalization positively influences economic growth. however, the latter in penalized by the financial instability deriving from it. conversely, in the case of developing countries, giovannini (1983, 1985) finds that savings do not significantly answer to real interest rate increase. according to greene and vallanueva (1991), interest rates increase reduced investments in thirty three developing countries. demetriades and devereux (1992) also reach a similar conclusion on a sample of sixty four developing countries. in the same vein, the study of nadem, al. (2016) on credit supply in pakistan revealed a harmful effect of interest rate raise on credit to the private sector, both in the short and long run. in africa, empirical studies do not lack. mwega and ngola (1991) used kenyan data to test the relationship between interest rates and savings. the results reveal that real lending rate has marginal influence on savings in kenya. they also noticed that high interest rates impede credit request and therefore impede investment. on a sample of thirty african countries, diery and yasim (1993) indicate that the real interest rate on deposits has a positive and significant impact on savings. moreover, they find that savings have a strong impact on investment, but interest rates have a negative impact on the latter. in nigeria, onwumere et al. (2012) find that interest rate liberalization had a non-significant impact of savings but a robust and negative impact on investment. consequently, yazid (2007) find a lowly significant and negative relationship between financial liberalization and household savings in algeria. according to this author, financial liberalization reduced household savings. this result is explained by the fact that liberalization allowed households’ easier access to consumer credit. 3. methodology in this section, we firstly present the model specification and secondly, the pmg estimation methodology. 3.1. model specification the model to estimate in this paper can be specified in the following way: (1) where is the bank credit granted to the private sector to gdp, the bank lending rates in annual percentage, is a financial repression indicator measured by banks’ reserves in the m2 money supply percentage, a financial savings indicator measured by the volume of deposits in gdp percentage, the non-performing loans measured by delinquent credits in credit granted percentage, , the consumer price index and the budget deficit measured by the gap between public revenues and expenditures. 3.2. the pooled mean group estimation mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 22 | p a g e the estimation technique chosen is the one proposed by pesaran et al. (1999), the pmg estimator. following pesaran et al. (1999), eq.(1) can be seen as an autoregressive distributed lag (ardl) model whose form is : is a vector of explanatory variables; is represents the fixed effect (country). the following long term if variables are co-integrated, then the term is a stationary process. in that case, the model can be respecified under the form of an error-correction model in which the short-term dynamics is influenced by the long-term relationship gap: where is the coefficient of adjustment, is the vector of long-term coefficients and is the variation operator between two successive dates. we expect that one of the advantages of ardl models is that short where a vector of coefficients; ascalar and relation ship is derived from this model: mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 23 | p a g e estimator allows heterogeneity both in short-term parameters and long-term coefficients. the mg estimator estimates the equation for each country of the sample and then calculates the unweighted means of coefficients on the whole panel. the homogeneity hypothesis of long-term coefficients is empirically tested. to this end, one recourses to a hausman test applied to the difference between mg and pmg estimators. under the null hypothesis, this difference is not significant, and then the pmg estimator in preferable. 4. data and variables description the empirical study uses the annual data of 7 waemu countries excepting guinea bissau. the countries are cote d’ivoire, senegal, niger, mali, burkina faso, togo and benin. the study data come principally from two major sources: bceao and the world bank’s world development indicator (wdi). the study is on the 1982-2015 period with34 observations. the descriptive statistics of all variables are consigned in table 1. in this table, one notices that the average interest rate is 11.31% on the period of study. that rate indicates high cost of credit in the waemu zone. in the meantime, credit granted to the private sector as related to gdp has a mean of 17.65%. this very low level can be associated to the very high cost of credit in the zone. table 2 shows high correlation between explanatory variables. of all those variables, the pair bank deposits (dep) and consumer price index (cip) presents the higher correlation coefficient (0.63), but below 0.8. the pairs bank credit to the private sector (cred) and bank deposits (dep), then lending rate (r) and non-performing loans (npl) respectively present correlation coefficients of 0.34 and 0.44. the inclusion of explanatory variables in our model is thus justified in addition with their theoretical interest. table 1. descriptive statistics variables obs. mean std.dev. min max bank credit to private sector (cred) financial repression (fr) bank deposits (dep) lending rate (r) 238 17.65622 8.290538 3.302083 46.2638 233 14.58288 11.54087 0.1493967 68.7819 229 15.21742 9.725433 2.751303 47.6188 238 11.31017 2.852473 0.85 18.779 232 5.303428 3.001261 0.2529732 17.80329 term and long term indicators are jointly estimated. moreover, these models allow the presence of variables that can be integrated in different orders, and , or co integrated (pesaran et shin, 1999). th e pmg estimator allows short term coefficients and the adjustment coefficient to vary according to the countries, but long term coefficients are identical for all countries ( in this study, the pmg estimator is based on the following error corre ction model: where it was shown that imposing an identical coefficient to the restoring force could lead to bias (kiviet, 1995). the mg mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 24 | p a g e table 2. matrix of pearson correlation coefficients cred r fr dep cpi npl db note: * 5% threshold significance 5. empirical results the empirical analysis follows the subsequent approach. firstly, we apply unit roots tests to the series in order to study the stationarity of variables. second, we estimate long-term coefficients with the pmg estimator. the integration order of variables is tested according to the tests of im, peseran and shin (ips, 2003). the null hypothesis of the test assumes that all series are non-stationary against the alternative hypothesis which states that only one fraction of series is stationary. the test results summarized in table 3 show that at the 5% threshold, the null hypothesis confirming the presence of unit root cannot be rejected for all level variables. these results show that credit to private sector (cred), deposits (dep) and inflation (cpi) are not stationary in level. however, variables are all stationary in first difference; they are i(0) and i(1). this implies that there is a presumption of cointegration relationship between the different variables. we apply the co-integration test of pedroni (1999) and the results are consigned in table 4. over all variables, on the seven statistics, four are in favor of the existence of a long-term relationship between credit supply and other variables. this suggests that variables are co-integrated and we will use an error-correction model to estimate the long term relationship1. once the presence of co-integration is detected, the objective following is to estimate the long-term relationships between variables. table3. results of panel unit root tests with im,pesaran and shin (2003) 1 pedroni (1999) shows that the statistics panel-adf and group-adf have better finite distance properties than other tests statistics. budget deficit (db) consumer price index (cpi) non performing loans (npl) 238 74.10916 24.1144 31.19 116.06 226 11.68508 11.60192 0.7622925 61.75492 cred r fr dep cpi npl db 1.00 -0.2939* 1.00 -0.1194 -0.1627 1.00 0.3460* -0.1213 -0.0669 1.00 -0.1487 0.0502 -0.2768* 0.6302* 1.00 -0.0680 -0.4474* 0.2503* -0.2223* -0.4721* 1.00 -0.0143 -0.1525 0.0525 0.3086 0.2152 0.0433 1.00 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 25 | p a g e variable level first difference statistics p-values statistics p-values lcred lr fr ldep lcpi lnpl ldb 3.381 -4.029** -3.402** -0.122 -0.604 -1.924* -3.933** 0.999 0.000 0.000 0.451 0.272 0.027 0.000 -10.009** -14.579** -13.181** -13.124** -7.507** -13.122** -12.297** 0.000 0.000 0.000 0.000 0.000 0.000 0.000 source: auther’s computation note: * (**) means that the rejection of the unit root hypothesis at the 5% threshold (1%). the choice of lags is based on the akaike info criterion. source: auther’s computation note : *(**) shows the test significance at the 10% threshold (5%). the choice of lags is based on the akaike info criterion. the pmg and mg estimates are consigned in table 6. the hausman test presented in table 5 shows that the homogeneity hypothesis of long-term coefficients cannot be rejected, which means that pmg estimations are the most appropriate ones. this result was expected a priori and reasonable for waemu countries that share the same monetary policy and aim at the convergence of their economies in the long run2. in that case, the results interpretation will be on the pmg method. table 5: hausman test result variables coefficients difference (b-b) mg (b) pmg (b) lr -0.670 -0.733 0.063 lfr 0.007 -0.210 0.217 ldep 0.567 0.509 0.058 lcpi -0.838 -0.702 -0.136 lnpl -0.159 -0.416 0.257 ldb -0.108 -0.066 -0.042 2 mg estimators only give coherent results when the panel dimension approaches infinity (pesaran and smith, 1995). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 26 | p a g e chi2(6) = (b-b)'[(v_b-v_b)^(-1)](b-b) = 12.05 prob>chi2 = 0.0609 source: auther’s computation note: the hausman test is applied to the difference between mg and pmg. under the null hypothesis, the difference between the estimated mg and pmg coefficients is not significant and pmg is more effective. the test probability is superior to the 5% threshold. the pmg estimator, the effective estimator under the null hypothesis, is preferred. most long-term effects have the same sign in the two regressions, but their scale is varying. in the “pmg estimators” regression where 7 countries are compelled to have the same long-term relationship, longterm coefficients are practically all significant. the estimates seem satisfying. the coefficient values obtained are nearly all significant, except public expenditures. the phi adjustment coefficient is statistically significant at the 1% threshold. this confirms the existence of the long-term relationship between variables. phi is equal to -0.311, which implies that an imbalance coming after a shock is completely corrected in the first term of the fourth year following a 31.1% rate per year. table 6. estimates of the long-term relationship variables pmg mg coef. s.e p-value coef. s.e p-value lr -0.733 ** 0.080 0.000 -0.670* 0.277 0.016 lfr -0.210** 0.030 0.000 -0.007 0.085 0.929 ldep 0.509** 0.075 0.000 0.567 0.298 0.057 lcpi -0.702** 0.183 0.000 -0.838 0.588 0.155 lnpl -0.416** 0.036 0.000 -0.159 0.145 0.273 ldb -0.066 0.043 0.131 -0.108 0.281 0.699 coef. of adjustment phi -0.311** 0.120 0.010 -0.571** 0.102 0.000 -0.004 -0.054 0.050 -1.332** 0.100** 0.004 0.103 0.028 0.068 0.209 0.028 0.029 0.966 0.056 0.465 0.000 0.000 0.881 0.118 -0.020 -0.127 -1.002** 0.082 0.042 0.105 0.034 0.079 0.274 0.050 0.063 0.261 0.553 0.110 0.000 0.101 0.501 source: auther’s computation note: the upper pad shows long-term coefficients and the lower pad shows short-term coefficients. * (**) shows the non-rejection of the long-term coefficients’ null hypothesis of homogeneity at the 5% threshold (1%). in the long run, the repression level has a significant and negative impact on credit to the private sector. this means that an increase of the banks’ reserves ratio on money supply would reduce bank loans possibilities. according to mckinnon (1973), the higher that ratio, the more “financially repressed” the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 27 | p a g e bank system is. financial repression is thus harmful to credit activity in the waemu zone. concerning the effect of lending rate on bank credit supply to the private sector, the former does not have the expected sign. indeed, interest rates increase negatively affects credit supply. the higher credit costs, the less banks are able to finance the activity. high credit costs discourage credit request which, as a last resort, negatively impacts on bank financing of the economy. at a given level of the lending rate, market balance might be characterized by credit rationing. imperfections and the oligopolistic structure of credit market begin the expected advantages of liberalization. this result is in conformity with that of tanimoune (2001) who shows that interest rates liberalization did not favor firms’ access to credit in the waemu zone. as for bank savings, it has a significant and positive effect on credit to the private sector in the zone. bank deposits increase is favorable to bank financing of the activity in the union. liquidity management seems to be an important factor in credit decisions for the private sector in the waemu zone. this result was highlighted in the study of saxegaard (2006); according to him, the “willful excess liquidity” of the union’s banks is the consequence of the sociopolitical instability observed in the zone. furthermore, the results show that inflation is harmful to bank credit to the private sector. indeed, for given and fixed real interest rates, inflation increase demands an increase of nominal interest rates. the consequence would be weighing down credit cost and discouraging companies from borrowing. most theories are conclusive enough on the harmful effect of inflation on credit. about the effect of non-performing loans, it is in conformity with our expectation. the impact of nonperforming loans on credit to the private sector seems very significant and negative in the long run. bad credits have a crowding-out effect on private investments financing. indeed, the more doubtful debts banks have, the less they are able to offer new credits, which reduces credit offer at the macroeconomic level. the effect of budget deficit is not significant, which means that it is not possible on the period of study to mention the notion of “crowding-out effect” between the public sector and the private sector. public expenditures might be complementary with private investments. 6. concluding remarks in this study, our objective was to analyze the effect of interest rates liberalization on bank credit to the private sector in the waemu zone, on the period from 1982 to 2015. to this end, we estimated a panel data model between six explanatory variables and bank credit granted to the private sector related to gdp. the results show that financial repression reduction, especially the reduction of compulsory setasides imposed to african banks, is favorable to bank financing of the private sector. the same applies for the reduction of non-performing loans and credit cost. likewise, fighting inflation is favorable to bank financing of the activity. in sum, these results provide a given number of implications in terms of policies. first of all, the accommodative policy started by the central bank of west african states (bceao) should be pursued. bceao should reduce its compulsory set-asides rates in order to encourage bank credit to the private sector. moreover, bank risk control is useful in increasing banks’ share in financing the activity. secondly, macroeconomic stability is an important requirement for the bank financing of the activity. a future study could be dedicated to determining the threshold from which inflation negatively acts on bank credit supply to the private sector. references mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 28 | p a g e banque européenne d’investissement (2016). tendances récentes dans le secteur bancaire en afrique subsaharienne: du financement à l’investissement. rapport de mars 2016 burkett, p. and dutt, a. k. (1991). interest rate policy effective demand and growth in ldc's. international review of applied economics, 5(2), 127-153. davidson, p. (1986). finance, funding, saving and investment. journal of post keynesian economics, 9(1), 101-110. demetriades, p. and devereux, m. (1992). investment and financial repression: theory and evidence from 63 ldc's. working paper 92-16, keele university. demirgüc-kunt, a.and detragiache, e. (1998). determinants of banking crises in developed and developing countries. imf staff papers, 45(1). diery, s. and yasim, e. h. (1993). financial liberalization in africa. world development, 21(11), 18671881. fry, m. j. (1978). money and capital or financial deepening in economic development. journal of money, banking and credit, 10(4), 464-475. galbis, v. (1977). financial intermediation and economic growth in less-developed countries : a theoritical approach. journal of development economics, 13, 58-72. giovannini, a. (1983). the interest elasticity of saving in developing countries: the existing evidence. world development, 11(7), 601-607. givannini, a. (1985). savings and the real interest in ldc's. journal of development economics, 197217. greene, j., & villanueva, d. (1991). private investment in developing countries. imf staff papers, 38(1), 33-58. guillaumont, s. and kpodar, k. (2006). developpement financier, instabilté financière et croissance économique. economie & prévision (174), 87-111. im, k. s., pesaran, m. h. and shin, y. (2003). testing for unit roots in heterogeneous panels. journal of econometrics, 115(1), 53-74. kapur, b. k. (1976). alternative stabilisation policies for less developed countries. journal of political economy, 84(4), 777-795. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 29 | p a g e kiviet, j.f. (1995). on bias, inconsistency and efficiency of various estimators in dynamic panel models.journal of econometrics, vol. 68, 53-87. mathieson, d. j. (1979). financial reform and capital flows in a developing economy. imf staff papers, 26(3), 450-489. mckinnon, r. i. (1973). money and capital in economic development. washington dc: brookings instiution. mwega, f. and ngola, s. (1991). the role of interest rates in the mobilization of private savings in africa: a case study of kenya. journal of economics and finance, 1(1), 1-14. naddem, a., khalil, j. and irfan, u. (2016). impact of interest rate on private sector credit : evidence from pakistan. jinnah business review, 4(1), 47-52. onwumere, j., okore, a. and imo, g. (2012). the impact of interest rate liberalization on savings and investment: evidence from nigeria. journal of finance and accounting, 3(10), 130-136. pedroni, p. (1999). critical values for coinegration tests in heterogeneous panels with multiple regressors. oxford bulletin of economics and statistics, 61, 653-670. pesaran, m. h., & smith, r. p. (1995). estimating long-run relationship from dynamic heterogeneous panel. journal of econometrics, 68(1), 79-113. pesaran, m. h., shin, y., & smith, r. p. (1999). pooled mean group estimation of dynamic heterogeneous panels. journal of american statistical association, 94(446), 621-634. reinhart c. et tokatlidis i. (2003), financial liberalization: the african experience, journal of african economies, vol. 12, octobre 2003, p. 53-88. saxegaard, m. (2006). excess liquidity and effectiveness of monetary policy: evidence from subsaharan africa. imf working paper no. 06/115 shaw, e. s. (1973). financial deepening in economic growth. new york: oxford university press. stiglitz, j. and weiss, a. (1981). credit rationing in markets with imperfect information. american economic review, 71(3), 393-410. tanimoune, a. o. (2001). impacts de la libéralisation financière sur l'intermédiation bancaire dans l’uemoa: essai d'évaluation sur données de panel. laboratoire d'economie d'orléans. taylor, l. (1983). structuralist macroeconomics: applicable models for the third world. new york: basic books. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 30 | p a g e wijnbergen, v. s. (1983). interest rate management in ldc's. journal of monetary economics, 12(3), 433-452. yazid, m. b. (2007). libéralisation financière et épargne des ménages: quel(s) lien(s) ? cahiersdu cread (81-82), 171-198. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 61 | p a g e fiscal sustainability and macroeconomic stability in turkey: an empirical study dr. erkin gültekin ph.d., t.c. ziraat bank a.s., eskisehir, turkey abstract: in today's globalized and technologically advanced world, economies around the globe are deeply interconnected, leading to varying economic balances in both developed and emerging nations. maintaining macroeconomic stability in these countries is crucial, and this brings us to the concept of sustainability. sustainability, while lacking a precise definition in economics literature, generally encompasses the idea of ensuring the continuity and self-sufficiency of an economy. it goes beyond the stability of individual macroeconomic indicators, emphasizing the harmony and coherence between these indicators. among the first concepts related to economic sustainability is fiscal sustainability. fiscal sustainability, a frequently used term in economics, gained particular importance in economic policy planning during the 1990s. although its definition lacks clarity, various perspectives exist. buiter (1983) views fiscal sustainability as the implementation of policies that stabilize the net value of the budget deficit relative to gdp. in contrast, blanchard et al. (1991) define it as achieving convergence of the public debt/gnp ratio to its initial level while ensuring the ability to service debt with public revenue. edwards and vergara (2002) suggest that fiscal sustainability exists when the public debt/gdp ratio remains stable and consistent with the overall demand in an economy. analyzing the sustainability of the public sector involves calculating the primary balance required to maintain a sustainable and stable public debt/gdp ratio. izquierdo and panizza (2003) define fiscal sustainability as a country's capacity to meet its budget deficit. among various methods to achieve balanced budget conditions, public debt is a widely employed strategy. keywords: sustainability, fiscal sustainability, macroeconomic balance, economic stability, public debt 1. introduction today, many countries in the world implement free market economies, and the economies of countries and markets are integrated with the advancements in globalization and technology. this process has caused different economic balances in emerged and emerging economies. these conditions of economic balance do not only manifest themselves within emerged and emerging economies; they can differ between these countries, as well. in this context, preserving the macroeconomic balance of these countries is as important as providing it. preserving macroeconomic balance leads us to the concept of sustainability. sustainability is a concept often used even though it does not have a clear definition in the economics literature. this concept generally defines the provision of continuity of the economy and enough sufficiency to ensure this continuity. from this perspective, sustainability can be interpreted as not only mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 62 | p a g e the stability of a macro indicator but also the balance and compatibility between macro indicators. the first concept to have appeared related to economic sustainability is fiscal sustainability. fiscal sustainability is a concept often used in the economics literature and was especially important in the planning of the economic policies of the 1990s, but it does not have a clear definition. buiter (1983) defined fiscal sustainability as the implementing of policies that stabilize the net value of the budget deficit ratio, which is the difference between budget revenue and budget expense, to the gdp rate. on the other hand, blanchard et al. (1991) defined fiscal sustainability as the convergence of the public debt/gnp ratio to the starting level and being able to meet loans with public revenue. according to edwards and vergara (2002), if the public debt/gdp ratio is stable and consistent with the total demand in an economy, then fiscal sustainability is present in that economy. calculating the primary balance of the public sector that is compatible with a sustainable and stable public debt/gdp ratio is an important element in the sustainability analysis of the public sector. izquierdo and panizza (2003) defined fiscal sustainability as a country’s sufficiency to meet the budget deficit. balanced budget conditions can be provided with different methods. public debt is one of these methods and it is widely used by many countries. therefore, budget constraints alone are not sufficient conditions for the provision of fiscal sustainability. in light of these definitions, it can be said that fiscal sustainability focuses on two main points: sustainability of the budget balance and sustainability of external debt stock. the sustainability of the external debt stock/gdp ratio in the long term is based on the fact that this deficit is not covered by higher interest rates and thus inflation. therefore, in addition to a reasonable course of external debt stock, financial sustainability requires a macroeconomic environment that supports stable economic growth, stable money and credit flow, and openness to foreign markets. in other words, coordination is needed between growth factors and money policy in order to ensure a sustainability level that will support all macroeconomic goals of the economy. in an economy that has a low debt/gdp ratio, a low real interest rate and high seigniorage revenue can be provided in an environment of high inflation. in an economy with a high debt/gdp ratio, on the other hand, sustainability can be ensured with high real economic growth and other stable variables (fraser, 1999). emerging economies resort to external borrowing due to the fact that they cannot finance economic development without an external source of loans, importing intermediate and investment goods and meeting public expenses with public revenue; the costs of internal borrowing are also high. therefore, a healthy debt structure is vital to an emerging economy. as burnside (2005) stated, fiscal sustainability is the power of meeting the debt load of the public authority as well as preserving the same set of policies. accordingly, protecting the same set of policies requires the correct identification of the factors that cause fiscal deficit. whether this deficit stems from public savings deficit or private sector savings deficit, the financing of this debt through borrowing is legitimized in today’s economies as long as the debt service is sustainable. since a public savings deficit means a budget deficit, or in other words the difference between public revenue and public expense, the concept of budget deficit sustainability is sometimes used in the literature instead of fiscal sustainability (karatay gögül, 2016, p. 90). however, following the privatization practices in emerging economies, public sector involvement in the economy decreased as private sector investment percentages in manufacturing and services increased. in these countries, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 63 | p a g e the financing needed for new investments of the private sector is financed with internal borrowing and/or external borrowing. therefore, private sector borrowing is as important as public borrowing for the concept of sustainability. importing public budget deficit stock in the provision of internal funds may negatively affect the investments of the private sector by restricting internal fund provision. this situation, which is known as “crowding out,” may lead the private sector to use more external sources of loans. savings deficits in emerging economies make it difficult to provide resources. furthermore, problems of high inflation in these economies cause an increase in interest rates. access to low-cost external sources is important. therefore, both the public sector and the private sector seek external resources. even though external debts provide resource transfer at the moment they are obtained, resource loss is evident when the interest rate and the capital are repaid. thus, it is necessary to consider how much the loan contributes to the production potential of the country when the benefit and cost of the external debt are analyzed (karluk, 2002, p. 147). sustainability of the external debts makes the balance between the real interest rate being paid and the real growth rate of the economy important. the integration of financial markets led to the free movement of portfolio investments made to countries. it is seen that emerging economies cannot take long-term and fixed-rate loans with national currency in each period. countries with insufficient internal savings are required to offer a sufficient real return in order to attract portfolio investments. however, both external borrowing and the flexibility of the portfolio investments bring about currency and interest risks. sustainability of the debt stock becomes harder as the ratio of the debt stock to gdp increases. once more, when the real interest rate is higher than the growth rate, the ratio of the debt stock to gdp will increase mathematically. the primary surplus of the budget is an important nominal anchor in terms of public finance. even though the real interest rate is higher than the growth rate, public finance can prevent the increase of the public debt stock by having a primary surplus. however, when both the real interest rate is higher than the growth rate and public finance has a primary surplus, the ratio of the debt burden to gdp will increase rapidly and the economy of the country will be fragile (karatay gögül, 2016). the primary surplus of the budget is a nominal anchor for public finance while having higher real interest rates than growth rates makes it difficult to maintain financial sustainability of the private sector. this also increases the cost of internal borrowing for the private sector. resource provision is easier for large companies, while this process is harder for small and medium-sized companies. furthermore, an inflow of foreign capital to the country is needed to sustain external debts. the most efficient way to ensure this is to increase net exports. utilizing the finance provided by loans, especially in the sectors related to exports, contributes to the conversion of external debt. when all of these conditions are taken into account, the concept of sustainability should be considered as not only fiscal sustainability but also as financial sustainability. the macroeconomic balance achieved with both the public and the private sector can be used to define financial sustainability. for this matter, both public and private sector loan usages and the sustainability of these debts are vital. turkey is one of the aforementioned countries for which borrowing is seen as a problem. sustainability of the debt stock particularly came into prominence after the economic crisis of 2001 and it has remained one of the most important problems on the agenda since then (göktan, 2008). after the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 64 | p a g e economic crisis of 2001, attempts were made to control fiscal discipline, and the nominal anchor of primary surplus was used as a control mechanism. however, the current deficit increased swiftly after this period, bringing about the need for financing and providing continuity in economic growth due to the fact that manufacturing requires imports. privatization gained momentum and the private sector started to replace the public sector in the economy. low internal savings and in particular high real interest rates until 2008 caused an increase in the external debt level of the private sector. the global economic crisis after 2008 and global liquidity expansion enabled implementation of more flexible policies. the debt sustainability of the emerging economies began to be questioned after statements towards a global consolidation period and the steps to be followed were explained in 2017. all of these developments made the continuity of financial sustainability important for turkey, as well. many studies have employed stationarity series tests and co-integration tests to empirically measure fiscal sustainability. the application of stationarity tests is a standard approach for testing the sustainability of budget deficits. this method was first used in the works of hamilton and flavin (1986), trehan and walsh (1988, 1991), and ahmed and rogers (1995) (şen, sağbaş, & keskin, 2010, p. 111). the variables examined in stationarity test methods are analyzed by applying unit root tests. if series are stationary in the test results, then it is concluded that the relevant series have sustainability. in this study, some variables used for examining fiscal sustainability and some variables that may indicate financial sustainability were employed to analyze financial sustainability in turkey. the variables of eu-defined general government debt stock/gdp, public net debt stock/gdp, net external debt stock/gdp, nonfinancial private sector loan usage/gdp, gdp growth, real interest rate of commercial credits, and real interest rate of government domestic debt securities were analyzed with stationarity tests and the levels of difference between the variables of gdp growth and real interest rate of commercial credits and real interest rate of government domestic debt securities were examined. 2. literature hamilton and flavin (1986) examined the budget policies of the period between 1960 and 1984 in the usa with an approach that they developed and found results suggesting that sustainability was ensured. in the work conducted by kremers (1988), following that of hamilton and flavin (1986), it was indicated that an insufficient gap lag was used in the regression equation. kremers repeated the analysis for the same period and claimed that the budget deficits of the usa were unsustainable. the method developed by hamilton and flavin (1986) was also employed in different countries: in canada by smith and zin (1991); in italy by baglioni and cherubini (1993); and in greece by makyrdakis, tzavalis, and belfoussias (1999). these authors all reached results indicating unsustainable budget deficits. feve and henin (2000) examined the fiscal sustainability of g-7 countries with unit root tests and found that fiscal sustainability was not ensured in some of those countries. croce and juan-ramon (2003) carried out fiscal sustainability research in their study that included a group of countries and found that turkey, argentina, and brazil did not have sustainability in the 1990s while belgium, indonesia, ireland, and mexico did have fiscal sustainability in that period. ono (2008), in his work on the fiscal sustainability of g-7 countries, employed both standard unit root tests and unit root tests depending on nonlinear time series for sustainability research and found results in favor of fiscal sustainability for these countries, except for japan. studies conducted on turkey have generally mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 65 | p a g e shown that the economy of turkey does not have fiscal sustainability. when we look at the studies conducted on the fiscal sustainability of turkey, those of göktan (2008) and aslan (2009) hold an important place in the literature. göktan (2008) used quarterly data of 1999-2006 and examined the fiscal sustainability of turkey in terms of debt stock, debt stock/gdp, primary balance, and primary balance/gdp criteria with both adf unit root tests and co-integration analysis. the results found by göktan (2008) showed that turkey did not have fiscal sustainability in the examined period. on the other hand, aslan examined the sustainability of the budget deficits on both a monthly (2006:1, 2009:6) and a yearly (1980-2005) basis and employed adf unit root tests and co-integration analysis. the findings showed that budget deficits in turkey were sustainable when analyzed on a monthly basis, but not on a yearly basis. in both analyses, standard adf unit root tests and co-integration analysis were employed and non-consistent results were found. ucal and alıcı (2010) used quarterly data of the periods of 1989:1-2000:12, 1989:1-2008:12, and 2001:12008:2 and examined fiscal sustainability with budget revenues, budget expenses, interest payments, and debt stock data by employing unit root and co-integration tests. they found that fiscal sustainability was weak in the periods of 1989:1-2000:12 and 1989:1-2008:12, while it was strong in 2001:1-2008:12. şen, sağbaş, and keskin (2010) used yearly data of 1975-2007 and examined fiscal sustainability with the variables of budget deficit, debt stock, budget revenues, and budget expenses by employing both adf and pp unit root tests and a cointegration test. they found that fiscal sustainability was not ensured in the period of 1975-2007. hepsağ (2011) used the quarterly data of 1990:1-2008:4 and examined fiscal sustainability with debt stock/gdp data by employing a periodic unit root test with structural break and found that fiscal sustainability was not ensured. 3. data and methodology in this study, quarterly data on the variables of eu-defined general government debt stock/gdp, public net debt stock/gdp, net external debt stock/gdp, non-financial private sector loan usage/gdp, gdp growth, real interest rates of commercial credits, and real interest rate of government domestic debt securities/gdp were used to examine financial sustainability. the eudefined general government debt stock/gdp data were limited to the period of 2006:1-2018:4, since only data for this period were published; all the other data span the period of 2002:1-2018:4. table 1 shows the variables used in this study, their abbreviations, and the sources of the obtained data. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 66 | p a g e table 1. variable description variable definition source nfprivatesectorloan non-financial private sector loan usage / gdp the central bank of the republic of turkey eudefinedgovdeptstock eu-defined general government debt stock / gdp ministry of treasury and finance pubnetdeptstock public net dept stock / gdp ministry of treasury and finance netextdpetstock net external debt stock / gdp ministry of treasury and finance gdpgrowth gdp growth turkish statistical institute rircomcredits real interest rate of commercial credits generated from data of turkish statistical institute and the central bank of the republic of turkey rirgovdomdeptsec real interest rate of government domestic dept securities generated from data of turkish statistical institute and bloomberg terminal even though schwarz (1978) claimed that the adf test is the best unit root test, campbell and perron (1991) proved that adf tests are liable to lag length and suggested that tests be chosen in accordance with suitable lag lengths. furthermore, structural breaks interpreted as changes in the parameter can affect the intercept term and slope parameter in the time series for the subperiods. the probability of faulty results increases in unit root tests carried out without taking these breaks into account. perron (1989) suggested adding structural breaks into unit root tests with the help of dummy variables as a solution for this problem. perron (1989) determined the date break as external, but later, approaching this situation critically, tests were developed in which date break was determined as internal. zivot and andrews (1992) suggested unit root tests that focused on an internal single break. even though tests that enabled multiple breaks were developed later on, tests with more than one break may cause faulty results since they show unit root series as stationary. therefore, the stationarity of the series was examined in this study by employing the adf unit root test with the zivot-andrews unit root test and the financial sustainability of turkey was examined with these methods. the eviews econometrics program was used in the unit root tests. the following graphics show the variables used in the study. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 67 | p a g e mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 68 | p a g e mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 69 | p a g e mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 70 | p a g e 4. results and discussion first, adf unit root tests were carried out on variables in this study and the results were recorded. stationary levels of the variables were evaluated with 5% significance in the adf tests. the schwarz information criterion was used to determine lag length in unit root tests. according to the adf unit root test results, the variables of gdp growth, real interest rate of commercial credits, and real interest rate of government domestic debt securities are stationary. non-financial private sector loan usage/gdp is not stationary in the intercept model, while it is stationary in the trend and intercept model. eudefined general government debt stock/gdp is not stationary in the intercept and trend and intercept models. public net debt stock/gdp is stationary in the intercept model, while it is not stationary in the trend and intercept model. finally, the variable of net external debt stock/gdp is not stationary in either the intercept or the trend and intercept model. table 2 shows the adf unit root test results of the variables. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 71 | p a g e table 2. adf unit root test results unit root test variable test statistic mackinnon %5 test critical value result adf (intercept) nfprivatesectorloan 0,278969 -2,905519 nonstationary eudefinedgovdeptstock 2,369767 -2,919952 nonstationary pubnetdeptstock 3,408658 -2,90621 stationary netextdeptstock -1,954706 -2,905519 nonstationary gdpgrowth -7,053619 -2,905519 stationary rircomcredits -3,512247 -2,905519 stationary rirgovdomdeptsec 2,963208 -2,905519 stationary adf (trend and intercept) nfprivatesectorloan -3,852173 -3,478305 stationary eudefinedgovdeptstock -2,251045 -3,502373 nonstationary pubnetdeptstock 0,520477 -3,479367 nonstationary netextdeptstock 2,330987 -3,478305 nonstationary gdpgrowth -7,112413 -3,478305 stationary rircomcredits 4,045669 -3,479367 stationary rirgovdomdeptsec -5,687251 -3,478305 stationary however, as mentioned before, carrying out unit root tests without taking the structural breaks of the variables into account may cause faulty results. therefore, zivot-andrews unit root tests that take the structural breaks of the variables into account were employed. table 3 shows the zivot-andrews unit root test results. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 72 | p a g e table 3. zivot-andrews unit root test results unit root test variable test statistic za %5 test critical value result za (intercept) nfprivatesectorloan -4,487321 -4,93 nonstationary eudefinedgovdeptstock -3,272866 -4,93 nonstationary pubnetdeptstock -1,494329 -4,93 nonstationary netextdeptstock -3,867323 -4,93 nonstationary gdpgrowth -7,86777 -4,93 stationary rircomcredits -4,454673 -4,93 nonstationary rirgovdomdeptsec -5,446295 -4,93 stationary za (trend) nfprivatesectorloan -4,508125 -4,42 stationary eudefinedgovdeptstock -3,048714 -4,42 nonstationary pubnetdeptstock -2,459687 -4,42 nonstationary netextdeptstock none none gdpgrowth -7,14999 -4,42 stationary rircomcredits -4,221672 -4,42 nonstationary rirgovdomdeptsec -4,876577 -4,42 stationary za (intercept and trend) nfprivatesectorloan -4,510362 -5,08 nonstationary eudefinedgovdeptstock -3,242678 -5,08 nonstationary pubnetdeptstock -2,448594 -5,08 nonstationary netextdeptstock -3,398871 -5,08 nonstationary gdpgrowth -8,029259 -5,08 stationary rircomcredits -4,630437 -5,08 nonstationary rirgovdomdeptsec -5,620651 -5,08 stationary mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 73 | p a g e according to the zivot-andrews unit root test results, the variables of gdp growth and real interest rate of government domestic debt securities are stationary in all three models. non-financial private sector loan usage/gdp is not stationary in the intercept model and trend and intercept model, while it is stationary in the trend model. eu-defined general government debt stock/gdp is not stationary in all three models. public net debt stock/gdp is not stationary in all three models. the results of net external debt stock/gdp are not stationary in the intercept and trend and intercept models (an error was obtained in the test results of the trend model). finally, the variable of real interest rate of commercial credits is not stationary in all three models. according to the results of both unit root tests, the variables of eu-defined general government debt stock/gdp and net external debt stock/gdp are not stationary. in particular, the net external debt stock/gdp variable is not stationary in all tests and this shows that the external debt stock is not sustainable. eu-defined general government debt stock/gdp is also not stationary in the tests. however, when we examine the graph for this variable, we can see that it has a downward trend. the variable of public net debt stock/gdp is not stationary in many of the test results. when we examine the graph related to this variable, it is seen that it has a decreasing tendency, except for the increases in 2008 and 2018. the variable of non-financial private sector loan usage/gdp is not stationary in either of the zivot-andrews test results. when we examine the graph related to this variable, non-financial private sector loan usage has had an increasing tendency ever since 2005. according to the results of both unit root tests, gdp growth and real interest rate of government domestic debt securities are stationary. real interest rate of commercial credits is stationary in the adf tests while it is not so in the zivot-andrews tests. as mentioned above, the levels of differences between real interest rates and gdp growth are vital in the examination of financial sustainability. when we examine the level of difference between gdp growth and real interest rate of government domestic debt securities in graph 8, we can see that real interest rate of government domestic debt securities was higher than the growth rates between 2002 and the end of 2009, but the difference was balanced in 2010. when we examine graph 3, we can see that the public net debt stock had a decreasing tendency until 2008; similarly, in graph 4, the net external debt stock variable has a decreasing tendency until 2006 and it is balanced between the years of 2006 and 2008. in this period, high real interest rates were applied in public internal borrowing, decreasing the net debt stock. after 2010, balance was restored between real interest rate of government domestic debt securities and the growth rate. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 74 | p a g e when we examine the level of difference between the variables of gdp growth and real interest rate of commercial credits in graph 9, we can see that the real interest rate of commercial credit is higher than the growth rate and there is no balance, except in some periods. after 2005 (graph 1), the nonfinancial private sector’s loan usage increased, while net external debt stock increased after 2008 (graph 4). 5. conclusion discussions on sustainability in turkey became especially prominent after the 2001 economic crisis. resource requirements of the private sector became as important as the resource requirements of the public sector. this period not only raised the importance of fiscal sustainability but also brought up the issue of the sustainability of the debts of the private sector. the loan usage of both the public and private sectors and the sustainability of these loans lead us to the concept of financial sustainability. this study examines the concept of sustainability not only as fiscal sustainability but also as financial while mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 75 | p a g e previous studies focused solely on fiscal sustainability. this study has used the quarterly data from the years of 2002-2018, analyzed the stationarity of the variables with adf and zivot-andrews unit root tests, and examined the interactions between the variables with graphs. in many studies conducted on fiscal sustainability in turkey, it was seen that fiscal sustainability is not ensured. according to the findings of the analysis and examinations of this study, there is no clear positive or negative result on fiscal sustainability, while financial sustainability cannot be ensured. references ahmed, s. & rogers, j. h. (1995). government budget deficits and trade deficits: are present value constraints satisfied in long-term data? journal of monetary economics, 36 (2), 351374. aslan, a. (2009). the dynamic analysis of the sustainability of budget deficit: the case of turkey. maliye dergisi, 157, 227-234. baglioni, a. & cherubini, u. (1993). intertemporal budget constraint and public debt sustainability: the case of italy. applied economics, 25 (2), 275-283. blanchard, o., chouraqui, j. c., hagemann r.p. & sartor, n. (1991). the sustainability of fiscal policy: new answers to an old question. national bureau of economic research (nber), working paper no: r1547, 7-36. buiter, w. h. (1983). measurement of the public sector deficit and its implications for policy evaluation and design. imf staff papers, 30 (2), 306-349. burnside, c. 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(1999). the monetary and fiscal implications of achieving debt sustainability. the caribbean centre for monetary studies xxxi annual conference, paramaribo, suriname. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 76 | p a g e göktan, a. (2008). an empirical study on fiscal sustainability in turkey. marmara üniversitesi, i̇ktisadi ve i̇dari bilimler fakültesi dergisi, 25 (2), 425-445. hamilton, j. d. & flavin, m. a. (1986). on the limitations of government borrowing: a framework for empirical testing. american economic review, 76 (4), 809-819. hepsağ, a. (2011). the analysis of sustainability of fiscal policies by periodic unit root test with structural break: the case of turkey. doğuş üniversitesi dergisi, 12 (1), 32-45. izquierdo, a. & panizza, u. (2003). fiscal sustainability: issues for emerging market countries. egyptian economic research center working paper, 91, 1-40. karatay gögül, p. (2016). fiscal sustainability analysis in the frame of structural changes for turkey (2002-2015). siyaset, ekonomi ve yönetim araştırmaları dergisi, 4 (2), 87-109. karluk s.r. (2002). türkiye ekonomisi, tarihsel gelişim yapısal ve sosyal değişim, 7. baskı, beta yayınları, i̇stanbul. kremers, j.j.m. (1988). long-run limits on the us federal debt. economic letters, 28 (3), 259-262. makrydakis, s., tzavalis, e. & balfoussias, a. (1999). policy regime changes and the long-run sustainability of fiscal policy: an applicaton to greece. economic modelling, 16, 71-86. ono, h. (2008). searching for non-linear effects and fiscal sustainability in g-7 countries. applied economics letters, 15, 457-460. perron, p. (1989). the great crash, the oil price shock and the unit root hypothesis. econometrica, 57 (6), 1361–1401. schwarz, g. (1978). estimating the dimensions of a model. the annals of statistics, 6 (2), 461-464. smith, g.w. & zin s.e. (1991). persistent deficits and the market value of government debt. journal of applied econometrics, 6, 31-44. şen, h., sağbaş, i̇. & keskin, a. (2010). an analysis of fiscal sustainability in turkey: 1975-2007. maliye dergisi, 158, 103154. trehan, b. & walsh, c. e. (1988). common trends, intertemporal budget balance and revenue smoothing. journal of economic dynamics and control, 12, 425-444. trehan, b. & walsh, c. e. (1991). testing intertemporal budget constraints: theory and applications to u.s. federal budget and current account deficits. journal of money, credit and banking, 23 (2), 206-23. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 77 | p a g e ucal, m. & alıcı, a. (2010). is fiscal policy sustainable in turkey?. emerging markets finance and trade, 46 (1), 83-93. zivot, e. & andrews, k. (1992). further evidence on the great crash, the oil price shock, and the unit root hypothesis. journal of business and economic statistics, 10 (10), 251-270. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 18 | p a g e assessing the role of monetary integration in alleviating poverty in cfa zone countries dr. emile nguimkeu tchouakeu lecturer, faculty of economics and management (fseg), university of yaounde ii, abstract: this paper examines the relationship between monetary integration and poverty reduction in countries of the cfa zone. while the role of monetary integration in promoting economic growth has been widely studied, its contribution to poverty eradication remains underexplored. this study aims to fill this gap by investigating the impact of monetary integration on poverty reduction in the cfa zone countries. it considers the distributional effects of monetary policies and analyzes the nature, intensity, and geographical spread of poverty within this region. keywords: monetary integration, poverty reduction, cfa zone, economic competitiveness, global trade introduction much research has been undertaken on the role of monetary integration to increase economic growth, but little is known about monetary integration contribution to poverty eradication. while recent theories and evidence indicate that monetary integration plays an important role in forcing macroeconomic discipline, evaluating the role of monetary integration in countries where poverty is widespread is a very hard and complex task. due to the fact that, the causes and characteristics of poverty differ from country to country, i endeavour to carry out a comprehensive examination of the constraints and opportunities for poverty reduction in countries of the cfa zone. this will require understanding of the distributional effect of monetary policies, the nature, intensity, and spread of poverty. this paper will therefore look at the link between monetary integration and poverty reduction. one of the critical challenges facing cfa zone countries is how to enhance they economic competitiveness and increase their share in the global trade in order to achieve their poverty reduction targets. among the various strategies adopted to surmount this challenge, cfa zone countries have consolidated their monetary integration. however, the latter countries are not the only group adopting this strategy. many countries of the world have grouped together to form, expand or strengthen various monetary integration arrangements in the last decade. in addition, the efficacy of monetary integration arrangements is revamping integration of developing countries in the global economy and subsequently their impact in reducing poverty have become important subjects of analysis in the last decade. many recognise that monetary integration forms an important part of the strategy for developing countries to achieve a ‘smooth and gradual’ integration into the world economy (kennes 1997). an ensuing analytical question is whether and how monetary integration reduces poverty. data used in this paper therefore provides a unique opportunity to investigate monetary integration and poverty reduction in the cfa zone. my analysis suggests that integrated monetary policies have mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 19 | p a g e direct impact on the income of the poor. further i found that monetary integration reduces poverty in the cfa zone. the rest of this paper is structured as follows: section one presents the literature survey on the definition of monetary integration. section two analyses, the basis of macroeconomic performance, poverty lines and the distribution of income in the cfa and non cfa zones countries and section three concludes. 1. literature review monetary integration and poverty reduction in the cfa zone the term monetary integration may describe institutional or legal monetary link between states coden (1972). member states in a monetary integration are subject to common monetary and fiscal policies. however, the definition of a monetary integration will be related to its degree of integration. the rational for any monetary integration is provided by the general framework of the theory of optimum currency areas. mundell was among the first economic theorists who first cited labour mobility as the most important determinant of optimum currency area. it facilitates adjustment between regions and prevents economic slowdown because it implies employment equalisation over areas which, in its absence, would be characterised by extreme high and low employment. when the currencies of small countries are pegged, mundell argues that: if you throw the devaluation instrument away, you want to have some protection in case your country gets into unemployment or excessive internal debt problems. if there is a shift of demand from your own country onto goods of the metropolitan centre, that will cause unemployment at home. if it can be mitigated by the labour flow to the metropolitan centre, the problem will be less acute” (mundell 1961: 366-367) allen (1976) defined monetary integration further by asserting that a monetary integration should include the following characteristics: a single money, or several currencies fully convertible at immutably fixed exchange rates. an arrangement whereby monetary policy is determined by all parties concerned, allowing no national autonomy in monetary policy. for example, as financial integration increases, inter-regional interest rate movements must become closer. no national autonomy is also allowed in a single external exchange rate policy. toward this end, national authorities must relinquish individual control over their international reserves and invest such control in a union authority (allen 1976: 4). therefore, the authors mentioned above emphasize the need for institutional safeguards to guarantee the existence of a single monetary policy. the cfa zone encompasses elements of monetary integration described above. in central and west africa for example, the franc zone includes 13 member countries: benin, burkina faso, cameroon, central africa republic, chad, congo, côte d’ivoire, equatorial guinea, gabon, mali, niger, senegal and togo. the franc zone owes its origins to the administration of french colonies before and immediately after world war ii. in 1945, the franc des colonies françaises d’afrique or cfa franc was created and was to be issued by the caisse centrale de la france d’outre mer, which had been established during the war to provide a substitute for french bank notes issued under the occupation. until 1962, the abbreviation “franc cfa” stood for franc des colonies françaises de l’afrique. today, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 20 | p a g e this label is interpreted as franc de la communauté financière africaine in west africa and is legal tender in benin, burkina faso, côte d’ivoire, guinea-bissau, mali, niger, senegal and togo. in central africa the same label is interpreted as franc de la coopération financière en afrique centrale and is legal tender in cameroon, central african republic, chad, republic of the congo (brazzaville), equatorial guinea and gabon. both currencies follow almost identical monetary arrangements • convertibility into french franc i.e. euro at a fixed parity. the exchange rate between the french and cfa francs is fixed at 100 fcfa = 1 ff. changes in this parity required the unanimous consent of all zone members, including france. • guarantee of convertibility by france through the establishment of an operation account for each colonial central bank with the french treasury. • free capital mobility throughout the zone. • pooling of most foreign exchange reserves at the french treasury. the introduction of the euro left the monetary arrangement in the cfa zone un-touched, except for the fact that its currency is now pegged to the euro. france, when becoming part of the euro area, did so with the understanding that decisions regarding new members or changes in the exchange rate of the cfa system would be communicated in advance to european institutions. interest rate structure and levels are determined by the beac (banque des etats de l’afrique centrale) in central africa and the bceao (banque centrale des etats de l’afrique de l’ouest) in west africa which set artificial discount rates identical for all member countries. each country’s national credit council sets the margin to be added to the beac or the bceao determined discount rates, so that ultimate borrowing and lending rates may differ between countries of the zone. in addition to monetary integration, countries in the cfa zone also aimed to advance economic integration by founding, in central africa, the cemac (communauté économique et monétaire de l'afrique centrale), and in west africa, the uemoa (union economique et monétaire ouest africaine) in west africa and the communauté économique et monétaire de l'afrique centrale () in central africa. in the next section i assert that low inflation rates generated by the monetary and economic integrations have contributed to poverty reduction in the cfa zone. this assertion is supported by fielding (2004) who argued that: households in a subset of the countries (in the cfa zone) especially poor household, bear the brunt of the price volatility… the policy instruments at its (cfa zone) disposal are potentially valuable set of tools to combat the price uncertainty that arises from exogenous shocks and increases the vulnerability of the poor. shorthand and stasavage (2004: 534) provided evidence that the cfa zone central banks take into account inflation rates and the output gap positions when making interest rate decisions. the regional integration also has effect on the price of goods produced and consumed by the poor. there is also a wider regional trade gain which benefits the poor. i also assert in the next section that the above integration also serves to increase the overall investment, savings and per capita income and thereby reducing poverty in the zone. azam asserted that: the crucial link is through the fact that formal sector workers, who are much more affluent than other category of workers, in most countries of the cfa zone, are running business in the informal sector. they invest their savings in small firms, where they generally employ people from their social network. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 21 | p a g e the fact that six out of thirteen cfa zone countries in central and west africa till date have reached the completion point indicates their commitment to reduce poverty. claveranne (2005) asserted that meeting the completion point, the cfa zone countries confirm their ability to carry out a pro-poor economic policy. it should be noted that to reach the completion point, the latter countries met a number of triggers involving macroeconomic stability and commitment to a poverty reduction strategy. 2. macroeconomic performance, poverty and income distribution: cfa and non cfa zones in subsections 2.1 and 2.2, i compare respectively macroeconomics and poverty indicators for central and west african countries in the cfa zone with those of the non cfa zone. only selected countries where relevant data to my study could be found in the world bank data base are considered in this section. it follows therefore that, in the cfa zone, seven countries have been selected: benin, burkina faso, cameroon, central african republic, cote d’ivoire, niger and senegal. in the non cfa zone, four countries have been selected: ghana, nigeria, sierra leone and the gambia. macroeconomics indicators analysed in subsection 2.1 are inflation, gross domestic savings as a percentage of gross domestic product (gdp) and gross domestic income per capita. poverty indicators analysed in subsection 2.2 are: poverty line, poverty headcount and the gini coefficient. 2.1 macroeconomic performance inflation figure 1 shows that, in terms of inflation, cfa zone countries demonstrate a superior performance compared to their non cfa zone counterparts. over the 1961-2000 periods they averaged an inflation rate of only 6% per year compared to the non cfa zone states at 22% per year. monetary integration in the cfa zone may have contributed to the latter performance. for example, honohan (1992) established a long-term relationship between cfa inflation rates and the "core" inflation rate of france. furthermore, the control over the rate of domestic credit expansion by the cfa two central banks appears to have played a major role to the current low rate of inflation. fixed exchange rates have enabled cfa zone countries to maintain lower inflation than their neighbours. the openness of the cfa economies prevents strong linkages between fiscal financing through credit expansions and monetary growth. if there is too much credit expansion, it will simply leak out into imports or capital movements within the zone and france. if there is too little, it will be made up by capital inflows. one may deduce that the fiscal expansion has little impact on the stock of money, and hence inflation. the above performance supports the analysis on poverty carried out in the next subsection. high inflation in the non cfa zone could be detrimental in two ways. first, inflation may not affect individuals below the poverty line due to their negligible average cash holdings. but it may wipe out the savings of the middle class and increase the number of poor. in this sense it widens inequality of income as indicated in table 2 and increases poverty as shown in figure 4 and in table 1 in the next section. second, if nominal wages increase less than the price of goods consumed by wage earners, worker’s real income will decline. this may also increase the number of poor. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 22 | p a g e gross domestic savings (%gdp) although the cfa regime appeared to offer its participants a higher gross domestic savings ratio in the 1960s at the range of 9% per year compared to 8% to their corresponding non cfa counterparts, figure 2 indicates that in the 1980s and the mid-1990s, the gross domestic savings of the groups reveal similar fluctuations. however, since the mid-1990s till now, cfa zone countries have outperformed the non cfa zone countries in terms of gross domestic savings. the issue of savings is very closely related to the question of investment in the poor and by the poor. without an enlarged pool of domestic savings, it is difficult to sustain higher rates of domestic investment which therefore contribute to a sustainable economic development unless there is increased reliance on foreign capital. conventional development economists have often assumed that the most effective way to boost savings is to channel income to those who are relatively rich, since they have higher marginal propensities to save than lowincome groups. but the savings rates of the poor often tend to be higher than is generally assumed, and moreover, a more equal distribution of assets that provides the poor with greater access to assets can have substantial positive effects on their savings rates. higher savings rates are usually tied to greater investment opportunities, and such opportunities most commonly arise from the possession of assets that can be built up over time. those without assets and little prospect of obtaining them understandably have a dampened incentive to save. high savings in the cfa zone countries may be reflected in the gross national income good performance as illustrated in the next subsection. gross national income per capita (gni) figure 3 reveals that the non cfa zone had a low edge over cfa zone countries in the periods 19601976 in terms of gni per capita. by contrast, from 1978 till now, gni has been higher in the cfa zone mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 23 | p a g e countries than that of the non cfa zone countries. low inflation and high domestic savings may have contributed to this outstanding cfa zone performance. it is widely held that a high gni per capita is a strong representation of the country’s ability to curb poverty (ceteris paribus). dollar and kraay (2002) have recently defended the view that growth is highly beneficial to poverty reduction. however, killick and white (1999) have argued that growth alone will not be sufficient to reduce poverty, particularly in africa, while white and anderson (2000) have suggested that a strategy that combines growth and a better income distribution can have a better result in terms of poverty reduction. indeed, the next subsection provides evidence of a better performance of income distributed in the cfa zone countries than that of the non cfa zone. 2.2 share of income and poverty poverty is associated with the distribution of income. thus, when considering poverty among households, it is necessary to put this in the more general context of the spread of incomes. before dealing with the distribution of incomes, it is first necessary to set out the basis on which poverty lines might be established. poverty line for the purpose of comparing the share of income between cfa zone countries and their non cfa zone counterparts, we set as indicator of monetary poverty, the national per capita income of the poorest 20% of the population as calculated by dollar and kraay (2002). according to our criterion, figure 1 shows that cfa zone countries have performed better than their non cfa zone counterparts in terms of the poverty reduction line since the 1970s till now. low inflation, higher gross domestic savings and higher gni outlined earlier may have contributed to the poverty line performance in the cfa zone. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 24 | p a g e poverty headcount the world bank, being the sole producer of the world poverty headcount, observed that out of 6 billion people 1.2 billion live on less than $1 a day. on the basis of the world bank headcount, table 1 indicates that the number of people living on less than $1 a day is lower in the cfa zone countries than in non cfa zone subsaharan african countries. the cfa zone states account for 31% of their total population, compared to 49% for the non cfa states. in the cfa states the lowest poverty headcount is found in cote d’ivoire with 16% followed by cameroon and senegal with 17% each. central africa and niger account for the highest poverty headcount in the cfa zone respectively for 67% and 41%. table 1 also shows that the lowest poverty headcount in non cfa zone is found in the gambia with 27% followed by ghana with 41% while nigeria and sierra leon account for the highest poverty headcount respectively with 71% and 57%. the gini coefficient poverty measures depend on the average level of income in a country and the distribution of income. based on these two elements, poverty measures therefore focus on the situation of those individuals or households at the bottom of the distribution. inequality is a broader concept than poverty in that it is defined over the entire population, not only below a certain poverty line. the inequality measure utilised in this paper is the gini coefficient of inequality. the ‘gini’ is based on the income levels of individuals. assume there are ‘m’ distinct income groups, each income group is denoted by ‘j’ but there are ‘m’ such groups. within each income group ‘j’ there is a number of individuals earning that income level. the total number of people ‘n’ is equal to m n j (1) j 1 the average/mean of any income (y) distribution is denoted by this average is simply the total income of all individuals divided by the number of individuals. hence, 1 m n j y j (2) n j 1 the gini index determines the differences in income between each pair of incomes. these differences are then summed together with absolute values being used so that information is not lost through values being both positive and negative. we take the difference between income of individual ‘j’ and individual ‘k’, so that y j y k income difference (3) we could estimate one of the differences and multiply by a factor of 2 because we take the absolute values of the income differences. the gini coefficient is then represented by, 1 m m g 2 n j n ky j y k (4) 2n j 1 k 1 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 25 | p a g e there are 2 summations because firstly, we sum over all the ks holding each j constant, and then we do the same for the js, summing over all the js holding each k constant. essentially, we are summing every single income differential in the sample. so everything inside the brackets represents the sum of the income differentials for the whole sample. this large number is then divided by 2n 2 . the ‘2’ comes from counting income differentials twice when summing over ‘ks’ and then ‘js’. the n-squared and the mean income terms are included so as to normalize the gini coefficient. the above equations indicate that the gini coefficient is good at picking up increasing or decreasing income inequality. for example, table 2 shows that income is more unequally distributed in non cfa countries than in cfa countries. the latter groups studied have a gini coefficient of 49.3% and 44.26% respectively. the income gap between rich and poor is more widened in the non cfa states than in their cfa counterparts. for example, the states of sierra leone and the gambia show the highest poverty gaps in the non cfa zone respectively with 62% and 50% while the states of central african republic and cote d’ivoire had the highest poverty gaps in cfa zone countries respectively with 61.33% and 48.39%. the percentage of people living in poverty may be reduced in the cfa zone in accordance with the world poverty headcount, while the same indicator shows that the level of poverty in non cfa zone countries is not encouraging. the data provides support for the assertion that inequalities often widen despite the benefits of strong and sustained economic growth. in terms of poverty reduction, we could recommend that contrary to masson and pattillo (2002), the monetary integration project in the economic community of west african states (ecowas) should be encouraged. this would be a large value added to the process of regional cooperation and integration in west africa. other countries in sub-saharan africa should follow suit. this conclusion is supported by clement et al (1996) who argued that: the two sub regions (central africa and west africa) need to intensify the momentum of regional integration and economic cooperation. this would help avoid inconsistent policies. it would also facilitate the emergence of large economic areas that offer broader markets and opportunities for economic of scale, and encourage factor mobility. the development of the regional instrument to foster economic convergence therefore should be actively encouraged. fielding (2002) also supported integrations by arguing that cfa zone has three main advantages comparing to their non cfa zone counterparts: greater financial openness, an absence of exchange rationing and more stable prices. he went further to argue that: for a wide variety of measures the exchange rate peg delivers more integration than a flexible exchange rate. the differences are statistically significant and economically substantial. in the case of trade integration there is also evidence that a common currency – as opposed to a simple exchange rate peg – makes a difference. in this case, the size of the difference depends on geographical factors reflecting international transportation costs. the extra trade that a common currency delivers is greater among countries that face lower costs. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 26 | p a g e jacob tche 23 table 1: poverty headcount in non cfa and cfa zone countries (% of population) beni n burkin a faso camero on central african republ ic cote d'ivoir e ghan a nige r nigeri a seneg al sierr a leon e gambi a, the total averag e non cf a zon e 41 71 57 27 49 cf a zon e 31 29 17 67 16 41 17 31 source: world bank’s povcalnet data tool, see http://iresearch.worldbank.org/povcalnet table 2: gini coefficient in non cfa and cfa zone countries (in percentage) beni n burkin a faso camero on central african republ ic cote d'ivoir e ghan a nige r nigeri a seneg al sierr a leon e gambi a, the total averag e non cf a zon e 40.75 43.6 62.87 50 49.3 cf a zon e 38.6 2 39.6 44.56 61.33 48.39 36.1 0 41.25 44.26 source: world bank’s povcalnet data tool, see http://iresearch.worldbank.org/povcalnet 4. conclusion while monetary integration arrangements have existed in many parts of the world for a long time, their efficacy in changing the nature of the integration in african economies and subsequently, their impact in reducing poverty has become an important subject of analysis and policy in the last decade. in most parts of africa, a new wave of regionalisation is taking place. whereas some monetary arrangements are expanding, and others are being strengthened, new ones such as that of the ecowas are also being mailto:contact@americaserial.com mailto:contact@americaserial.com http://iresearch.worldbank.org/povcalnet http://iresearch.worldbank.org/povcalnet american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 27 | p a g e formed. in this paper, i attempted to offer a unique opportunity to investigate monetary integration and poverty reduction in the cfa zone. i have followed past practice in focusing primarily on the macroeconomic performance and on the international poverty line that accords with poverty lines typical of the poorest countries. for this purpose i started by analysing the level of inflation, the gross domestic savings and the gni per capita. i carried out my investigation on poverty by using a poverty line of the poorest 20 % and the number of people living on less than $1 a day in the cfa zone countries and in non cfa zone in central and west africa. the inequality measure utilised in this paper was the gini coefficient of inequality. in conclusion, we can say that: • in terms of inflation, cfa zone countries demonstrated a superior performance compared to their non cfa zone counterparts. • since the mid-1990s till now, cfa zone countries have outperformed non cfa zone countries in terms of gross domestic savings. • the non cfa zone had a low edge over cfa zone countries in the 1960-1976 periods in terms of gni per capita. by contrast, from 1978 till now, gni has been higher in the cfa zone countries than that of the non cfa zone countries. • cfa zone countries have performed better than their non cfa zone counterparts in terms of the poverty reduction line since the 1970s till now. • the number of people living on less than $1 a day is lower in the cfa zone countries than in non cfa zone sub-saharan african countries. • income is more unequally distributed in non cfa countries than in cfa countries. furthermore, monetary integration can affect poverty in a variety of ways: low inflation rates which will have effect on the price of goods produced and consumed by the poor, wider regional trade gains which benefits the poor, the increase in the overall investment, savings and per capita income. these effects will depend on the depth of the integration process and on the complementary condition that countries put in place. however, the latter positive effects are likely to remain limited in regions with nonmembers of a monetary integration. this means that expectations with respect to poverty reduction in non-monetary integrated countries may be tempered. this notwithstanding, money creation constraints, for example, is the reasons behind cfa zone countries extreme reliability on fiscal policies rather than monetary policies to solve government expenditure problems. thus while i remain cautious in encouraging monetary integration in other parts of africa, my results indicate that countries in the cfa zone have come furthest on the way to poverty eradication. references azam, p. (2004) poverty and growth in the waemu after the 1994 devaluation, journal of african economies, 13 (4), 536-562 claveranne, b. (2005), la zone franc: au-dela de la monnaie…, economica, paris. clement, j. a. p., mueller, j., cosse, s., le dem, j. (1996), “aftermath of the cfa franc devaluation”, imf occasional paper no. 138 (washington: international monetary fund) coden, w. (1972), monetary integration, princeton university, new jersey mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 28 | p a g e dollar d., kraay, a. (2002) growth is good for the poor, journal of economic growth,7(3), 195-225 fielding, d. (2002), the macroeconomics of monetary union: analysis of the cfa franc zone, routledge, london fielding, d.(2003) “economic integration in west africa: does it make a difference?”, mimeo, wider, united nations university, helsinki. fielding, d. (2004) how does monetary policy affect the poor? evidence from the west african economic and monetary unions, journal of african economies, 13 (4), 563-593 honohan p. (1992) price and monetary convergence in currency unions: the franc and rand zones, journal of international money and finance, 11(4), 397-410. kennes, w (1997) developing countries and regional integration the courier acp-eu, no. 165, 6467. available at www.euforic.org/courier/165e_ken.htm as of may 2007. killick, t., white, h. (1999) poverty in africa: why economic growth will not be enough, odi, london. available at http://www.odi.org.uk/speeches/killick.html as of may 2007. mundell, r. a. (1961) african currency problems in african and monetary integration, edited by tremblay, r., edition hrw, montreal, pp. 363-368. masson, p., pattillo, c. (2003) monetary union in west africa: an agency of restraint for fiscal policies?, journal of african economies, 11(3), 387-412 polly, r, (1976), organisation and administration of a monetary union, princeton university, new jersey ravallion, m. (1998), poverty lines in theory and practice, world bank, washington dc. shortland, a., stasavage, d. (2004) what determines monetary policy in the franc zone? estimating a reaction function for the bceao, journal of african economies, 13 (4), 518-535 white, h., anderson, e. (2000) growth versus distribution: does the pattern of growth matter?, ids, london world bank (2001), 2001 world development indicators, the world bank group, washinton, d.c. mailto:contact@americaserial.com mailto:contact@americaserial.com http://www.euforic.org/courier/165e_ken.htm http://www.odi.org.uk/speeches/killick.html american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 13 | p a g e banking liquidity paradox: insights from an optimal reserve model omer kouakou economics department, alassane ouattara bouaké university. abstract: the banking liquidity paradox, characterized by excessively liquid banks despite the insufficient supply of business loans, is a persistent concern in sub-saharan africa (ssa). this paradox stems from both involuntary and voluntary factors influencing commercial banks' excess reserve holdings. involuntary causes include substantial foreign currency inflows resulting from exports of commodities like oil, coffee, and cocoa. these export revenues significantly boost bank liquidity, a phenomenon observed in regions like cemac. additionally, factors such as accumulating foreign exchange reserves to maintain currency stability in fixed parity monetary zones, remittances from migrants, official development aid, and debt relief initiatives like the heavily indebted poor countries initiative (hipc) contribute to increased bank liquidity. furthermore, the repatriation of capital after currency devaluation and the establishment of regional stock exchanges amplify capital inflows. voluntary factors also play a role, including restrictions on central banks financing national treasuries, as well as monetary policies associated with mandatory reserves. this article delves into the intricate web of involuntary and voluntary influences driving the banking liquidity paradox in ssa, shedding light on the complexities of the region's financial landscape. keywords: banking liquidity paradox, sub-saharan africa (ssa), excess reserves, capital inflows, monetary policy, financial landscape. 1. introduction the question of the banking liquidity paradox in the banking system concerns the insufficient supply of business loans by banks, which are nevertheless excessively liquid. this shortfall in the global supply of loanable funds has been variously interpreted. in general, the causes of excess liquidity in the countries of sub-saharan africa (ssa) are grouped into two categories: involuntary causes and voluntary causes of excess reserve holding by commercial banks (agénor, aizenmann and hoffmaister, 2004). the involuntary detention of excess liquidity is explained by large inflows of foreign currency generated by the exports of certain commodities such as oil, coffee, cocoa, etc. the revenues from these exports inflate the liquidity of banks as studies show it for the cemac zone (beguy, 2012; doumbia, 2011). other sources of increased bank liquidity are: the accumulation of foreign exchange reserves to defend the parity in fixed parity monetary zones via the internal and external stability of the value of the currency (doumbia, 2009), the influx of funds from migrants, official development aid, the cancellation of the debt of certain countries following the heavily indebted poor countries initiative (hipc initiative), the repatriation of capital after the devaluation. other factors contribute to the influx mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 14 | p a g e of capital: the establishment of regional stock exchanges, the prohibition of the financing of national treasuries by the central banks and the monetary policy resulting from the play of mandatory reserves. the involuntary detention of excess liquidity is explained partly by the underdeveloped nature of their financial market. for example, in a context of administered interest rates, banks are reluctant to grant loans that increase the risks of insolvency, instability and non-bankable projects (eboué, 1990, 1998b). this results in credit rationing like the one studied by modigliani and jaffee (1969). the excess liquidity resulting from credit rationing can also be explained by information problems between lenders and borrowers (stiglitz and weiss, 1981). these information problems manifest themselves in the form of asymmetric information: the bank does not know the real quality of the projects (stiglitz and weiss, 1981) or in the form of symmetrical ignorance (stiglitz and emran, 2007): the borrowers themselves even ignore the quality of their projects. this behavior of the banks is all the more marked as the lending rates (cost of credit) are very high. this increases the borrower's probability of default, the default rate and the reserve rate (vo thi, 2005, prao, 2012). banks are therefore becoming very cautious about loans granted. other factors that increase credit rationing are the weak legal, judicial and regulatory framework (sacerdoti, 2005), the lack of bankable projects, gaps in accounting standards, and the existence of a poorly developed justice system (doumbia, 2011). the reduction of these uncertainties involves the production of reliable accounting documents, the development of the clientagent relationship via proximity and trust, an update of accounting and auditing standards. excess liquidity, linked to the holding of voluntary liquidity, is also justified by the high level of deposits by governments in some countries and by deficient loans (saxegaard, 2006). the voluntary holding of liquidity meets the desire of secondary banks facing growing uncertainty to avoid potential risks. this precautionary banking behavior resulting in excess liquidity has various consequences, particularly with regard to the effectiveness of monetary policy. nissanke and aryeetey (1998) show that bank excess liquidity weakens the transmission mechanism of monetary policy. more specifically, it becomes difficult, in the presence of excess liquidity, to regulate the money supply via the reserve requirement ratio and the monetary multiplier. saxegaard (2006) tests this result for a sample of ssa countries. his study suggests that liquidity weakens the ability of monetary authorities to influence the conditions of demand in these countries. agénor, aizenmann and hoffmaister (2004) obtain similar results. ideas are proposed to absorb the excess bank liquidity by minimizing the uncertainties that cause the precautionary behavior of banks. beguy (2012) proposes the establishment by the state of a guarantee fund allowing banks to recover part of their debts in the event of default. in doing so, this guarantee fund absorbs the banks' excess liquidity. for some, this entails a good restructuring of the judicial system in terms of efficiency to encourage banks to increase business loans (pagano and bianco, 2005). another measure according to beguy (2012) is the tax bonus. indeed, for him the state can encourage the banks to grant the credits by the implementation of a fiscal bonus, to those who will commit the most to the financing of the private sector. thus, works that address the issue of voluntary excess liquidity have explained it essentially by the risky environment faced by risk averse banks. these uncertainties are due to financial markets imperfections, information asymmetries, weak judicial and regulatory framework, etc. our objective, in this paper, is to show that, whatever the degree of uncertainty (low uncertainty or high uncertainty), excess liquidity mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 15 | p a g e may appear. this is the case when expected portfolio return of the risk neutral bank is sufficiently low. to address this issue, we take over a theoretical analysis, unlike most of the studies about excess liquidity that use empirical analysis. more precisely, we develop a model of optimal behavior of the bank. this model is an adaptation of baumol's (1952) optimal cash model. the rest of the article is structured as follows: section 2 models the optimal behavior of a risk-neutral bank. then, in section 3, the hypothesis of a risk-averse bank makes it possible to highlight the main role of uncertainties in absorbing the excess banking liquidity. section 4 concludes the paper. 2. the optimal behavior of the risk neutral bank 2.1. the assomptions a risk-neutral bank realigns its portfolio once a period and is assumed to invest its total fund 𝑇 in two types of assets (loans and risk-free securities). the bank decides how much of its portfolio to allocate to loans risk-free securities (𝑦𝑖𝑡) and liquidity in order to maximize its profit (𝛱𝑖𝑡). loans, if they generate a higher expected return than that of risk-free securities, also induce more risk. loans have two types of risk: market risk and default risk (credit risk). loan yields (𝑟𝑐𝑖𝑡) and security assets (𝑟𝑠𝑖𝑡), the two types of assets that compose the bank portfolio, are: 𝑖, ∀𝑡, 𝑟𝑠𝑖𝑡 = 𝑟𝑓 (1) ∀𝑖, ∀𝑡, 𝑟𝑐𝑖𝑡 = 𝑟𝑓 + 𝜌 + 𝜀𝑖𝑡 (2) where 𝑟𝑓 : risk free interest rate; : market risk premium ; is an idiosyncratic shock that affects the bank at period . noting 𝑥𝑖𝑡 the proportion of the portfolio invested in loans by bank in period and (1 − 𝑥𝑖𝑡) the proportion of the portfolio invested in securities, the return of the bank portfolio is determined as follows: ∀𝑖, ∀𝑡, 𝑅𝑖𝑡 = 𝑥𝑖𝑡𝑟𝑐𝑖𝑡 + (1 − 𝑥𝑖𝑡)𝑠𝑖𝑡. this expression comes down to: the bank, supposedly risk neutral, optimizes its profit. we notice 𝐶𝑖 : the volume of bank loans granted by the bank at ; 𝐴𝑖𝑡: the volume of security assets; 𝑖𝐶 : the cost of the bank loan (interest rate); 𝑖𝑀𝑀 : the cost of refinancing on the money market; 𝑅𝐸𝐹𝑖𝑡 : the refinancing of bank with the central bank in . the profit of the bank is the difference between its total revenue and its total cost: • total revenue: revenues from bank loans (𝑖𝐶𝐶𝑖𝑡) and capital gains reported by the investment of security assets (𝑟𝑓𝐴𝑖𝑡); • the total cost is the sum of the total refinancing cost (𝑖𝑀𝑀𝑅𝐸𝐹𝑖𝑡) and the total cost of holding the liquidity (𝐶𝑇𝐿). the profit of the bank at period is written: to determine the total cost of holding liquidity, we draw on baumol's optimal cash management model (1952), which we adapt to banking behavior. a bank must therefore hold at all times a level of liquidity such that it is not short of cash. indeed, it must at all times satisfy the withdrawals of funds from its customers either at the counters or automated teller machines (atms). insufficient liquidity can lead to insolvency of the bank. at the same time, however, this amount of liquidity should not be too large, because there is an option cost to holding it: the rate of return on the investments in which it could be mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 16 | p a g e invested. it is assumed that the cash flows of the bank are certain, liquidity outflows are at a constant rate. the average liquidity held by the bank is 𝐿/2 (with : bank liquidity at the beginning of the period). the bank's assets portfolio (loans, security assets) can be used to regenerate bank liquidity when needed. when liquidity becomes insufficient, the bank sells part of its portfolio at the beginning of the period to bring liquidity back to the desired level. in doing so, it regenerates its liquidity in the next period. the rate of decline in liquidity is constant over a period. each conversion of securities into cash corresponds to transaction costs (commission paid by the bank to its broker for the sale of securities, time spent by the bank on such transactions). therefore, the lower the bank liquidity, the higher the number of conversions and the higher the transaction costs of the bank. let be the fixed costs that the bank incurs each time it converts securities into money. we have: 𝐹 = 𝑓𝐶𝐶𝑖𝑡 + 𝑓𝐴𝐴𝑖𝑡, where 𝑓𝐶 are the fixed costs related to the conversion of risky securities into money and 𝑓𝐴 are the fixed costs related to the conversion of safe securities into money. during a period, the total transaction costs of a bank related to the management of its liquidity are the product of the number of conversions that multiplies the fixed costs per conversion. with the additional assumption that the total fund the bank must have at period is a multiple of deposits it has in its reserves, . thus, we have: in addition, the holding of liquidity also includes an option cost. cash does not pay any interest. the option cost related to the holding of cash therefore corresponds to the interest income sacrificed as a result of the conversion of securities into cash. if 𝑅𝑖𝑡 is the rate of return on the bank portfolio from which the cash is generated, and since the average annual cash position of the bank is (𝐿/2), the option cost of holding the liquidity is as follows: the total cost of holding the liquidity (𝐶𝑇𝐿) is the sum of the transaction cost and the option cost: 2.2. the optimization program of the risk-neutral bank the profit of the bank becomes: we can refine this expression of the bank profit. to do this, we start from the fact that the refinancing of bank 𝑖 with the central bank is the difference between, on the one hand, the sum of banknotes in circulation of the bank (𝐵𝑖𝑡), the reserve requirements of bank (𝑅𝑂𝑖𝑡) and, on the other hand, the sum of the value of the gold and currencies of the bank (𝑂𝐷𝑖𝑡) and the net loans of the bank to the treasury (𝑇𝑖𝑡). so: 𝑅𝐸𝐹𝑖𝑡 = 𝐵𝑖𝑡 + 𝑅𝑂𝑖𝑡 − 𝑂𝐷𝑖𝑡 − 𝑇𝑖 . in addition, it is assumed that the deposits of bank with the central bank consist only of reserve requirements 𝑅𝑂𝑖𝑡 whose rate is such that 𝑅𝑂𝑖𝑡 = 𝑟𝐷𝑖𝑡. the net mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 17 | p a g e contribution of the bank to the treasure at period t is: 𝑇 = 𝐹𝑀𝐸𝑖𝑡 − 𝐶𝐶𝑃𝑖𝑡 with 𝐶𝐶𝑃: total postal check accounts, hence 𝑅𝐸𝐹𝑖𝑡 = 𝐵𝑖𝑡 + 𝑟𝐷𝑖𝑡 − 𝑂𝐷𝑖𝑡 − 𝐹𝑀𝐸𝑖𝑡 + 𝐶𝐶𝑃𝑖𝑡. finally, knowing that the money supply created by the bank in (𝑀𝑖𝑡) is the sum of bank loans 𝐶𝑖𝑡, the monetary financing of the treasury 𝐹𝑀𝐸𝑖𝑡 and the value of gold and currencies 𝑂𝐷𝑖𝑡; we obtain 𝑀𝑖𝑡 = 𝐶𝑖𝑡 + 𝐹𝑀𝐸𝑖𝑡 + 𝑂𝐷𝑖𝑡 ⇒ −𝑂𝐷𝑖𝑡 − 𝐹𝑀𝐸𝑖𝑡 = 𝐶𝑖𝑡 − 𝑀𝑖𝑡. because of this, 𝑅𝐸𝐹𝑖𝑡 = 𝐵𝑖𝑡 + 𝑟𝐷𝑖𝑡 + 𝐶𝑖𝑡 − 𝑀𝑖𝑡 + 𝐶𝐶𝑃𝑖𝑡. it is assumed, moreover, that the bank bears interest on deposits with 𝑖𝐷 the interest rate on deposits, and some variable costs whose growth rate increases with the activity of banks (here measured by the distributed credit): 𝐶𝑉𝑖𝑡 = 𝑔𝐶𝑖𝑡2. let us define the following ratios: and . we can write: 𝐵𝑖𝑡 + 𝑟𝐷𝑖𝑡 + 𝐶𝑖𝑡 − 𝑀𝑖𝑡 + 𝐶𝐶𝑃𝑖𝑡 = 𝑝′𝑀𝑖𝑡 + 𝑟𝑝𝑀𝑖𝑡 + 𝐶𝑖𝑡 − 𝑀𝑖𝑡 + 1 − 𝑝 − 𝑝′ ′ . remembering that 𝐹 = 𝑓𝐶𝐶𝑖𝑡 + 𝑓𝐴𝐴𝑖𝑡 , , and 𝑇𝑖𝑡 = 𝑥𝑖𝑡𝐶𝑖𝑡 + 𝑦𝑖𝑡𝐴𝑖𝑡+(1 − 𝑥𝑖𝑡 − 𝑦𝑖𝑡)𝐿𝑖𝑡, the bank profit is written: finally, after some refittings, the expression of the bank profit is refined as follows: the bank chooses the triplet so as to maximize the profit . the first order conditions give the following results: the resolution of the system formed by the three equations , and leads to the optimal level of credit supply , the optimal liquidity holding and the optimal demand for security assets . we determine the liquidity ratio defined here as the ratio of the optimal liquidity to the optimal credit. from the equation (12), we obtain: mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 18 | p a g e knowing that , it follows: in this expression, the term 𝑦𝑖𝑡/𝑥𝑖𝑡 contains the monetary variables 𝑖𝐶, 𝑖𝑀𝑀, 𝑟, 𝑝, 𝑖𝐷 through , so that the following proposition holds: proposition 1: the liquidity ratio depends on financial parameters, namely 𝑥𝑖𝑡, 𝑦𝑖𝑡, 𝑓𝐶,𝐴,𝑟𝑓, 𝜌. it depends also on the monetary variables 𝑖𝐶, 𝑖𝑀𝑀, 𝑟, 𝑝, 𝑖𝐷. formally: now let's introduce the liquidity ratio threshold . this is the liquidity ratio defined normatively as the threshold beyond which there is bank excess liquidity. formally, there is bank excess liquidity, that is, , when: where , the return of the banking portfolio of loans and securities. can be interpreted as the cost of converting into liquidity a portfolio consisting of a credit unit and the corresponding number of security assets. can be interpreted as the number of securities held in the portfolio (proportion of credits and corresponding proportion of security securities). the product of these two terms is then nothing other than the total cost of converting the bank's portfolio into liquidity. is the average conversion cost and is the average return over the period. when this cost is too high, which is higher than the average yield of the banking portfolio, the bank prefers to keep a lot of liquidity. otherwise, when the average yield of the banking portfolio over the period is higher than the average cost of conversion, the bank is encouraged to invest its funds to grant more loans and acquire more securities. this results in a decrease in liquidity: from these results follows the proposition 2: proposition 2: the bank has excess liquidity when the financial market is underperforming with respect to investments in securities and/or loans: mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 19 | p a g e this excess liquidity is absorbed in two cases: • 𝑅𝑖𝑡 increases, that is, when the risk-free rate 𝑟𝑓 and/or the market risk premium (here, the yield on loans) increases, ceteris paribus; cf. equation (3): ; • the fixed costs related to the conversion of safe securities into liquidity, 𝑓𝐴, and the fixed costs related to the conversion of debt securities into liquidity, 𝑓𝐶, fall, ceteris paribus. in the model of the risk-neutral bank developed above, bank excess liquidity results from the optimal behavior of the bank which optimizes its profits. excess liquidity is a sign that the financial market is not providing the right incentives for investment in securities or loan financing. whatever the degree of economic uncertainty (low uncertainty or high uncertainty), there is excess liquidity when the total cost of conversion in liquidity of securities per unit of credit granted is greater than the expected return of the bank portfolio. so the ultimate determinant of the optimal excess liquidity here is not the uncertainty but the low expected return of the bank portfolio. the level of economic uncertainty explains indirectly the bank’s optimal excess liquidity, through the idiosyncratic shock 𝜀𝑖𝑡 contained in the bank’s portfolio return the main role played by the economic uncertainty appears in a context of high expected return of the bank portfolio. in this case, the excess liquidity is absorbed by the economy. more precisely, the bank reallocates the excess liquidity by reassigning the proportion of credit and safe securities in its portfolio. either the bank increases the proportion of loans deemed to be riskier or it increases the proportion of safe securities. such a reassignment requires lifting the hypothesis of a risk-neutral bank. hence, it is assumed that the bank is risk averse, and we show how the uncertainty affects the proportions of loans and safe securities in the bank’s portfolio. 3. the optimal behavior of the risk averse bank 3.1. the assumptions the objective-function of the risk averse bank is the expected utility of its profit 𝑈(𝛱𝑖𝑡). as the degree of uncertainty in the economy grows, it becomes increasingly difficult to determine the optimal rate of return on loans. this pushes the bank to use an informative signal to try to predict this optimal rate of return on loans. in other words, in times of great economic uncertainty (experience of crisis, restructuring of the banking system, instability of deposits, informational asymmetry, symmetrical ignorance, weak legal, judicial and regulatory framework, etc.), signals coming from the market are ambiguous. hence the banks use the expectation of loan return conditional on the perceived signal, to predict this optimal return. we know that the return of the portfolio of bank in period depends largely on 𝜀𝑖𝑡 which is realized only at the end of the period. however, it is at the beginning of the period t that each bank determines the composition of its portfolio. it does so according to the imperfect information available to it. at period , the bank observes an imperfect signal 𝑆𝑖𝑡 allowing it to predict the value that will take the variable 𝜀𝑖𝑡 at the end of the period. this observed signal, different for each bank, is composed of a heterogeneous noise 𝜀𝑖𝑡 and a homogeneous noise 𝜐𝑡 whose intensity varies from one period to another. the homogeneous noise 𝜐𝑡, unlike 𝜀𝑖𝑡, is an aggregate shock. it is assumed to be uncorrelated with 𝜀𝑖𝑡. formally, we have: mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 20 | p a g e in the absence of perfect information, if 𝜐𝑡 increases, the bank observes that 𝑆𝑖𝑡 increases, which causes an increase of the uncertainty on 𝜀𝑖𝑡 and therefore on the yield of the portfolio 𝑅𝑖𝑡. in other words, when the degree of uncertainty in the economy increases, the noise in the signal also increases and it becomes more and more difficult to determine the true value of 𝜀𝑖𝑡 as well as the optimal rate of return of the loans. but the bank has no other choice: to forecast 𝑙𝑖𝑡, it needs information about 𝜀𝑖𝑡. the best prediction of 𝜀𝑖𝑡 is its expected unconditional value (𝜀𝑖𝑡), which is equal to . but observation of the signal 𝑆𝑖𝑡 can allow the bank to improve this prediction by using the expected value of 𝜀𝑖𝑡 conditional on the received signal (𝜀𝑖𝑡/𝑆𝑖𝑡). the informative nature of this signal implies that (𝜀𝑖𝑡/𝑆𝑖𝑡) ≠ 0. suppose, like baum and al (2002), that this conditional expectation is a proportion 3.2. the optimization program of the risk averse bank with this justification of the choice of conditional expectation in the bank's program, it follows that the objective-function of the bank is the expected utility of the conditional profit to the perceived informative signal, as in calmès and salazar (2006). it will be noted 𝐸(𝛱𝑖𝑡/𝑆𝑖𝑡). some restrictions on the utility function or on the prior distribution of random yields make it possible to write the objectivefunction above as a mean-variance function (tobin, 1958; markowitz, 1959; levy-markowitz, 1979). thus, by noting , the degree of bank aversion to risk, we can write the expected utility of the conditional profit of bank at period , as follows: the expected return of the portfolio of the bank at period conditional on the received signal is thus written: 𝜆𝑡𝑆𝑖𝑡) (22) it is shown that the conditional variance of the return of this banking portfolio is (proof in appendix a1): the objective function of the bank is then written: maximizing with respect to , the first order conditions are (proof in appendix a2): mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 21 | p a g e 3.3. absorption of excess liquidity in a context of uncertainty let us now show that economic uncertainty is also reflected in a decrease in the supply of funds of the bank. for this, we determine the direction of the relationship between the homogeneous aggregate shock and the proportion of loans in the bank's portfolio: when the degree of uncertainty in the economy 𝜎𝜐2𝑡 increases, the proportion 𝑥𝑖𝑡 of funds invested in loans decreases in favor of safe securities. indeed, with the increase of the noise in the signal, it becomes more and more difficult to determine the true value of 𝜀𝑖𝑡 as well as the optimal rate of return of the loans. in this case, when the risk perceived by the bank exceeds a signal that it considers acceptable, it is encouraged to lower the proportion of funds invested in loans and to increase that invested in safe securities. it is also possible to evaluate the impact of uncertainty on the variance of the ratio of loans to banks' assets: as the level of uncertainty in the economy increases, so does the variance in the ratio of loans to total assets. in this case, the bank reallocates the excess liquidity by reassigning the proportion of credit and safe securities in its portfolio. more precisely, the bank decreases the proportion of loans deemed to be riskier and increases the proportion of safe securities. these theoretical results are consistent with the results of various empirical studies (sigouin, 2003; calmès, 2004; beguy, 2012). the excess liquidity does not systematically go to the financing of the economy. it can be mainly invested in safe securities. we summarize theses results in the following proposition. proposition 3: in a context of high expected return of the bank portfolio, when the degree of uncertainty in the economy increases, the proportion 𝑥𝑖𝑡 of funds invested in loans decreases in favor of securities security. as the level of uncertainty in the economy increases, so does the variance in the ratio of loans to total assets. this means that banks tend to choose portfolios that are similar in terms of asset allocation. this leads to a decrease in the overall supply of funds on the market. 4. concluding remarks in this paper, we have developed a theoretical model in which excess banking liquidity results from an optimal behavior of a risk neutral profit-maximizing bank. whatever the degree of economic uncertainty (low uncertainty or high uncertainty), there is excess liquidity if the expected return of the banking portfolio (safe securities, loan financing, etc.) is too low. in order to overcome the excess liquidity in countries facing a subfinancing of the economy, the regulator can implement incentive measures that reinforce the return of bank portfolios. put another way, an economic policy implication is that the absorption of excess liquidity does not only go through policies aimed at minimizing uncertainty but especially by measures to strengthen financial market incentives for bank portfolios. examples of such measures are: setting a satisfactory level of credit cost for banks through monetary policy; setting a satisfactory level of risk free rate; reduced costs of bank deposits; reduced fixed costs related to the conversion of safe securities into liquidity; reduces fixed costs related to the conversion of debt securities into liquidity; etc. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 22 | p a g e in our model, the uncertainties play an active role in a context of high expected return of the bank portfolio. in this case, the excess liquidity decreases but it is not systematically oriented towards the financing of the economy. in order to drain excess liquidity towards the financing of private sector of the economy, the regulator should enforce measures that minimize the economic uncertainties. knowing that uncertainty increases the credit risk, the regulator can apply measures to control credit risk so that the excess liquidity is oriented more on financing the economy than on investing in safe securities. such measures concern the development of insurance products (credit insurance, credit derivatives, etc.), the establishment of specific guarantee funds that can absorb the banks' excess liquidity by allowing them to recover a portion of their receivables in the event of default. another measure is the tax bonus which encourages, via tax give aways, banks that are more involved in the financing of the economy. an extension of this work could be to empirically test the hypothesis that, for banks considered to hold excess liquidity, one would expect to find that the expected return on their banking portfolio is low. and for the others, the expected return on their banking portfolio is sufficiently high. further study is expected in the future. references agenor p.-r., aizenman j., hoffmaister a.w., 2004, « the credit crunch in east asia: what can bank excess liquid assets tell us ? », journal of international money and finance, vol. 23, pp. 27– 49. aryeetey e., 1998, « informal finance for private sector development in africa », economic research papers 41, bad. baum, c.f., m. caglayanet n. ozhan (2002), “the impact of macroeconomic uncertainty on bank lending behavior”, document de travail. baumol, w.j. (1952), « the transactions demand for cash: an inventory theoretic approach», quarterly journal of economics, lxvi, (nov), pp. 545-556. beguy, o. (2012), « trois essais sur la surliquidité bancaire dans la communauté économique et monétaire d'afrique centrale (cemac) ». thèse de doctorat unique de sciences économiques soutenue à l’université d'auvergne clermont-ferrand i. calmès, c., 2004, « regulatory changes and financial structure: the case of canada », swiss journal of economics and statistics (sjes), vol. 140 (i), pp. 1-35, march. calmès, c. et salazar, j. (2006), « variance macroéconomique conditionnelle et mesure de dispersion des actifs dans les portefeuilles bancaires » pp. 688-700, in f.-é. racicot et r. théoret, « finance computationnelle et gestion des risques », presses de l’université du québec. doumbia, s., 2011, « surliquidité bancaire et « sous-financement de l'économie ». une analyse du paradoxe de l'uemoa », revue tiers monde, vol. 205, no. 1, pp. 151-170. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 23 | p a g e eboue c. (1990): "les effets macro-économiques de la répression financière dans les pays en développement" economie appliquée, tome lxiii, n° 4, pp. 93-117. eboue c. (1998) : " la libéralisation financière dans les pays en développement – une évaluation préliminaire du cas africain", gestion macro-économique, nouvelles approches et enjeux de politique économique, abidjan, octobre 1998. emran, m.s. et stiglitz, j.e. (2007), “financial liberalization, financial restraint, and entrepreneurial development », http://cid.harvard.edu/neudc07docs/neudc07_s5_p02_emran.pdf. jaffee, d.m., modigliani, f. (1969), “ a theory and test of credit rationing”, american economic review, vol. 59, issue 5, 850-72. jappelli, t., pagano, m. and bianco, m., 2005, « courts and banks: effects of judicial enforcement on credit markets”, journal of money, credit and banking, vol. 37, issue 2, pp. 223-244. levy, h., markowitz, h.m. (1979), “ approximating expected utility by a function of mean and variance”, american economic review, vol. 69, no. 3 (june), pp. 308-317. markowitz, h.m. (1952), “portfolio selection”, journal of finance, march, p.77-91. markowitz, h.m. (1959), “portfolio selection: efficient diversification of investment”, new york, wiley. nissanke, m. and e. aryeetey 1998. “financial integration and development, liberalization and reform in sub-saharan africa”, odi and routledge, london. sacerdoti, e. (2005), « access to bank credit in sub-saharan africa: key issues and reform strategies”, imf working paper wp/05/166, 38 p. saxegaard m., 2006, « excess liquidity and effectiveness of monetary policy : evidence from subsaharan africa », imf working paper, wp/06/115, washington d.c., fmi. sigouin, c. (2003), «investment decisions, financial flows, and self-enforcing contracts», international economic review, vol . 44, n° 4, p .1359-1382. stiglitz, j.e., weiss, a., 1981, “credit rationing in markets with imperfect information”, american economic review, vol. 71, no. 3 (june), pp. 393-410. tobin, j. (1958), “liquidity preference as behavior toward risk”, review of economic studies, frebruary, 25, p. 6586. mailto:contact@americaserial.com mailto:contact@americaserial.com http://cid.harvard.edu/neudc07docs/neudc07_s5_p02_emran.pdf american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 24 | p a g e tsiang, s.c. (1972), “ the rationale of the mean-standard deviation analysis, skewness preference, and the demand for money”, american economic review, vol. 62, issue 3, 354-71. tsiang, s.c. (1974), “the rationale of the mean-standard deviation analysis: reply and errata for the original article”, american economic review, vol. 64, 442-450. vo thi phuong. nga, 2005, « conséquences de bâle ii sur la tarification et la distribution des crédits », banque et marchés, n° 78, p. 4651. appendix a1 let’s prove that . the return of the banking portfolio is so that the conditional variance of 𝜀𝑖𝑡 is : we have 𝑉𝑎(𝑟𝑓/𝑆𝑖𝑡) = 0 since 𝑟𝑓 is certain and 𝑉𝑎𝑟(𝜌/𝑆𝑖𝑡) = 0 since is constant, so that : ∀𝑖, ∀𝑡, 𝑉𝑎(𝑅𝑖𝑡/𝑆𝑖𝑡) = 𝑥𝑖𝑡2𝑉𝑎𝑟 (𝜀𝑖𝑡/𝑆𝑖𝑡) (𝐴1 . as the conditional expectation of 𝜀𝑖𝑡 is a proportion 𝜆𝑡 of the signal 𝑆𝑖𝑡, namely (𝜀𝑖𝑡/𝑆𝑖𝑡) = 𝜆𝑡𝑆𝑖𝑡, the conditional variance of 𝜀𝑖𝑡 is a proportion 𝜆𝑡 of its unconditional variance: 𝑉𝑎𝑟 𝜀𝑖𝑡/𝑆𝑖𝑡) = 𝜆𝑡𝑉𝑎𝑟 (𝜀𝑖𝑡) = 𝜆𝑡𝜎𝜀2𝑡 (𝐴1.3) finally: mailto:contact@americaserial.com mailto:contact@americaserial.com 25 american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 25 | p a g e journal of finance and bank management, vol. 6, no. 1, june 2018 appendix a2 maximizing the objective function of the bank with respect to 𝑥𝑖𝑡, the first order condition gives: from equation a2.1, we obtain: we have since 𝜀𝑖𝑡 ⊥ 𝜐𝑡. thus: finally : mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 56 | p a g e exploring the nexus between government efficiency, regulatory quality, and economic growth in trade 1dr. philemon v. tomsa, 2dr. charles b. bitang and 3dr. christy z. mbala 1assistant, department of analyses and economic policy, university of maroua 2associate professor, head of department of monetary economics, university of ngaoundère 3associate professor, department of economics, university of yaoundé ii abstract: the pivotal role of institutions in economic development has been well-established in the literature since the 1990s. scholars like north (1990), mauro (1995), engerman and sokoloff (2003), and dollar and kraay (2003) have underscored the significance of quality institutions in fostering economic growth and enabling effective economic policy measures. while prior research has extensively examined the connections between institutions and trade, their impact on economic growth remains relatively understudied. this study bridges this gap by exploring the relationship between institutions, trade openness, and economic growth, drawing upon the frameworks of endogenous growth theory and the new theory of international trade. it acknowledges that trade openness can be a catalyst for economic growth, offering economies of scale and facilitating technology transfer. however, recent decades have witnessed disparities in economic performance between developed and developing countries, prompting a reassessment of the presumed positive effects of trade openness. this research contends that the quality of national institutions plays a crucial role in shaping a country's economic growth trajectory, potentially acting as a determining factor for its successful integration into global trade networks. by delving into the nuanced interplay of institutions, trade, and economic growth, this study aims to provide valuable insights for policymakers and researchers alike. keywords: institutions, trade openness, economic growth, endogenous growth theory, developing countries. 1. introduction during the 1990, literature gave institutions a primordial place. it provided a series of analyzes aimed at demonstrating the essential role of quality institutions in the process of economic development and in the effectiveness of economic policy measures. north (1990) was one of the first to demonstrate the importance of institutions in economic development. mauro (1995) emphasizes the phenomenon of corruption which is harmful to investment and economic growth in developing countries; while engerman and sokoloff (2003) postulate that there are economies of scale due to good quality of institutionsand trade openness in determining economic development. in the same vein, dollar and kraay (2003) formulate that countries which have good institutions tend to trade more. however, most mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 57 | p a g e of the work examines the links between institutions and trade ignoring their effect on economic growth (lavallée, 2006; levchenko, 2013; avom and gandjon, 2014; gandjon, 2017). according to the theory of endogenous growth and the new theory of international trade, openness to international trade is a catalyst for economic growth insofar that it allows countries to benefit from economies of scale and promotes transfer of technology. however, the differences in economic performance observed between rich and developing countries over the past three decades have put the positive effects of trade openness on economic growth into perspective (sachs and warner, 1995). thus, any poor quality of national institutions could further harm contributed to countries weakness economic growth that could truly miss it integration into world trade. in this background, using annual data, this paper analyses whether efficiency in terms of policy execution and the quality regulation matters on the relationship between trade and economic growth in central african countries. objective of this paper is to provide an overview of the role of regulation quality and government efficiency in the relationship between trade openness and economic growth, the question that could be raised here is why this research remains relevant for the economy of central african countries. one reason mentioned, is the choice of the political dimension of institutions that is justified by controversies of the work and the scarcity of to our knowledges which analyzed the effectof the quality of political institutions especially the effectiveness of thegovernment efficiency and regulationqualityon trade and growth. indeed, these two indicators seem mixed when compared to the statistics of the worldgovernance indicators (wgi, 2017) and in view of other countries with a quality institution appreciate (tranparency, 2010). moreover, considering these indices, these indicators in terms of political governance have progressed relatively compared to previous years (transparancy, 2016). the rest of the paper is organized as follows: the second section reviews the existing literature. the third section shown the methodological framework used. the fourth section presents the various results and discussions obtained.the last partconcludes this work. 2literature review trade is a central concern in macroeconomics in view of the controversies existing literature. there is a growing and clear interest on the relationship between trade openness and economic growth. some work works havebeen devoted to this analysis. the studies are divided into two categories. for the first category, trade openness has a positive effect on economic growth. it highlights the important role of trade openness as a factor that promotes long-term growth in improving well-being through increased productivity (frankel and romer, 1999; abessolo, 2005; busse and koniger, 2012). regard the second category, trade openness has no significant effect on economic growth if it is separated from quality institution (constantinos and al, 2014; vitola and senfelde, 2015; votsoma et al, 2020). drawing on studies by dollar and kraay (2003), balogoun (2016) assesses the effect of trade openness on poverty in developing countries. it shows that to a large extent trade openness reduces income inequalities. however, the growth channel, relayed by the theoretical literature, remains insignificant. he concludes that the analysis of the transmission channel, through nonlinear regressions suggests that the impact of trade openness on poverty does not come from the effects of the redistribution income on economic growth, but rather from otherinstitutionalvariable. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 58 | p a g e conversely, mathew and al (2014) separately analyze trade openness and the quality institution on economic growth in sub-saharan africa using the least square dummy variables (lsdv) and the generalized moments method (gmm) on the period 1985-2012. the study is significant considering the fact that trade openness and institutions exert to some extent a positive influence on the economic growth of african countries. the results indicate that the institutions had a positive and significant impact on economic growth but trade openness was not very significant on the economic growth of african countries. in africa, dinkneh and yushi (2016) find that africa-china trade openness has a positive and robust effect on the real gdp growth of african countries. this trade of africa-china interacts with the political institutional and human capital of africa. it effect is positive and significant. therefore, it needs africa strong domestic absorption capacity in order to reap the technology improving effect of trade with china. these results therefore provide evidence that trade openness and the quality of institutions are an important to economic growth for africa.hence, niyongabo (2007) hypothesizes that openness policies can be more effective if they benefit from good quality political institution in developing countries. using the ordinary least squares (ols), he concludes that good governance and the adoption of open trade policies act interactively and are positively associated with increasing income, reducing inequalities and the cushioning of trade shocks. meanwhile,krenz (2016) studies the two-way relationship between political institution and trade. to this end, itworks covers 87 countries and spans the period 1990-2007. using the co-integration method, the results conclude that the political institutional framework has a positive long-term effect on trade. this report is robust to different evaluation methods. the estimators report unbiased evaluations for cointegrating variable, even under the presence of endogenous repressors. in addition, the results confirmed a long-term causality from institutions to trade. he concludes that an improved political institutional framework is a cause of increased trade exchange. however,mina and ndikumana (2007) explore that one of the causes limiting the growth in the degree of trade in africa may be weak institution. their results of arellano bond method (gmm) assessments on panel data from african countries show that institutions play an important role. they find that the common effect of institutions and trade has a u shape, suggesting that while trade has the high levels of expansion institution play an important role in harnessing the trade engine that drives economic growth whereas, linh bun (2009) uses a regression by the least squares method (ols) in panel.he examines the effect of openness on the growth of the ten countries of the association of south-east asian nations. he also combines the quality institution and trade. its results suggest that trade and the quality of political institutions positively affect economic growth and find that the good quality of institutions has a greater effect on economic growth. in contrast, using the gmm method, kilishi and al (2013) first assess the quality of institutions and economic growth in africa, addressing two questions: do institutions matter in africa? if so, what are the interaction effects of institutions on growth? to this end, it shows that political institutionis important in promoting growth. this improvement in the quality of institutions affects the growth rate through the quality of standardization, the legal framework and political stability. thus, according to him, improving the standardization quality of trade agreements may have more of an effect on growth mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 59 | p a g e than in isolating them. finally, they find that institutional factors become much more important associated with trade openness on economic growth. 3. methodology this paragraph successively sets out the economic growth model to be estimated, the data and their sources as well as the model estimation strategy. 3.1. econometric specification the specification of the neoclassical growth model developed by mankiw and al (1992) considers human capital and physical capital. the model can be expressed as follows: y(t) a(t)k(t) l(t)1 0 1 the cobb-douglas production function (y) depends on physical capital (k), labor force (l) and the level of technology (a). inspired by this previous function, the neoclassical model of mankiw and al (1992) is formulated as follows: the global functional form allows us to establish the following relation direct relation: pib it b0 b1 pib it 1 b2 ouv it b3 x it it it indirect relation: pib it b0 b1 pib it 1 b2 ouv b3 ip b3 x it b4 ip ouv it it it or b 0 . b 4 are parameters of the model variable. x is the control variable; pi * ouv is the interactive variable between trade and the quality of political institutions (government efficiency and regulation quality), ouv is trade openness, u is the country specific, e is the error term. 3.2. variables the real economic growth rateis a percentage to take into account purchasing power parity to allow comparison between countries (greenaway and al, 2012). trade openness measures the proportion of a country total income that is linked to international trade. government efficiency measures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from policy, the quality of policy development and execution, and the credibility of government policies (kaufmann and al, 2004). regulatoin quality captures perceptions of government capacities to formulate and enforce sound policies and regulation that enable and encourage the promotion of private sector development (kaufmann et al, 2004; koeniger, and silberberger, 2015). public expenditure measured by final public consumption as a percentage of gdp, this variable allows us to take into account the effect of fiscal policy in our analyses by virtue of keynesian teachings (levine and renelt, 1992, sachs and warner, 1995; edwards, 1998). the rate of inflation measures the annual growth rate of the consumer price index (cpi), the cpi is one of the best measures of inflation for economies heavily dependent on import prices. this variable takes into account macroeconomic stability. in the economic literature, we talk about the rate of inflation when the index is not specified (romer, 1991). gross fixed capital formation is the aggregate that measures, in national accounts, the investment (acquisition of production goods) in fixed capital of the various resident economic agents. formerly called gross domestic investment, it consists of expenditures for additions to the tangible fixed assets of the economy plus the net changes in inventorie (yanikkaya, 2003, wacziarg and welch, 2008).natural resource measures natural rent by the difference between the selling price of natural resources and their operating costs (devarajan and wolfgang, 2013; mondjeli and tsopmo, 2017). the active population measures the rate of increase of the active population. this variable takes into mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 60 | p a g e account the role of the labor factor in economic activity. indeed, a demographic expansion increase the proportion of the population considered as non-productive, mainly those of children and seniors. the table 1 shows summary variables. table 1: variables dependent variable economic activity economic growth real gdp rate in annual% wdi gross fixed capital (+) wdi formation as% of gdp total natural resource (+) wdi as% of gdp annual population (-) wdi growth rate in% public expenditure rate (+/-) wdi inflation rate in % (+ /-) wdi annual source: the author 3.3. data and study area data was acquired from several sources including: (i) the world governance indicator (wgi, 2018), (ii) world bank development indicators (wdi, 2018); and (iii) data from the international monetary fund (weo, 2018). the sample covers a few countries in central africa (cameroon, congo, gabon, guinea and chad). the incorporation of these five countries in the same sample can be justified by their strong historical and cultural roots, in addition to the economicies of being part of the customs and monetary union. 3.4. estimation methods the conclusions of chang and al (2005) has marked the literature that examines how trade openness and institutions interact, seeking a possible role for policy complementarities. although, they did not give the specific application, he asserts that the essence of the analyses can be extended for the analyzer expenditure as% of gdp trade sum of exports and imports of goods and services(%gdp) (+) wdi variable concept component measurement indicator s ign so urce government efficiency government efficiency index (+) wgi q uality regulation regulation index (+) wgi control variable i nvestment natural resource population public inflation mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 61 | p a g e of complementarity between trade and other reforms. to achieve our objective of analyzing the effect of government efficiency and the quality of regulation in the relationship between trade and economic growth, this research uses an empirical methodology based on the method of instrumental variables (iv gmm) over the period 1995-2017. the decision to use this method is justified by correcting for heteroscedasticity in order to best compensate for the endogeneity of certain improvement variables (arellano and bond, 1991; arellano and bover, 1995; blundell and blond, 1998; roodman, 2009). 4. empirical results table 2 below shows the result. overall, the instrumental variable used in our regression are valid since the hansen / sargan test does not allow rejecting the null hypothesis of validity of the instrument in level and in difference (p-value> 0.05). in addition, we find that there is no second order autocorrelation of the errors of the difference equation ar (2), because arellano and bond second order autocorrelation test accepts the hypothesis no lack of second-order autocorrelation (p-value> 0.05). the arbitrage is done by comparing the value provided automatically by the conversion associated with the evaluated wald value, which facilitates the analyses. it will therefore suffice to compare the discussion associated with the wald-statistic with the 5% threshold used. if the conversation associated with w-statistics was selected at 5%, then the h0 hypothesis will be rejected in favor of the alternative hypothesis according to which the regression is globally significant. in this case, the wald statistic is less than 5%, so the null hypothesis is rejected and the model is globally significant. table 2: estimation of interaction termsthe components of political institution andtrade on economic growth dependent variable real annual economic growth system dynamic panel-data estimation (gmm-type) model (1) model (2) model (3) model (4) lagged growth (-1) 0.007* (0.34) 0.290** (2.10) 0.322*** (2.82) 0.267** (1.69) trade 0.154*** (9.74) 0.135*** (7.68) 0.148*** (9.85) 0.139*** (7.32) population -1.973 (-0.32) 6.464 (1.52) 8.389** (1.91) 9.027* (1.72) public expenditure -0.136*** (3.89) -0.601*** (-3.87) -0.603*** (7.05) -0.429*** (3.84) inflation -0.298*** (3.37) -0.197*** (-4.57) -0.188*** (3.53) -0.222*** (4.16) natural resource -0.653 (-0.89) 0.191*** (2.66) 0.163 (1.51) 0.252** (2.04) private investment -3.456 (-0.98) 2.800 (1.09) 2.974 (1.98) 0.861 (0.30) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 62 | p a g e government efficiency 0.069 (0.86) 0.066* (1.61) 0.058 (1.49) 0.169* (1.56) regulation 0.022 (0.66) 0.014 (0.42) -0.011 (0.34) 0.149* (0.65) government efficiency *trade /// 0.103*** (3.81) // 1.559 (0.23) regulation* trade // // 0.098*** (4.84) 0.101 (2.92) constant 4.161 (0.09) -44.263 (-1.40) -53.190** (2.33) -57.011 (3.92) interaction terms (no) (yes) (yes) (yes) observations 95 90 90 90 ar(1) p-value 0.3296 0.4531 0.3488 0.0982 ar(2) p-value 0.4096 0.3244 0.4927 0.574 wald p_value 0.0000 0.000 0.000 0.000 countries 5 5 5 5 note: ***: significant at the 1% level; **: significant at the 5% level; *: significant at the level of 10% in table 2, column 1, 2, 3, 4, there are a positive relationship between trade openness and economic growth. column (1) shows a positive impact of trade openness on economic growth. the coefficient associated with trade is 0.154, which suggests that an increase of 1 unit in the trade openness rate leads to an increase economic growth of 0.154 unit. this result, which at first glance seems to join the conclusion of frankel and romer (1999) and ho and iyke (2018). indeed, they highlight the important role of trade openness as a factor that promotes long-term growth. among the effects favoring economic growth, several authors support the preponderant place that the process of trade openness plays in improving well-being by boosting productivity. we tested the validity of the interactive effect between trade and government efficiency on the one hand, and the quality of regulation on the other. the results show that the coefficients of the main interactive variable specified havepositive sign. column (2) shows a positive effect of the interactive variable between trade openness and government efficiency on economic growth. the coefficient associated with the interactive variable is 0.103, which suggests that a unit increase in trade openness and government efficiency results in economic growth of 0.103 unit. therefore, trade and government efficiency are complementary. in other words, perceptions of the quality of public services, the quality of the civil service, the degree of its political independence, the quality of policy formulation and execution, and the credibility of government policies reinforce the positive effect of trade openness on economic growth. this result is consistent with the conclusions of zaouli and zaouli (2015) and bonnal (2015). column (3) shows a positive effect of the interactive variable between trade openness and regulation on economic growth. the coefficient associated with the interactive variable is 0.098, which suggests that a 1unit increase in trade openness and regulation leads to economic growth of 0.098 unit. consequently, trade openness and the quality of regulation are complementary. in other words, the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 63 | p a g e quality of perceptions of the government capacities to formulate and implement sound policies and regulations to encourage the promotion of private sector development enhances the positive effect of trade openness on the market. this result matches the work of koeniger and silberberger (2015) and mina and ndikumana (2007). regarding the control variable, aunit increase in the population growth rate leads to 8,389 units of economic growth in column (3). this result is consistent with the work of hanushek and kimko (2000). however, the coefficient associated with public expenditure is negative. a unit increase in the public expenditure ratio leads to a decrease in growth respectively of 0.136 unit in column (1); 0.601 unit in column (2); 0.603 unit in column (3). these results corroborate with the conclusions of levine and renelt (1992) and edwards (1998). likewise, the coefficient associated with inflation is negative. aunit increase in the public expenditure ratio leads to a decrease in growth by 0.238 unit respectively in column (1); 0.197 unit in column (2); 0.188 unit in column (3). these results corroborate with the conclusions of romer (1991). on the other hand, the coefficient associated with the natural resource is positive. an increase of 1 unit of natural resource rent results in an increase of 0.191 unit of economic growth in column (2). these results corroborate with the conclusion ofmondjeli and tsopmo (2017). 5. conclusion this article examined whether the quality of polical institution, espaciallygovernmentefficiency and the regulation quality, are likely to strengthen the effect of trade on the economic growth of five central african countries, over the period from 1995 to 2017. to establish this result, we used the econometric model of mankiw and al (1992). using the dynamic panel gmm method. firstly, trade openness positively affects economic growth. secondly, government efficiency and the quality of regulation reinforce the positive effect of trade openness on economic growth.in order to benefit from growth driven by trade openness, government efficiency and the quality of regulation matter. references abessolo y.a. (2005). ouverture commerciale : condition de la contribution du capital humain à la croissance économique des pays en développement, centre d’économie du développement, ifrede-gres, université de bordeaux iv. arellano, m., bover, o. (1995). another look at the instrumental-variable estimation of errorcomponents models. journal of econometrics. 68 (1), 29-51. avom, d., gandjon, f. s. g., (2014). qualité du cadre juridique, corruption et commerce international : le cas de la cemac.revue d'économie politique. 124 (1),158. blundell, r. bond, s. (1998). initial conditions and moment restrictions in dynamic panel data models. journal of econometrics. 87 (5), 115-143. bonal, m., mehmet e. 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(2004). governance matters iii : governance indicators for 1996-2002. world bank policy research working paper no. 3106. washington, d.c. : world bank. kilishi, a. a., h. i. mobolaji, m. a. yaru, a. t. yakubu, (2013). institutions and economic performance in subsaharan africa : a dynamic panel data analysis. journal of african development 15(2), 91-120. koeniger, j., silberberger, m., (2015). regulation, trade and economic growth. discussion papers.number 255. center for european, gouvernance and economic developement research. krenz, a., (2016).do political institutions influence international trade ? measurement of institutions and the longrun. center for european, gouvernance, and economic developpement research, no, 276, discussion paper ; ssn : 1439-2305 lavallée, e. (2006). similarité institutionnelle, qualité des institutions et commerce international. economieinternationale, 108 (4), 27-58. levchenko, a. 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(1992). a contribution to the empirics of economic growth. quarterly journal of economics, 107 (2), 407-437. matthew, a. oluwatoyin, b. folasadeadegboye, (2014). trade openness, institutions and economic growth in subsaharan africa (ssa). developing country studies 4(8), 18-30. mauro, p., (1995). corruption and growt. quarterly journal of economics, vol, 110 (3), 681-712. mina, b., ndikumana, l., (2007). the growth effects of openness to trade and the role of institutions:new evidence from african countries. working paper, 1-28 mondjeli n, i., m. tsopmo. p.c., (2017). the effects on economic growth of natural resources in subsaharan africa : does the quality of institutions matters ? economics bulletin.37, (1). niyongabo, g., (2007). politiques d’ouverture commerciale et développement economique. thèse de doctorat en mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 66 | p a g e variable obs mean std. dev. min max 8.924176 sciences economiques. université d’auvergne, clermont-ferrand i faculté des sciences economiques et de gestion centre ’etudes et de recherches sur le développement international (cerdi) north, d, c., (1990). institutions, institutional change and economic performance, cambridge university press. new york. romer p.m, (1991). endogenous technological change. journal of political economy, 98, (5), pp.71102. roodman d. m. (2009), « a note on the theme of too many instruments », oxford bulletin of economics and statistics, 71, 135-158. sachs, j. d. warner, a., (1995), economic reform and the process of global integration, brookings papers on economic activity 26(1),1-118. transparency international (2010), database corruption, transparency international transparency international (2016), global corruption report 2016, transparency international berlin, germany vitola, a., senfelde, m (2015). the role of institutions in economic performance. verslas :teorijairpraktika / business, 16 (3): 271–279 wacziarg, r., welch, k.h., (2008). trade liberalization and growth : new evidence. world bank econ. rev. 22, 187– 231. wdi (2018). world development indicators. washington, dc: world bank. http://www.worldbank. weo(2017), statistcic data, world economic outlook, octobre wgi (2018). world gouvernance indicators. washington, dc: world bank. http://www.worldbank yanikkaya, h., (2003). trade openness and economic growth : a cross-country empirical investigation. journal of development economics, 72, 57–89. appendix appendix 1: statistics growth economic 70 5.742603 7.495651 37.99873 gov efficiency 70 -1.136766 .3386584 -1.721875 -.394153 regulation 70 -.9982445 .3280813 -1.490816 .1646162 trade openness 70 101.5553 49.73676 37.06518 307.0159 population 70 2.794799 .4569652 2.204565 3.832788 public expenditure 70 11.11555 3.963983 2.736065 20.58012 natural resource 70 46.81607 20.87731 4.51427 80.69243 mailto:contact@americaserial.com mailto:contact@americaserial.com http://www.worldbank/ http://www.worldbank/ http://www.worldbank/ http://www.worldbank/ american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 67 | p a g e inflation 70 3.523465 5.948757 -18.07454 20.47896 investment 70 29.41983 11.74087 14.298 64.852 source:author by wdi and wgi data (2017) mailto:contact@americaserial.com mailto:contact@americaserial.com microsoft word 4.docx american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 63 | p a g e macroeconomic resilience and poverty reduction in asean: a comprehensive analysis 1dr. aulia rizqiyah wulandari and 2muhammad faisal rahman 1department of economics, universitas islam indonesia, address: condong catur, depok, sleman, yogyakarta, indonesia. 2graduate student in economics, universitas gadjah mada, address: catur tunggal, depok, sleman, yogyakarta, indonesia. abstract: poverty remains a persistent challenge in the association of southeast asian nations (asean) member states, despite various efforts to address it through regional integration initiatives. this abstract examines the ongoing battle against poverty in asean, which has its roots in the organization's founding goals of promoting prosperity and social progress. despite multiple initiatives and policies aimed at poverty alleviation, around 120 million people in asean still live below the poverty line, with indonesia and the philippines having the highest poverty rates. governments in asean have pursued strategies such as maintaining a favorable foreign investment climate (fdi), striving for five percent annual economic growth, and managing inflation and unemployment. among these strategies, fdi plays a crucial role as it contributes to economic growth and job creation. this abstract underscores the significance of fdi in poverty reduction and highlights the importance of maintaining macroeconomic resilience to achieve asean's poverty alleviation targets. keywords: poverty, asean, regional integration, foreign direct investment, economic growth, job creation i. introduction poverty is a problem for the economies in the world, including for the association of southeast asian nations (asean) member states. the asean declaration in 1967 reveal that the missions of poverty alleviation became one of the goals of the establishment of asean regional integration. it aims to realize prosperity and social progress. various efforts have been implemented into several asean blueprint roadmaps. for example, the declaration of asean concord in 1976, the asean ministers meeting on rural and poverty eradication (amrdpe) in 1997, the asean socio-cultural community council (ascc) in 2003, and the asean economic community council (aec) in 2009 (asean secretariat, 2019). through the integration of asean policy and development cooperation in each country, the poverty rate in ten asean countries tends to decreasing. however, poverty remains a challenge due to many people still live below us$1.90 per day in asean member states. it is estimated that there are around 120 million people asean population living below the poverty line. asean poverty rate is almost a quarter of the total population of asean (himawan and tanjung, 2016). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 64 | p a g e indonesia and the philippines are the countries that have the highest poverty rates. arround 90 percent of poor people in asean integration from indonesia and the philippines until 2017(johanna chisholm, 2017). to overcome the issue of poverty, the governments in asean countries have maintained a foreign investment climate (fdi), encouraged the economy to grow up five percent per year, inflation and unemployment controlled (utama, 2015;asean secretariat, 2019). asean statistic annual report (2013) alleviation targets can be achieved if asean countries maintain macroeconomic resilience such as the fdi climate. fdi has becomes a catalyst to providing positive impacts such as to create of new jobs for each country (júlio et al., 2013). according to teixeira and loureiro (2019) explained that asean member countries prioritized the allocation of fdi inflows through the integration of the asean comprehensive investment agreement (acia) in 2009. until 2018, the allocation of fdi inflow to asean countries was us$ 155 billion, which around 66 percent from the service sector (unctad, 2019). in the context of gdp, asean became one of the fifth largest economies in the world in 2018. this is because the economies in asean countries have contributed to a gdp of around us$ 3 trillion of world of gdp (septiari, 2019). throughout 2019, economic growth in asean was recorded at 4.8 percent or us$ 3.5 trillion (current usd). the contribution of gdp came from indonesia reached us$ 1.1 trillion, thailand us$ 543.5 billion, singapore us$ 372.0 billion, malaysia us$ 364.6 billion, and vietnam us$ 261.9 billion. asean's economic growth was recorded to be higher than the world's economic growth of 2.3% (world bank, 2020). but, if compared with the gdp per capita of asean member states, it reaches around us$ 1,407 to us$ 65,233 in 2019. the gdp per capita figure in asean countries is relatively high for several countries. however, the problem of poverty still occurs. economic growth and gdp are not only high and sustainable, but also inclusive and equitable (adb, 2018). ii. literature review asean countries have a higher poverty rate than countries in other of the world. research on the level of poverty in asean is still not a done deal. much of the literature is a form of review of the poverty level phase in asean such as the asean report which reviews poverty in 10 asean countries. however, several studies examine the relationship between macroeconomic variables and poverty in a country. studies by hassan et al (2015); perera and lee (2013); ruch and geyer (2018); teixeira & loureiro (2019) shows how various macroeconomic sectors, including gdp influence poverty levels. the study that focuses on the poverty level of asean countries as the dependent variable is nearly absent. magombeyi and odhiambo (2018) states allocation of foreign capital investment for the public sector has not significant contribution to poverty alleviation in south africa. other studies, such as those conducted by ahmad et al (2019) found that the inward fdi flow had a negative impact to poverty variables. it is because fdi became the catalyst to strengthening economic fundamentals in asian countries. meanwhile, rachman et.al (2020) study shows that economic growth is essential in promoting development. simultaneously, one percent increasing economic growth will reduce poverty in cambodia, malaysia, indonesia, and thailand. the asean countries poverty related to the vicious circle of poverty phenomenon. the theory explains that people who lived below poverty line who experience a lack of capital. the poor people have limited mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 65 | p a g e capital which causes low of productivity and low income. furthermore, due to low productivity and low incomes lead to low savings and investments. then, the vicious circles of poverty will continue. if there are no extraordinary efforts to overcome the circle, the poor people of asean countries always being to poor condition. therefore, the fulfillment of basic needs and the definition of poverty for indonesia still need to be researched more specifically about the definition. descriptive analysis approach needs to be done to determine the reality of poverty in indonesia. poverty in developing countries such as in indonesia tends to be influenced by several factors such as economic, social, and political factors (ruch & geyer, 2018). theoretically, the changes of macroeconomics will affect a country's poverty level. this is because macroeconomic variables are the main factor determining of changes in the movement of a country's economy. in addition, quality resources must be considered by the state. quality human resources will result in positive and significant economic growth, then will increase global competitiveness. accordingly, this study proposes a hypothesis that macroeconomics such as economic growth, foreign investment, inflation, average years of schooling, exports and imports affect negatively on poverty in asean countries. based on the previous description, the objective of this study is to examine the effect of the macroeconomic variables toward the decline of the number of poor in asean countries. the previously observed studies emphasize aspects of economic growth and macroeconomic indicators as the main topics. this research has two main objectives. first, to identify the characteristics of poverty in asean. second, to analyze the ability of economic growth and other macroeconomic indicators to influence poverty reduction in asean countries. iii. methodology to analyze the effect of macroeconomic variables on poverty levels in asean countries, this study using the panel data from ten observation periods from 2010 to 2019. the dependent variable is the poverty level (poverty headcount ratio below us$ 1.90 a day with ppp 2011), meanwhile for the independent variables in this study are inward fdi (% of gdp), economic growth (%), inflation (%), mean years schooling (meanvalue), export % of gdp, and import % of gdp. each dependent and independent variable data was captured by asean statistical report, world bank, world poverty, and undp. poverty data in eight asean member states are not available in full at the world bank, then the researchers took from other sources, namely the asean statistical report and the world poverty sdgs. the using of the world bank's us$1.90 poverty measure aims to address each poverty percentage in the nine asean countries is more comparable. the formulation of the model used in this study is as follows: lpovas it = β0 + β1lfdiasit+ β2legasit+ β3lunmpasit+ β4linfasit+ β5lexptasit+ β6limptasit+ β7lmysasit+ eit table.1 variable definition (1) variables variable definition source lpovas poverty headcount ratio below us$ 1.90 a day with ppp 2011 asean stat, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 66 | p a g e world bank, and world poverty lfdias fdi inward (% of gdp) world bank legas economic growth (%) world bank lunmpas unemployment rate (%) world bank linfas inflation gdp deflator (%) world bank lmysas mean years schooling undp lexptas export % of gdp world bank limptas import % of gdp world bank in this research method, panel data regression is used. data analysis in this study has several stages in testing the specification model. tests are carried out to choose which model is the most suitable between common, fixed, and random effects. according to baltagi (2005); wooldridge (2009) when the common effect (1) model was tested. the next step is the fixed effect and random effect models are tested in panel regression. the basis of the fixed effect equation is as follows: yit = β0 + βxit + ui + eit (2) equation (2) shows the basic equation of fixed effect. where, y is the dependent variable with i as the individual observation and t is the time period. x is the independent variable in the observation period of time. meanwhile is the coefficient for the independent variable and e is the error term. the equation model in fixed effect becomes: lpovas it = β0 + β1lfdiasit + β2legasit + β3lunempasit + β4linfasit + β5lexptasit + β6limptasit + β7lmysasit + eit (3) where β0 is fixed (non-stochastic) and will be different if the variable has been input into the random effect model equation so that it is random (wooldridge, 2009). yit = β0 + βxit + ui + eit (4) equation (4) for each variable is the same as the explanation in equation (3). ui shows the individual residual which is a random characteristic of the i observation unit in each equation. baltagi (2005) claims that the chow test was conducted to select the best model between the common effect model and the fixed effect model. after the chow test, the hausman test was carried out in selecting the fixed effect and random effect models. iv. result and discussion table 2 describes the results of the common effects test, which shows that all independent variables are significant at 5% alpha, except for the lfdias variable which is not significant. the regression results represents that only variables from lexptas and lmysas have a statistically negative and significant effect on poverty levels in the eight asean countries. it is because the role of domestic exports can be an opportunity in the creation of new jobs provided the government pushes policies inward. likewise, the mean years schooling shows an influence in reducing poverty levels in asean countries. meanwhile, the variables of economic growth, unemployment, imports, and inflation have a positive effect on poverty levels in the eight asean countries. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 67 | p a g e the next step is analyze fixed effect and random effect as shown in table.3. the purpose of the fixed effect test is to compare each model is better between fixed effect or common effect. the result of fixed effect shows that all variables are significant at 5% alpha, except for legas and lunempas variables. to compare which model is better between fixed effect and common effect, chow test can be performed. table 4 shows the results of the chow test, the probability value of the f-count is smaller than 0.05 (5%), which means the fixed effect model is better than the common effect model. based on the principle of panel data analysis, if the chow test results show a statistically significant value, then the test is continued on panel regression with using random effect model. table.2 common effect analysis variables common effect coef. t-stat c 5.42 2.81 lfdias -0.21 -0.81 legas 1.68 3.52** lunempas 0.85 3.22** linfas 0.55 3.36** lexptas -5.24 -5.29** limptas 5.08 5.12** lmysas -4.07 -4.39** r-square 0.74 adj r-square observation 0.72 80 note: ***, **,* explain the stationary in for a = 1%, 5%, and 10% respectively the results of the random effect test are described in table 2. all independent variables have a significant effect on poverty levels in the eight asean countries. the variables of lfdias, lexptas, and lmysas have a negative effect. meanwhile legas, lunempas, linfas, and limptas have a positive effect on poverty. to choose which model is the best between fixed effect and random effect, the hausman test can be used. the hausman test results are listed in table 3 which shows the chisquare probability (x2) is greater than 0.05 (5%). the best model selected in the hausman test is the fixed effect model. the next step is to analyze the fixed effect model test of all the effects of the independent variables on the poverty level. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 68 | p a g e table.4 chow test and hausman test summary chow test hausman te st statistic d.f prob chi-sq stat d.f prob mly c 2.06 0.00 myn c 0.73 0.00 php c 3.46 0.00 thd c 3.57 0.00 vtn c 0.40 0.00 r square 0.97 0.96 80 0.74 0.72 80 adj r square observa tion note : ***,**,* explain the stationary in for a = 1%, 5%, and 10% respectively mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 69 | p a g e crosssection f 74.67 (7.65) 0.00 cross section chisquares 176.14 7 0.00 cross section random 3.66 7 0.81 note : ***,**,* explain the stationary in for a = 1%, 5%, and 10% respectively 4.1 summary and analysis the regression results of fixed effect model show that fdi variable statistically has a positive and significant effect on poverty levels in the eight asean countries. the coefficient of 0.28 indicates there is an increasing of allocation of inward fdi by one percent, the poverty rate will continue to increase by 0.28 percent. this result is different from the findings teixeira and loureiro (2019) explained that when the flow of inward fdi in portugal increased, it had an impact on reducing poverty levels in portugal. the positive relationship between inward fdi and poverty rates in asean countries due to the influence of foreign investment to the eight asean countries has not yet effect on the small and medium economic sector. on the other hand, fdi allocation for the agricultural sector, education sector, and health sector must be increased to encourage the human development in asean member countries (ahmad et al., 2019). this research is also supported by findings from magombeyi and odhiambo (2018) explain that the influence of fdi in each country is positive and significant on poverty. this is indicated by the poverty rate that does not tend to decrease in developing countries and south africa. according to the asean secretariat (2019) report, asean countries have focused on allocating fdi funds to the business activity services reached around 80 percent in the last five years. the focus of asean countries to encouraging foreign investment in the service sector is expected to create a business area environment and develop industry in the asean region (ziegenhain, 2020). however, there are still some obstacles of the inflow of foreign investment. this is because not in line with the strengthening of the community's economic resilience. adb (2018) revealed that the high tendency to require foreign investment to enter asean countries has not considered other factors such as the increasing of individual of wealth, the large number of middleclass people, and the purchasing power and consumption sector in asean. the unequal allocation of fdi to all sector areas can be the answered why poverty does not decrease when fdi increases. asean has a large-scale market and has around 600 million people in ten countries. however, it is possible that the majority of fdi allocations are only for companies and large businesses without focusing on small and medium enterprises. clearly, there is an impact in terms of employment, income from the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 70 | p a g e lower middle class, and the small medium enterprises (smes) sector. the smes sector is only a complement to support the basic needs of large companies. meanwhile for the inflation variable, the regression results show that the variable of inflation has a statistically positive and significant effect on poverty in asean. this indicates that when inflation rises by one percent, the poverty rate also increases by 0.34 percent. world bank (2020) explained that asean countries have concerned about controlling the inflation rate to maintained at creeping inflation. in last ten years, asean countries inflation reached below five percent per year. the inflation rate in asean countries which is at the level of creeping inflation is caused by the policies taken by asean countries to controlling inflation rates. several monetary policies were taken, such as managing foreign capital flows, maintained currency, and creating a regulatory framework and supervision (adb, 2018). the level of creping inflation for asean countries is still vulnerable and tends to rise to the level of galloping inflation (asean secretariat, 2019). this is due to two things, firstly, the increasing price of goods can affect the people's purchasing power to decreasing (talukdar, 2012). second, the velocity of money from developing countries is very largest. for example, people in developing countries, including in asean member countries, who bought for basic foods tend to be less because they did not have a lot of income. although producers always produce goods to support consumer shopping on daily. however, their production tends to be smaller. the activity of the velocity of money in developing countries is too high. the monetary multiplier will increase and encourage rising national income and inflation to gradually lead to galloping inflation. the results show that the variable from exports has a positive and significant effect on poverty levels in asean countries. meanwhile, the variable of imports has a negative and significant effect on poverty in asean countries. it is positive influence of exports in asean countries. many asean countries are opening their markets and promoting foreign direct investment to increase employment and productivity, which are export-oriented industries and exports of goods and services (okabe & urata, 2014). the exports from asean countries in the industrial sector as well as goods and services have reached 7 percent of world exports (adb, 2018). however, companies or businesses operating in other economic sectors will be affected by this activity due to a low of support. their production was stuck and decrease due to low of demand. meanwhile, the negative import sector is caused by the low supply chain between asean countries to promoting the welfare of the people in the region. the role of exports for asean countries has become an opportunity for economic liberalization. according to adb (2018); asean secretariat (2019) stated that asean is one of the most open regional integrations in the world. in the last five years, total exports were recorded at more than us$ 1.2 us$ 1.4 trillion or around 54%-55.2% of asean's total gdp. in fact, asean countries have gradually made efforts to prepare exporters to compete in the domestic and international markets. operational competition policies have been well designed to support other economic policies, including trade liberalization. by reducing barriers to entry, competition policy also encourages the formation of strong supporting industries and increases the efficiency of smes (unctad, 2019). therefore, the existence of this trade openness is a good opportunity for each asean country to maximize the benefits of increasing the export sector. the variable from mean years schooling has a negative and significant effect on poverty levels in the eight asean countries. when the average length of schooling increases, it has an impact on reducing mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 71 | p a g e the poverty rate in the eight asean countries by 4.41 percent. this finding is supported by the results of research from afzal et al (2012); thapa, (2015) revealed that an improved level of education has an impact on reducing poverty levels in pakistan and nepal. the negative relationship between mean years schooling and poverty is possible because the role of asean countries in driving their economies tends to be open. it therefore has an impact on the benefits for asean from this element of globalization. in addition, asean economic integration in the asean declaration report (2016) prioritizes the role of long-term investment in education as the basis of human development. for example, such as cooperation between educators, promotion of educational rights and obligations, and partner cooperation with multilateral institutions. as expected, the aec integration states that increasing human resources is very important in improving the quality of life of citizens as a whole. it has to ensuring effective infrastructure to deliver public services that provide access to quality education and good health, as well as providing people with needed skills (asean statistic annual report, 2020). meanwhile, the variables of economic growth and unemployment have no significant effect on the poverty level in asean countries. the effect of economic growth shows positive results, while unemployment is negatively related to poverty levels. research from fadillah (2021) reveals that the increase in per capita income in south east asian countries has an impact on increasing income in the lower middle-class community in the last four decades. the contribution of the community to encourage economic growth in asean countries. likewise with the unemployment rate where the average unemployment rate in asean countries reached 0.71% to 4.4% in the last five years. the role of the government has been trying to reduce the unemployment rate through increasing new jobs, attracting foreign investment, opening trainings for workers. in addition, the aec blueprint explains to encourage the regional labor market in asean, a mutual recognition agreement (mras) has been implemented which consists of seven qualified jobs. this can be an opportunity but also a negative impact for human resources in asean countries. it is because the population growth rate in asean countries is projected to reach 18 percent or become more than 700 million people. this means that the supply of labor in asean countries will increase (pavon, 2019; ziegenhain, 2020). therefore, various efforts and programs must be updated and improved by asean countries. especially to trengthening the resilience of macroeconomic fundamentals which can be an advantage, but on the other hand it can be a negative impact due to excessive inequality in asean countries. this is because the resilience of economic fundamentals in asean countries tends to be vulnerable. v. conclusion this study aims to examine the effect of macroeconomic variables on poverty levels in eight asean countries. the results show that all independent variables have a significant effect on poverty, except for economic growth and unemployment. the variables of fdi, inflation, and exports have a positive and significant effect on the poverty level. meanwhile, the variables of import and mean years schooling have a negative and significant effect on poverty. the influence of this macroeconomic variable needs to be considered for stakeholders to taking a policy that will have an impact on the community in a country. in the majority of this research, the biggest influence comes from exports and foreign investment which causes the poverty level to tend to increase. from the findings of the study, it mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 72 | p a g e appears that the authorities of asean countries must be aware of their macroeconomic developments. regardless of the benefits that will be given due to the increasing economy. however, the power and policies that are not objective have an impact on the widening of the number of poor people in asean countries. reference afzal, m., malik, m., e., begum, i., sarwar, k., & fatima, h. (2012). relationship among education, poverty and economic growth in pakistan: an econometric analysis. journal of elementary education, 22(1), 23-45. asean statistic annual report (2013) association of southeast asian nations annual report. retrieved from: https://www.asean.org/storage/images/asean_rtk_2014/8.%20asean%20annual%20re port%2 02013-2014.pdf asean declaration report (2016) asean declaration on strengthening education for out-ofschool children and youth (ooscy). asia development bank (2018) asian economic integration report 2018. retrieved from: https://www.adb.org/publications/asian-economic-integration-report2018 asean statistic (2019) asean investment report 2019 fdi in services: focus on health care. retrieved from: https://asean.org/asean-investment-report-2019-fdi-services-focus-healthcare/asean secretary (2019) asean secretariat. retrieved from: https://asean.org/2019/10/?cat=17 baltagi, b.h. (2005) econometric analysis of panel data. 3rd edition, john wiley & sons inc., new york. asean declaration report (2020) asean declaration on strengthening education for out-ofschool children and youth (ooscy). chisholm, johanna (2017) indonesia and the philippines have 90% of southeast asia's poorest. global media asia. retrieved from: https://southeastasiaglobe.com/indonesia-philippines-poorest/ fayyaz. a, muhammad umar draz, lijuansu, ilhan ozturk, abdul rauf, and shahid ali (2019) impact of fdi inflows on poverty reduction in the asean and saarc economies. sustainability, mdpi, open access journal, vol. 11(9). fadillah, a. (2021). makro ekonomi dan pengentasan kemiskinan di indonesia: analisis kemampuan pertumbuhan ekonomi dan indikator makro ekonomi dalam pengentasan kemiskinan di mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 73 | p a g e indonesia. ascarya: journal of islamic science, culture, and social studies, 1(2), 186–203. https://doi.org/10.53754/iscs.v1i2.84 himawan, a and tanjung, e (2016) jokowi: jumlah orang miskin di asean masih 120 juta orang. suara.com website. retrieved from: https://www.suara.com/bisnis/2016/09/08/125651/jokowi-jumlah-orangmiskin-di-aseanmasih-120-juta-orang hasan. sa, zaman, k and gul s (2015) the relationship between growth-inequality-poverty triangle and environmental degradation: unveiling the reality. arab economic and business journalvolume 10, issue 1, june 2015, pages 57-71. julio p, pinheiro-alves r, tavares j (2013) foreign direct investment and institutional reform: evidence and an application to portugal. port econ j 12(3):215–2 magombeyi& n. m. odhiambo (2018) fdi inflows and poverty reduction in botswana: an empirical investigation. cogent economics & finance, taylor & francis journals, vol. 6(1), pages 1480302148. okabe, misa & urata, shujiro (2014) the impact of afta on intra-afta trade. journal of asian economics, elsevier, vol. 35(c), pages 12-31. pererra, l.d. and lee, g.h.y (2013) have economic growth and institutional quality contributed to poverty and inequality reduction in asia?. journal of asian economics. volume 27, august 2013, pages 71-86. retrieved from: https://www.sciencedirect.com/science/article/abs/pii/s1049007813000614 pavon, carlos (2019) poverty in southeast asia: lower-middle income countries. world data lab. retrieved from: https://worlddata.io/blog/poverty-in-southeast-asia-lower-middle-incomecountries ruch.w and geyer jr. h.s (2018) public capital investment, economic growth and poverty reduction in south african municipalities. regional science policy and practice. willey online library. vol.9 issue.4 pages 269-284. retrieved from: https://rsaiconnect.onlinelibrary.wiley.com/doi/abs/10.1111/rsp3.12104 rachman, sn, suharno, and badriah ls (2020) the crucial factors affecting poverty and inequality in asean: a case study of cambodia, malaysia, indonesia, and thailand. international conference on rural development and enterpreneurship 2019 vol. 5 no.1isbn: 978-623-714428-1. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 74 | p a g e septiari, dian (2019) asean world’s fifth-largest economy: report. the jakarta post webiste. retrieved from: https://www.thejakartapost.com/seasia/2019/11/26/asean-worlds-fifthlargest-economy-report.html talukdar, s. r. (2012). the effect of inflation on poverty in developing countries: a panel data analysis. master of arts thesis, texas tech university, 1-56. thapa, s. (2015). relationship between education and poverty in nepal. economic journal of development issues, 15(12), 148-161. https://doi.org/10.3126/ejdi.v15i1-2.11873 the asean post (2019) asean growth slower than forecasted. retrieved from: https://theaseanpost.com/article/asean-growth-slower-forecasted teixeira and loureiro (2019) fdi, income inequality and poverty: a time series analysis of portugal, 1973–2016. portuguese economic journal. uttama, nathapornpan piyaareekul (2015) foreign direct investment and the poverty reduction nexus in southeast asia. poverty reduction policies and practices in developing asia springer link. pp 281-298. retrieved from: https://link.springer.com/chapter/10.1007/978-981-287420-7_15 unctad (2019) asean investment report 2019. unctad website. retrieved from: https://unctad.org/webflyer/asean-investment-report-2019 wooldridge, j.m. (2009) introductory econometrics: a modern approach. 5th edition, south-western cengage learning, mason. world bank (2020) gdp growth, inflation, unemployment on percentage. world bank website. world poverty (2020) poverty headcount ratio at $1.90/day. sustainable development report website. retrieved from: https://dashboards.sdgindex.org/explorer/sdg1_wpc ziegenhain, p (2020) asean 2025: toward increased investment in the southeast asia region?. aegis journal of international relations. vol.4 no.1. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 14 | p a g e corporate learning strategies and employee satisfaction obrirhe ekevwehero francis, kifordu a. anthony and arubayi demaro department of business administration, delta state university, abraka doi: https://doi.org/10.5281/zenodo.11449874 abstract: the study examined corporate learning strategies and employee satisfaction. the study determined the impact of embedded systems, empowerment, and systems connection on employee satisfaction. related literature was reviewed for the objectives of the study. the study adopted a descriptive survey design. 297 employees from four firms selected from delta and edo state. the sample size used for data analysis was 162. the questionnaire was used as an instrument for data collection. the data collected from the administration of the questionnaire was analyzed using descriptive and inference statistics. all relevant statistical testing was done. the finding of the study revealed that there is a significant relationship between embedded systems and employee satisfaction; there is a significant relationship between empowerment and employee satisfaction and there is a significant relationship between systems connections and employee satisfaction. it was concluded that employee satisfaction is a key factor for the success of any organization which can be achieved if the organization encourages embedded systems, employee empowerment and system connection. it was therefore recommended among others that; organizations should endeavour to sustain the habit of measuring gaps between current and expected performance and make lessons learned available to all employees and contribute to knowledge. keywords: corporate learning strategies, employee satisfaction, embedded systems, empowerment system connection introduction the elements involved in embedding employees in their jobs are: links, fit and sacrifice. these are associated with where employees work and where they reside. as a retention construct, embedded system decreases employees’ turnover intentions and actual voluntary turnover (ampofo, coetzer & poisat, 2017). andika and darmanto (2020) opined that, when employees are newly hired, organization’s culture are emphasized during their first weeks of training. employers are required to understand employee’s interests and hobbies and connect them with employees who may already be involved in similar interests and hobbies. these new employees will feel like they belong, even if it is their first week at work. but when employees are not new, it is the responsibility of employers to check to discuss career goals, any potential issues at work, or any struggles they are facing outside of work. this gives employees hope and job satisfaction (tampi, nabella & sari, 2022). empowerment is the constant process of giving employees with the necessary skills, training, resources, encouragement, and incentive to achieve at their best (yin, wang, & lu, 2019). empowerment is vital mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 15 | p a g e because it promotes employee satisfaction, resulting in happier and more loyal employees. the truth is that empowerment is more than a single act or process; it is a corporate culture and the structure of the organization (lasspied, awad, & giorat, 2020). empowerment leads to employee satisfaction by providing employees with a sense of independence, creativity, and control over their schedule. employee satisfaction is an intangible yet strong force that fosters a more engaged and productive workplace. satisfied employees are more likely to do their tasks well and for much longer.according to jonathan (2023), not all organizations have caught up to the changing needs of their workforce, 65% of employees are satisfied with their current jobs. he further said that 51% of employees are disengaged, while 13% are actively disengaged. only 36% count themselves as engaged (jonathan, 2023; paais, pattiruhu, 2020).empowered workers are happy and have the ability to promote good change throughout the firm. changing how employees see their function and discuss it with their colleagues may result in more productive and loyal teams. connecting with employees' needs and wishes and facilitating communication can not only improve employee culture and morale, but also have a major influence on retention and organizational success (hulshof, demerouti, & le-blanc, 2020). system connection is another area to be considered when talking about employee satisfaction. employees with strong personal ties to a firm are more likely to be satisfied at work, and less likely to leave. these new and existing employees build a local network outside of work and at work. according to choi (2020), it is a good act to pair each new employee with a buddy to help them make friends during the first few weeks. organizations can organize lunches, happy hours, or other social events with colleagues to help new employees get to know the office. to set up lasting relationships, companies should also give each new employee a mentor, whom they can get to know, learn from, and rely on. these mentors will not only be able to help their mentees make friends, but they will be able to tell early if the new employee is struggling or not (bekirogullari, 2019). one of the ways organization can satisfy employees is to encourage embeddedness, empowerment and system connection among others (firzli, 2018). it is important for organizations to create a supportive learning environment. every company suffers from employee turnover. especially when losing a particularly talented employee, managers are often faced with the question on how to prevent this in the future (quested, thøgersen-ntoumani, uren, hard castle & ryan, 2018). apart from the many well-known measures of employee retention, there are also other factors you can take into account when trying to keep your talent from leaving. a relevant, effective, yet rather unknown factor is employee embeddedness. base on the aforementioned, this study examined impact of embedded system, empowerment and systems connection on employee satisfaction. statement of the problem embeddedness is a measure of employee engagement which has a huge impact on employee satisfaction. if an employee does not feel connected to the organization, it results in dissatisfaction. this implied that for an employee to be satisfied, he/she must be fit to do the job, link with friends and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 16 | p a g e colleagues and make sacrifices for the organization by working judiciously. considering the above, organizations and management should pay attention to embeddedness in employees. organizations are to integrate employees into processes and culture. while doing this, empowerment should not be left out. an empowered employee gives more to the organization by increasing productivity and performance. companies, whose employees are not embedded, empowered and connected, are liable to suffer setbacks. they might not be competitive, successful, and productive. thus, the current examined impact of embedded system, empowerment, and systems connection on employee satisfaction. objectives of the study  determine the impact of the embedded system on employee satisfaction.  evaluate the impact of empowerment on employee satisfaction.  assess the impact of systems connection on employee satisfaction. research questions  determine the impact of the embedded system on employee satisfaction.  evaluate the impact of empowerment on employee satisfaction.  assess the impact of systems connection on employee satisfaction. hypotheses of the study ho1: there is no significant impact of embedded systems on employee satisfaction. ho2: there is no significant impact of empowerment on employee satisfaction. ho3: there is no significant impact of systems connection on employee satisfaction. literature review conceptual review embedded system embeddedness is a measure of employee engagement which goes beyond what happens in the office, but it nevertheless has a huge impact on employee satisfaction, particularly for new employees. if an employee doesn’t feel connected to the community he or she lives and works in, the likelihood they will leave increases exponentially waterschoot, kaap-deeder & vansteenkiste, 2020). embeddedness is broken down into three elements (waterschoot et al., 2020): (1) fit.-the employee feels like they belong at the company and in their community. they feel like they share the same values and goals, and they believe they can contribute meaningfully. (2) linksemployees are connected; they have strong relationships at work as well as friends outside of work. they feel invested in their local network. (3) sacrificeif employees were to leave organization, they would feel as though they were giving something up such as projects at work, meaningful friendships, or a promising career path. the consequences of leaving are greater than the promise of new opportunities elsewhere. ampofo, coetzer and poisat (2017) recommend employers should pay attention to embeddedness in employees. if embeddedness is an issue, he suggests firms should improve their boarding process. assessing embeddedness should not mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 17 | p a g e only occur once an employee joins an organization. it should be an integral part of a firm’s ongoing efforts to engage employees. companies can take steps to address each component above (jallad, 2021). empowerment empowerment refers to people's level of autonomy and self-determination at work. this allows people to represent their interests in a responsible and self-determined manner while acting on their authority. it is the process of getting stronger and more confident, particularly in managing one's own life and asserting one's rights. empowerment also refers to professional support that helps individuals overcome their feelings of helplessness and lack of influence, as well as identify and apply their skills to execute their jobs (jallad, 2021). in the workplace, empowerment is a realistic method to resourcebased intervention. empowerment is viewed as a method for increasing employee responsibility. empowerment is a significant notion in discussions about increasing employee engagement and happiness (ulutas, 2018). empowerment, defined as a shift from a deficit-oriented to a more strengthoriented perspective, is increasingly appearing in management ideas, as well as continuing education and self-help (rahmi, achmad, & adhimursandi, 2020). system connections an employee connects successfully with the company when they feel needed at work, do not have to pretend to be someone else, and totally identify with the business's aims and vision (rahmi et al., 2020). employees will consider sticking with their present employer if the connections both outside and inside the company benefit them. system connection entails reciprocal praise, honest feedback, and the encouragement of mutual improvement. there should be an interaction between employers and employees. the employers would need to set a positive example. only managers who express gratitude to their staff and are prepared to establish important social connections with their team may expect the same in return (behbahani, 2023). the pace at which one employee connects with the organization is influenced by the connection of the entire group. if a new employee finds that there are few individuals hanging out at the, it instantly indicates a lack of social bonds among employees. also, if employees see that their coworkers are looking for new employment. naturally, they will question why this is the case. regardless matter how happy the employees are, their colleagues' bad emotional state of mind will have an indirect impact on their own well-being. thus, these signals have the potential to emotionally disengage personnel inside the firm (behbahani, 2023). employee satisfaction satisfied employees are critical to the health of your company. an employee who enjoys their job will work harder and stay with the company longer, so creating a space of positivity and respect in the workplace can contribute to the company's success. employees want jobs they will not dread. they want to work in a healthy environment with friendly management and colleagues, do meaningful work, and get paid well. a business prioritizes employees’ satisfaction, and reap considerable benefits such as lower turnover, higher productivity, positive organization culture, and loyalty, according to steben mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 18 | p a g e (2023), 20 per cent of employees feel satisfied and engaged at work, and if employees are satisfied, they work diligently (steben, 2023). impact of embedded systems on employee satisfaction employee embeddedness is about having employees feel anchored in the organization's culture rather than merely incorporated into it. this means that the employer must examine not only compensation, well-being, and empowerment, but also how to establish an atmosphere in which people desire to stay, mostly because leaving would force them to give up too much. this environment would inevitably contain a strong social network both within and outside of the office, a strong personal and organizational fit, and a strong interdependence between the firm and its workforce.embedded systems provide mechanisms to monitor the difference between present and expected performance, make lessons learned available to all employees, and track the effectiveness of training time and resources (ampofo, coetzer, & poisat, 2017). impact of empowerment on employee satisfaction empowered employees increased their confidence degree and self-reliance. this extra confidence creates job satisfaction and increases levels of productivity. empowerment encompasses the enlargement of an employee’s job duties by giving them the (bekirogullari, 2019) independence and authority of decision-making about their job without the approval of his immediate supervisor; it is the level of responsibility and authority given to an employee; motivate employees enthusiast to utilize their skills, abilities and creativity by accepting accountability for their work; it enables employees training, provided with all the appropriate and relevant information and the best possible tools. empowerment helps to recognize people for taking initiative, gives people control over the resources they need to accomplish their work, and supports employees who take calculated risks (choi, 2020; lassoued et al., 2020). impact of systems connection on employee satisfaction employees will contemplate leaving their positions if their relationships (social ties) both inside and outside of the organization lose value or do not exist at all. valuable social links extend beyond the wellknown; i get along with my colleagues at work. they include reciprocal praise, honest feedback, and the encouragement of mutual development. managers set a good example in this regard and take the initiative to build these relationships. only managers who express gratitude to their staff and are prepared to create significant social relationships with their team can expect to receive the same in return. employees' commitment to their jobs benefits not just them, but also their employers. according to behbahan (2023), employees' connection to their work has the biggest influence on total job satisfaction and performance. he went on to define employee connection as a sense of belonging in the workplace based on several aspects of employee experience, including (1) connection to work: having a sense of satisfaction and purpose daily; (2) connection to people: developing relationships with peers, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 19 | p a g e teams, managers, and leaders; and (3) connection to culture: feeling that personal values align with the culture, mission, values, and norms. system connection helps individuals to think globally, collaborate with the outside world to satisfy shared needs, and seek solutions from across the company when addressing challenges (behbahan, 2023). theoretical framework theoretical framework according to the literature, embedded systems, empowerment, and system connections are associated with employee satisfaction. thus, fig. 1 below depicts the i below depict the theoretical framework of this study. fig. 1: theoretical framework of the study source: researcher, 2024 the above figure indicates the independent variables as embedded system, empowerment, and systems connections while employee satisfaction is the dependent variable. organizations that encourage embedded systems, empowerment and systems connection make employees happier which makes them (employees) satisfied with their jobs. this satisfaction leads to people helping each other learn, people are given time to support learning, people are rewarded for learning, open and honest feedback, sharing ideas & views, increased trust & transparency, increased performance, increased productivity, employee retention, and customer satisfaction. empirical review jallad (2021) examined the relationship between learning organization and job satisfaction from the perspective of the staff of tulkarem municipality – palestine. the study used seven independent variables: continuous learning, inquiry and dialogue, team learning, embedded system, empowerment, system connection, strategic leadership, and their effect on job satisfaction. the study uses a survey to test the hypotheses and answer the study questions, as this kind of data collation is more convenient than other methods. the findings from multiple regression tests revealed that there was a statistically significant impact of strategic leadership and continuous learning on job satisfaction. the recommendations were that managers could build programs and systems to encourage learning at all levels, embedded system (em) empowerment (ep) employee satisfaction (es)  people help each other learn  people are given time to support learning  people are rewarded for learning  open and honest feedback  share ideas & view  increases trust & transparency  increase performance  increase productivity  employee retention  customer’s satisfaction independent variables dependent variable outcomes systems connections (sc) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 20 | p a g e ampofo et al. (2017) responded to calls for further job embeddedness research in a wider range of national, cultural, and organisational contexts. there is a paucity of research on job embeddedness in thailand and in smaller enterprises. data collected from 181 employees in small and medium-sized enterprises located in two provinces of thailand were analysed. results suggest that organisation embeddedness, but not community embeddedness, predicts turnover intentions in the sample studied. only a handful of studies have examined the three sub-dimensions of organisation embeddedness: links, fit and sacrifice. our results showed that each of these sub-dimensions was significantly and negatively associated with turnover intentions. practical implications of the results and directions for future research are outlined in the paper. ulutaş (2018) studied the relationship between job satisfaction and empowerment can be omitted. in this context, a survey was conducted on the employees of 19 different companies operating in different sectors in the konya industrial zone, including the first five hundred and the second five hundred largest industrial establishments in turkey, and important data on the relationship between empowerment and job satisfaction were reached. according to this research results; it shows that there is a positive relationship between empowerment and job satisfaction. alshemmari (2023) investigated the role of employee empowerment (delegation, engagement, trust, communication and motivation) in increasing efficiency of employee performance within state audit bureau of kuwait. for that sake, quantitative methodology was employed, and (243) questionnaires were distributed on a sample from human resource department in state audit bureau of kuwait. spss was used to tackle and analyze gathered primary data; results of study indicated the acceptance of the main hypothesis which argued that employee empowerment has the ability to increase efficiency of employee performance with r= 0.901 and explaining 81.1% of the variance. study recommended providing career development opportunities and giving employees the chance to take on new responsibilities, take on special projects and participate in professional development courses. also, arrange for employees to participate in exchanges or internships at other audit bureaus to obtain new perspectives and broaden their experiences. further recommendations were presented in the study. the study had both practical and theoretical implications, as for practical implications, the study revealed that empowered employees tend to be more engaged, motivated, and committed to their work. as a result, they may perform their job duties with greater efficiency and effectiveness, leading to improved productivity and quality of work. as for the theoretical implications, it was seen through the study that investigating the relationship between employee empowerment and performance can provide insights into social exchange theory, which suggests that employees who feel valued and empowered are more likely to reciprocate with high levels of performance and commitment. as a theoretical contribution, the study revealed that empowerment is a key component of selfdetermination theory, which suggests that individuals are motivated by a desire to fulfil their basic psychological needs for autonomy, competence, and relatedness. investigating the relationship between empowerment and performance can help to further understand this theory and how it can be mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 21 | p a g e applied in the workplace. the practical contribution saw that empowered employees tend to be more engaged, motivated, and committed to their work. as a result, they may perform their job duties with greater efficiency and effectiveness, leading to improved productivity and quality of work. tools and methods the study adopted a descriptive survey design. the target population comprised all employees of vintex aluminum asaba (80), life flour mill sapele (76), differential aluminum (52) and nelux paint benin (89), which made up of 297 employees. the sample size of the study was 170 which was derived from the total population via taro yamane (1967) formula. the four firms were chosen through the random balloting technique. the questionnaire was used as an instrument for data collection which was constructed based on the modified likert 5-point scale of strongly agreed (sa), agree (a), undecided (ud), disagree (d) and strongly disagree (sd). the research instrument was face and contented validated. the reliability of the instrument was established using the test and retest method with a coefficient of reliability of 0.82 using cronbach alpha in spss 25. the researcher personally administered copies of the questionnaires to the respondents after due permission from the managers of the respective organizations. 170 copies were distributed but 162 were retrieved which showed a 95% retrieval rate. this is because some of the filled questionnaires were lost, some were not properly filled in, and some of the respondents did not return their copies. the data collected from the administration of the questionnaire was analyzed using descriptive and inference statistics. the research questions were answered using simple percentages and mean. the formula is as follows: mean = 5+4+3+2+1 = 15 = 3.0 5 5 the mean response that is greater than 3.0 was conserved as agreed, a mean response that is lesser than 3.0 was considered as disagreed, while a mean response that is equal to 3.0 was considered as neutral point. the hypotheses were tested using multiple regressions via spss 25 at a significant level of 0.05. the model of multiple regressions is as follows: model specification using multiple regressions mathematically, it can be represented as; y= β0+β1x1+β2x2+β3x3…… +β0xn y = βo + βiem1 + β2ep2 + β3sc3 + e3 ….. +β0xn es = f (em, ep, sc) i. es = f (em) es = β0 + β1em1 + ei … (i) where, es = employee satisfaction em = embedded system ep = empowerment mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 22 | p a g e sc = system connections i = individual respondents βo = constant term β i = regression coefficient ei = error term ii. es = f (ep) es = β0 + β2ep2 + e2 …. (ii) where, es = employee satisfaction ep = empowerment iii. es = f (sc) es = β0 + β3sc3 + e3 … (iii) where, es = employee satisfaction sc = system connections analysis of data and interpretation frequency tables were used to present analyzed data. research questions were answered using simple percentages and meanwhile the hypotheses were tested using multiple regressions at a significant level of 0.05 in spss 25. answering of research questions research question 1 what is the impact of embedded systems on employee satisfaction? table 1: impact of embedded system on employee satisfaction s/n statement sa a ud d sd mean sd remark 1. my organization creates systems to measure gaps between current and expected performance. 90 (56%) 37 (23%) 15 (9%) 10 (6%) 10 (6%) 4.15 34.08 accepted 2. my organization makes its lessons learned available to all employees. 60 (37%) 80 (49%) 9 (6%) 7 (4%) 6 (4%) 4.12 35.06 accepted 3. my organization measures the results of the time and resources spent on training. 92 (57%) 30 (19%) 5 (3%) 20 (12%) 15 (9%) 4.01 34.52 accepted grand total 4.09 34.55 accepted mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 23 | p a g e table 1 shows the means responses to items 1 – 3 as; 4.15, 4.12 and 4.01 respectively; with a grand mean and standard deviation of 4.09+34.55. this means that, with embedded system creates systems to measure gaps between current and expected performance; makes its lessons learned available to all employees and measures the results of the time and resources spent on training. research question 2 what is the impact of empowerment on employee satisfaction? table 2: impact of empowerment on employee satisfaction s/n statement sa a ud d sd mean sd remark 4. my organization recognizes people for taking initiatives. 70 (43%) 60 (37%) 12 (7%) 10 (6%) 10 (6%) 4.05 29.98 accepted 5. my organization gives people control over the resources they need to accomplish their work 70 (43%) 60 (37%) 12 (7%) 10 (6%) 10 (6%) 4.25 29.98 accepted 6. my organization supports employees who take calculated risks. 70 (43%) 60 (37%) 12 (7%) 10 (6%) 10 (6%) 3.80 29.98 accepted grand total 4.03 29.44 table 2 shows the means responses to items 4 – 6 as; 4.05, 4.25 and 3.80 respectively; with a grand mean and standard deviation of 4.03+29.44. this means that empowerment helps organizations to: recognize people for taking initiative, gives people control over the resources they need to accomplish their work and supports employees who take calculated risks. research question 3 what is the impact of systems connections on employee satisfaction? table 3: impact of systems connections on employee satisfaction s/n statement sa a ud d sd mean sd remar k 7. my organization encourages people to think from a global perspective. 60 (37%) 62 (38%) 6 (4%) 18 (11%) 16 (10%) 3.81 26.51 accepted 8. my organization works together with the outside community to meet mutual needs. 50 (31%) 100 (62%) 4 (2%) 5 (3%) 3 (2%) 4.17 42.72 accepted 9. my organization encourages people to get answers from across the organization when solving problems. 85 (52%) 55 (34%) 5 (3%) 10 (6%) 7 (4%) 4.24 35.97 accepted grand total 4.07 35.0 7 accept ed table 3 shows the mean responses to items 7-9 as: 3.81, 4.17, and 4.24 respectively; with a grand mean and standard deviation of 4.07+35.07 respectively. this means that systems connections encourage people to think from a global perspective; make organizations work together with the outside community mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 24 | p a g e to meet mutual needs and encourage people to get answers from across the organization when solving problems. test of hypotheses they hypotheses were tested using multiple regressions in spss 25. the output of the analysis is shown in table 4 – 7 below: multiple regression model for the study es = o +iem + 2ep + 3sc es = employee satisfaction  dependent variable em (embedded system), ep (empowerment) and sc (systems connections)  independent variables table 4: variables entered/removeda model variables entered variables removed method 1 sc, ep, emb . enter a. dependent variable: es b. all requested variables entered. table 5: model summaryb model r r square adjusted r square std. error of the estimate durbinwatson 1 .899a .809 .805 .26673 .164 a. predictors: (constant), sc, ep, em b. dependent variable: es the r value of 0.899 in the model summary table (table 5) represents the pearson correlation. this implies that there is a strong and positive correlation across the variables since the value of r (0.899) tends to 1. the r square (r2) value of 0.809 (table 5) is known as the coefficient of determination. it shows the proportion of the variance in the dependent variable that can be explained by the independent variables. this implies that 81% of the variation in employee satisfaction (es) can be explained by embedded system (em), empowerment (ep) and systems connections (sc). table 6: anovaa model sum of squares df mean square f sig. 1 regression 47.463 3 15.821 222.381 .000b residual 11.241 158 .071 total 58.704 161 a. dependent variable: es b. predictors: (constant), sc, ep, em mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 25 | p a g e the value of sig (0.00) in table 6 indicates that, the independent variables (em, ep and sc) combined has a statistically significant association with the dependent variable (es). table 7: coefficientsa model unstandardized coefficients standardize d coefficients t sig. collinearity statistics b std. error beta toleranc e vif 1 (constant ) 1.252 .196 6.398 .000 em .691 .077 .794 9.016 .000 .156 6.396 ep .098 .090 -.069 -1.096 .025 .304 3.291 sc .192 .105 .173 1.825 .017 .135 7.397 a. dependent variable: es hypothesis 1: there is no significant impact of embedded systems on employee satisfaction. the sig-value (0.000) of e) in table 7 indicates that there is a significant relationship between embedded systems (em) and employee satisfaction (es) since the sig-value (0.000) is lesser than 0.05. this means that the null hypothesis which states that there is no significant impact of embedded systems on employee satisfaction is rejected. this implies that there is a significant impact of embedded systems on employee satisfaction. in every additional effort to improve embedded systems (em), employee satisfaction (es) is expected to increase by 0.691 (table 7) assuming other independent variables remain constant. hypothesis 2: there is no significant impact of empowerment on employee satisfaction. the sig-value (0.025) of empowerment (ep) in table 7 indicates that there is a significant relationship between empowerment (ep) and employee satisfaction (es) since the sig-value (0.025) is lesser than 0.05. this means that the null hypothesis which states that, there is no significant impact of empowerment on employee satisfaction is rejected. this implies that there is a significant impact of empowerment on employee satisfaction. in every additional effort to improve empowerment (ep), employee satisfaction (es) is expected to increase by 0.98(table 7) assuming other independent variables remain constant. hypothesis 3: there is no significant impact of system connections on employee satisfaction. the sig-value (0.017) of systems connections (sc) in table 7 indicates that there is a significant relationship between systems connections (sc) and employee satisfaction (es) since the sig-value mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 26 | p a g e (0.017) is less than 0.05. this means that the null hypothesis which states that there is no significant impact of systems connections on employee satisfaction is rejected. this implies that there is a significant impact of empowerment on employee satisfaction. in every additional effort to improve systems connections (sc), employee satisfaction (es) is expected to increase by 0.192 (table 7) assuming other independent variables remain constant. findings the study's findings indicated that there is a substantial association between embedded systems and employee satisfaction, as demonstrated by the answer to research question 1 (table 1) and the test of hypothesis 1. embedded systems establish mechanisms to monitor gaps between present and expected performance, make lessons learned available to all employees, and track the effectiveness of training time and money. this discovery is consistent with the findings of ampofo et al. (2017), who discovered that embedded systems evaluate the differences between present and predicted performance as well as the outcomes of training time and resources. the response to research question 2 (table 2), as well as the test of hypothesis 2, demonstrated that there is a substantial association between empowerment and employee happiness. empowerment enables organizations to recognize individuals for taking initiative, offer workers authority over the resources they require to complete their tasks, and encourage employees who take measured risks. this conclusion complements the findings of choi (2020) and lassoued et al. (2020), who believe that empowerment encourages individuals to take initiative and provides them control over the resources they need to complete their tasks. the answers to research question 3 (table 3) and the test of hypothesis 3 also demonstrated a substantial association between systems connectivity and employee satisfaction. systems linkages inspire individuals to think globally; they enable organizations to collaborate with the outside community to satisfy shared requirements; and they motivate people to seek solutions from across the organization when addressing challenges. this conclusion is consistent with the findings of behbahani (2023), who said that system linkage promotes individuals to think globally, collaborate, and seek answers while addressing difficulties. conclusion employee happiness is critical to the success of any business; when people are content at work, the emotion spreads across the organization, driving organizational progress. employee happiness may be increased if the organization promotes embedded systems, employee empowerment, and system integration. this study is consistent with behbahani's (2023) findings, which said that system connectedness promotes individuals to think globally, collaborate, and seek answers while addressing difficulties. recommendation  organizations should consistently measure performance gaps and share lessons gained with all workers.  stakeholders should reward initiative and encourage staff to take appropriate risks. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 27 | p a g e  encouraging continuous stakeholder ties fosters global thinking and collaboration with the community to satisfy shared needs. references alshemmari, j. 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(2020). moving beyond mandates: organizational learning culture, empowerment, and performance. international journal of public administration, 43(8), 724-735. firzli, n. (2018, april 3). greening, governance and growth in the age of popular empowerment. ft pensions experts. financial times. retrieved april 27, 2018. hulshof, i., demerouti, e., & le-blanc, p. m. (2020). providing services during times of change: can employees maintain their levels of empowerment, work engagement and service quality through a job crafting intervention? frontiers in psychology, 11, 87. jallad, m. n. (2021). the relationship between learning organization and job satisfaction: case study of palestinian municipalities. european journal of business and management, 13(20), 1-8. jonathan, d. (2023). 7 best practices to boost employee satisfaction in 2023. retrieved from http://embeded%20system/7%20best%20practices%20to%20boost%20employee%20satisfa ction%20in%202023.html mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.linkedin.com/pulse/employees-connection-work-impact-job-performance-nicolas-behbahani https://www.linkedin.com/pulse/employees-connection-work-impact-job-performance-nicolas-behbahani american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 28 | p a g e lassoued, k., awad, a., & guirat, r. (2020). the impact of managerial empowerment on problem solving and decision making skills: the case of abu dhabi university. management science letters, 10(4), 769-780. nassani, a. a., & altuwaijr f. k. (2021). the impact of organizational learning culture's on job satisfaction, organizational commitment, and turnover intention among privet sector in saudi arabia. european journal of business and management, 13(8), 13-17. paais, m., & pattiruhu, j. r. (2020). effect of motivation, leadership, and organizational culture on satisfaction and employee performance. the journal of asian finance, economics and business, 7(8), 577-588. parul, m., & pooja g. (2017). the relationship between learning culture, inquiry and dialogue, knowledge sharing structure and affective commitment to change. journal of organizational change management, 30(4), 610-631. quested, e., thøgersen-ntoumani, c., uren, h., hardcastle, s. j., & ryan, r. m. 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(2022). the influence of information technology users, employee empowerment, and work culture on employee performance at the ministry of law and human rights regional office of riau islands. enrichment: journal of management, 12(3), 16201628. ulutaş, m. (2018). the effect of empowerment on employees’ job satisfaction: a research on konya industrial zone. manas journal of social studies, 7(1), 1-12. mailto:contact@americaserial.com mailto:contact@americaserial.com https://officevibe.com/blog/importance-employee-satisfaction#:~:text/ =tasks%20and%20projects.-,satisfied%20employees%20are%20critical%20to%20the%20health%20of%20your%20company,contribute%20to%20your%20company%27s%20success https://officevibe.com/blog/importance-employee-satisfaction#:~:text/ =tasks%20and%20projects.-,satisfied%20employees%20are%20critical%20to%20the%20health%20of%20your%20company,contribute%20to%20your%20company%27s%20success https://officevibe.com/blog/importance-employee-satisfaction#:~:text/ =tasks%20and%20projects.-,satisfied%20employees%20are%20critical%20to%20the%20health%20of%20your%20company,contribute%20to%20your%20company%27s%20success https://officevibe.com/blog/importance-employee-satisfaction#:~:text/ =tasks%20and%20projects.-,satisfied%20employees%20are%20critical%20to%20the%20health%20of%20your%20company,contribute%20to%20your%20company%27s%20success american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 29 | p a g e vansteenkiste, m., ryan, r. m., & soenens, b. (2020). basic psychological need theory: advancements, critical themes, and future directions. motivation and emotion, 44(1), 1–31. waterschoot, j., van der kaap-deeder, j., & vansteenkiste, m. (2020). the role of competence-related attentional bias and resilience in restoring thwarted feelings of competence. motivation and emotion, 44(1), 82–98. yin, y., wang, y., & lu, y. (2019). antecedents and outcomes of employee empowerment practices: a theoretical extension with empirical evidence. human resource management journal, 29(4), 564-584. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 1 | p a g e accruals and earnings management: implications for stock liquidity 1dr. samir a. ben ammar and 2dr. nadia r. chaouch 1associate professor at the graduate institute of accounting and business administration, university of mannouba, tunisia 2professor in the graduate institute of management and president of the research laboratory gouvernance d'entreprise, finance appliquée et audit. abstract: the quality of financial information is a central theme in accounting and finance literature, with significant implications for market efficiency and liquidity. as emphasized by levitt (2000), high-quality financial information serves as the cornerstone of a robust and efficient market, essential for maintaining liquidity and market efficiency. quality accounting standards, according to levitt, contribute to improved liquidity and reduced capital costs, making them vital for market health. this study delves into the role of accounting figures as critical financial indicators that enhance information efficiency and bolster market outlook and liquidity. drawing on the insights of chung (2009) and bachtiar (2008), it explores how high-quality accounting standards, when effectively disclosed, can lead to higher returns, improved liquidity, and reduced capital costs. the investigation further examines the link between the quality of disclosed earnings and stock liquidity through the ask-bid spread, as proposed by bachtiar. in the context of emerging markets like tunisia, liquidity is of paramount importance and directly influences the pricing process. this research adds depth to the literature by examining the relationship between earnings management, information disclosure, and stock liquidity, as explored in studies by allayannis et al. (2009), iatridis et al. (2009), matoussi, karaa, and maghraoui (2004), bhattacharya, desai, and venkataraman (2013), and fizazi et al. (2009). keywords: financial information quality, market efficiency, stock liquidity, accounting standards, emerging markets. i. introduction quality of financial information has been the topic of countless debates in the accounting and financial literature. indeed, according to levitt (2000), it is the driving force of a powerful and an efficient market. without it, liquidity diminishes and market efficiency ceases to exist. the author adds that high quality accounting standards consist in improving liquidity and reducing capital cost. accounting figures, as one of the financial indicators, reduce inefficiency of information and contributes to improving market outlook and liquidity. stocks liquidity can thus be perceived as a measure of market efficiency and used as an effective tool of disseminating useful information (chung 2009). bachtiar (2008) argues that high returns disclosed through high quality accounting standards can eventually improve liquidity and reduce capital cost. furthermore, bachtiar checked the inherent hypothesis of a mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 2 | p a g e positive relationship between the quality of disclosed earnings of firms and the liquidity of their stocks through the ask-bid spread. by increasing the liquidity of stocks, transaction costs may decrease. liquidity plays also an important role in the pricing process. it represents a key concept in emerging markets like tunisia. numerous studies have focused on the relationship between earnings management and disclosure (allayannis et al., 2009;iatridis et al., 2009), while others have examined the relationship between information disclosure and stocks liquidity(matoussi, karaa, and maghraoui 2004; bhattacharya, desai, and venkataraman,2013; fizazi et al. 2009 ). nevertheless, studies of the relationship between earnings and liquidity management remain rare, especially in emerging markets (beneish et al., 2012, peterson et al., 2015, sohn 2016). thus, our study will aims inextending the debate on this issue by examining the impact of earnings management on market liquidity in the tunisian context. in tunisia, few researches have been focused on the relationship between the practice of earnings management and liquidity, while the issue of accounting manipulation was regularly addressed by researchers. in the united states, many researchers have explicitly addressed the practices of earnings management. several recent studies, such as those of mastumra (2003) and young (2005) have attempted to determine the impact of an earnings management policy on the financial market. therefore, it seems appropriate to investigate this relationship in a sample of listed tunisian companies. indeed, studying emerging markets like the tunis stock exchange (tse), earnings management may be very revealing because it traces the specificity most pursued by stock market investors. indeed, our study of the tunisian stock market comes under this perspective. this emerging and recent market is known by a strong information asymmetry and very low information efficiency. these specificities may lead us to identify earnings management practices specific to the tunisian market. therefore, we can determine the degree of impact of these accounting practices on investor behavior via stocks liquidity. the aim of this paper is to determine whether earnings management has an impact on stocks liquidity for the case of tunisian firms. this amounts to studying the relationship between liquidity (via the askbid spread) and accruals using the modified models of jones (1995). therefore, this paper is structured as follows: the first section reviews the relevant literature. the second section presents our research hypotheses and methodology, while the third section focus on the results obtained on the tunisian stock market. in the last section, a discussion of the results and a conclusion will be proposed. ii. literature review 1. earnings management theories the earnings management theories are based on two main hypotheses. the first hypothesis assumes that information asymmetry between informed and less informed shareholders is likely to be reduced by disseminating information (glosten and milgrom 1985). such an accounting policy-based signaling leads to a reduction in the askbid spread and an increase in liquidity. the second hypothesis assumes that an information disclosure policy reduces information-searching costs. this results in lower transaction costs and a higher transaction volume. kraft et al. (2014) show that reducing information asymmetry is a basic fundamental to the decision to publish manipulated earnings. liquidity is considered as the facility to trade large volumes of stocks without causing a significant price shift during a narrow time span (etemadi and resayian 2010). this concept heavily depends on informational mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 3 | p a g e transparency. indeed, information asymmetry between investors reduces transparency of market transactions and may lead to dysfunctions. botosan and plumlee (2002) argue that information inefficiency reduces market liquidity and increases capital cost. earnings management also helps to moderate information asymmetry, since stocks become more liquid (chung, 2009). at present, only few studies have explored the relationship between earnings management and stocks liquidity. richardson (2000) found that managers tend to manipulate earnings when there is a strong information asymmetry. 2. earnings and liquidity management research in the literature, there are several measures of market liquidity. some of them are the transactions volume, the turnover ratio and the ask-bid spread. in this context, relevant empirical research can be classified into two main trends: the first trend included studies on measuring liquidity through the ask-bid spread (ascioglu et al., 2012, kan, 2013, bafghi et al. (2014)). these studies consider the ask-bid spread as the best estimator of stocks liquidity, and they focused on the adverse selection dimension of the ask-bid spread. they concluded that companies that use earnings management as their performance measurement disclose higher adverse selection costs. as a direct result of these costs, liquidity providers widen their spreads, reducing thus liquidity. in the spanish context, livnat et al. (2008) investigate on the relationship between disclosure and stocks liquidity over the 1994-2000period. the authors found a positive relationship between liquidity and financial disclosure. lakhal (2008) examined the effect of quarterly earnings disclosure on market liquidity to show that they reduced information asymmetry between different market participants and improved stocks liquidity. in the german context, grüning et al. (2010) found that information disclosure in annual reports improves liquidity by acting on investor forecasts who adjust their portfolios. in the tunisian context, triki and omri (2008), examining a sample of 20 tunisian firms over the 2000-2005period,found a negative relationship between earnings quality and the ask-bid spread the second trend included studies that examined liquidity through transaction volume. these studies found a positive correlation between the amount of ias to us gaap-recon ciliated earnings and transaction volume (peterson et al., 2015, yuan and cheng , 2016). chen and sami (2006) studied the reaction of the us financial market in terms of transaction volume when changing accounting tools. the studied sample consists of 38 non-us companies (ten countries) listed on the american market between 1995 and 2001. after running several statistical tests, positive correlation was found between the amount of readjusted earnings and transaction volume. thus, it was concluded that us investors take into account earnings informational content in their investment decisions. most studies taking transaction volume as a liquidity measure expand in three main directions: its relationship to the ask-bid spread, price change and information. subscribing to this perspective, several studies conducted on the us market examined the reaction of stock prices following a disclosure of manipulated earnings as information to investors. this methodology consisted of determining the abnormal volumes around the disclosure date of managed earnings. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 4 | p a g e iii. methodology focusing on the tunisian context, the stocks liquidity will be investigated through the ask-bid spread and discretionary accruals according to the modified models of jones. 1. tunisian context in tunisia, as soon as the new market is created in 1996, new companies, small and with a high growth potential, can access equity markets in order to raise funds such as to ensure their growth (matoussi 2004). these companies seemed to be highly motivated to manage their earnings. tunisian accounting regulations are mainly legal in origin. in addition to the regulatory framework, companies should comply with the code of commercial rules, which contains few accounting rules or principles. in theory, such an absence of legal constraints offers companies a large number of accounting tools. this situation makes the tunisian context as an interesting ground to study earnings management practice. first, tunisian accounting standards offer managers considerable flexibility to choose accounting practices. moreover, the tunisian context is known by a concentration of corporate ownership and a relatively illiquid financial market. in tunisia, unlike other countries like north america, earnings disclosure attracted particularly investors ‘attention, motivating thus firms to engage in earnings management. our assumption is that the tunisian market is likely to represent a fertile ground in terms of an upward earnings management. 2. research hypotheses based on previously mentioned theoretical and empirical foundations, some hypotheses can be deduced such as: • h1: there is a negative relationship between discretionary accruals and market liquidity chung et al (2009) examined a sample of us companies, assuming that earnings management reduces stock liquidity. they measured earnings management through discretionary accruals over the october 2001 to december 2002period. the price range was also used as a liquidity indicator. dumontier et al. (2002), studying the french market found that investors admit manipulations as soon as they have the means to detect them. accordingly, ascioglu et al. (2011) used a triple measure to determine the impact of earnings management on stock market liquidity. the first measure consists of accounting data while the other two relate to real earnings management, which included operating cash flow and discretionary costs. the results point to a direct relationship between illiquidity measure and earnings management through discretionary accruals. • h2: discretionary accruals explain liquidity better than non-discretionary accruals. a number of univariate regressions in which the dependent variable is liquidity should be run whereas the independent variable is one of earnings management components (discretionary, non-discretionary accruals) in each regression. • h3: structuring total accruals into discretionary and non-discretionary accruals better explains liquidity. by decomposing total accruals into discretionary and non-discretionary accruals, their explanatory power improves. • h4: investors react according to the direction of earnings management (upward or downward). 3. variables and model a panel data estimation technique was used in order to test the proposed hypothesis on the relation between earnings management and market liquidity. specifically, we exploited the models of chung et mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 5 | p a g e al. (2009) and bafghi et al. (2014), based on the ask-bid spread as a measure of liquidity. the ask-bid spread is interesting in that it takes into account the notion information asymmetry. the market is all the more liquid because the difference between the best selling price and the best purchasing price is small (ascioglu et al., 2012, kan 2013). it was proved to be the most appropriate measure for the tunisian context and the most important determinant of liquidity of the tunis stock exchange (matoussi and zemzem 2004). the proposed models are as follows (1-3): liqit 0 1tacit 2sizeit 3volit 4spit 5rit 6vrit it (1) liqit 0 1dacit 2sizeit 3volit 4spit 5rit 6vrit it (2) liqit 0 1ndacit 2sizeit 3volit 4spit 5rit 6vrit it (3) where : liqit :spread of firm i at moment t. tac :total accruals of firm i at moment t. dacit :discretionary accruals of firm i at moment t. ndacit :non-discretionary accruals of firm i at moment t. sizeit :market value of firm i at moment t. volit :average trading volume of firm i at moment t. spit :average stock price of firm i at moment t. rit: stock return of firm i at moment t. vrit :stock return volatility of firm i at moment t. opting for the decomposition method is almost motivated by the specificity of the tunisian context, as a controlled market. therefore, we have chosen the model of chung, sheu, and wang (2009). bafghi et al. (2014), considered to be among the most suitable models to estimate the ask-bid spread. moreover, the authors believe that this model provides the best liquidity estimators. our models relate total accruals, discretionary and non-discretionary accruals to firms' stocks liquidity after checking for the contribution of each. they also enable to estimate the effect of earnings management on liquidity. first, they distinguish between discretionary and non-discretionary accruals as well as the perception of their effect on firm liquidity. second, they take into account the effect of other variables likely to affect stocks liquidity. comparing the coefficients of determination (r²) of the models in (1) and (2) will allow us to check whether the variable "discretionary accruals (dac)" explains liquidity and detects any additional information contained in the discretionary accruals likely to affect total accruals (tacs). to this end, the modified model of jones’s for earnings management was selected for this study. in summary, total accruals are decomposed in equations (2) and (3) into nondiscretionary accruals (ndacs) and discretionary accruals (dacs). this will determine the additional explanatory power of the discretionary (non-discretionary) component of accruals in our liquidity measurement model. a. the endogenous variables market liquidity the theory provides a number of liquidity measures: the ask-bid spread of illiquidity ratio, transaction volume, etc. in our study, we measured this variable by the average annual spread (attig and al. 2006 and bafghi et al., 2014), as it had been shown that it was the most appropriate measure for the tunisian context and most likely to determine liquidity of the tunis stock exchange (matoussi and al., 2004). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 6 | p a g e the spread was calculated for each sample value and for each day, as the difference between the best purchasing price and the best selling price divided by the average of the two prices. the spread of the tunis stock exchange that corresponds to the indicated market costs was selected to measure liquidity (4). askit bid it sprdit= ask it bid it (4) 2 with: askit = the price ask of stocki on day t. bidit = the price bid of stocki on day t. earnings management component as indicated above, the modified models of jones (1995) were adopted for the earnings management measurement (5). tacit / ait 1 (1/ ait 1) 1( reit / ait 1) 2(ppeit / ait 1) e it (5) with : tacit :total accruals of firm i in year t. ait-1 :total assets at the end of year t-1. δreit :(ca) net total revenues between t and t-1 of firm i. reit revit rec it δrevit : total revenues variation between t and t-1 of firm i. δrecit : receiveables variation between t and t-1 of firm i. ppeit :gross provisions of firm i at moment t. eit :residuals of discretionary accruals model of firm i in year t (dacit). βi: coefficients estimated for firm i. α : constant term b. the control variables according to the literature many determinants of the ask-bid spread, including transaction volume, price volatility, stock price and firm size (amihud 2002, brockman and chung 2001) could be provided. a fortiori, ascioglu et al. (2012) highlighted the positive relationship between transaction volume and liquidity level, while others found a negative relationship with size and price (amihud 2002). transaction volume an increase in transaction volume involves a serious disequilibrium in the equity market. it implies additional costs that should be compensated by widening the spread. atiase and bamber(1994) considered transactions volume s a proxy of information asymmetry. moreover, stoll (1978) shown that transaction volume and risk affect the stock holding cost and that stock price was a proxy for the unobservable minimum cost. the authors argued that spreads negatively relate to transaction volume. similarly, (chen et al., 2007) found that liquidity is an increasing function of transaction volume. stock price the financial literature assumes that price significantly explains stock liquidity. indeed, the studies of attig et al., (2006), brockman and chung (2001), and ajina et al., (2015) found that stock price positively correlates with liquidity. stock returns mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 7 | p a g e numerous models studying the relationship between returns and liquidity have been developed in the literature. most of them indicate that the expected returns negatively correlate with liquidity (amihud 2002). indeed, this negative sign was explained by investors requiring a liquidity premium to compensate the high transaction costs. thus, under equilibrium uninformed investors require compensation for holding stocks with high private information. returns volatility asymmetry of market information is measured by returns volatility. accordingly, any change in price produced by a change in investor forecasts results in an increase in returns variance (or volatility). in this regard, ascioglu et al. (2007) shown that volatility had an impact on inventory cost and stock risk management, and therefore widened the spread. empirical studies in the us market such as those of stoll (1978), roulstone (2003) and wang et al. (2009) revealed a positive relationship between volatility and ask-bid spread. firm size firm size is considered to approximate the degree of information asymmetry and therefore adverse selection costs. under the same perspective, bhattacharya et al. (2013) shown that small firms presented a larger information asymmetry than large firms. on the other hand, stocks of smallcapitalized firms were less liquid than stocks of largecapitalized firms (brown and hillegeist 2007). indeed, stock liquidity depended on firm size for two reasons. first, a large firm attracts the interest of analysts and investors. second, its size allows it to disseminate a large amount of information that leads to reducing information asymmetry and improving liquidity. c. sample and study period with the aim of avoiding missing data problems that may result in biased estimations, stocks with a low number of trading days in our sample were disregarded, allowing us to retain the 23 most liquid stocks for our study. then, only 299 observations were considered to represent 23 firms over the 20102012period. as for the tunisian data, firm liquidity data was collected from the tunis stock exchange, and the accounting figures were extracted from the official bulletins published by the financial market council (cmf). iv. results and discussion the descriptive statistics of the studied variables will be detailed, with respect to various relevant tests. the models parameters will be estimated and the contribution of discretionary (non-discretionary) accruals to stock spreads will be determined. 1. descriptive statistics a descriptive analysis of the studied variables was carried out initially (table 1). it resulted in the following observations: • accounting results disclosed by tunisian firms seems to be lower than cash flow, which explains the negative sign of total accruals. this negative sign is mainly generated by non-discretionary accruals. • earnings management through discretionary accruals carries additional information that does not necessarily exist in non-discretionary accruals, which confirms our hypotheses formulated above. table 1. descriptive statistics mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 8 | p a g e variables average standard deviation min max dependent variable liq 0.676 1.242 -2.207 7.821 independent variables tac1 tac2 ndac1 ndac2 0.0576 0.0576 0.0576 0.0552 0.130 0.130 0.0341 0.0225 -0.256 -0.256 -0.149 0.0156 0.892 0.892 0.122 0.100 dac1 6.11e-09 0.125 -0.325 0.811 dac2 0.00240 0.127 -0.271 0.796 control variables size r sp 16.37 18.53 31.00 1.707 34.38 39.70 12.13 -40.46 1.370 19.83 380.7 203.4 vol 2.700 0.169 2.212 2.886 2. tests specific to panel data to investigate the components of earnings management that explain stock liquidity of tunisian firms, econometric regressions on panel data covering the 2000-2012period was carried out in order to deduce the appropriate estimation methods. to this end, we proceed in two steps: first, the absence of any multi co linearity problem between the independent variables was checked, using the pearson correlation test between the continuous variables and the variance inflation factor (vif) test. the vif values were much lower than the generally required 5% or even 10% significance level. therefore, correction can be avoided (tables 1 and 2, appendix i-1). table 2 illustrates the pearson correlation matrix, reporting the relationships between the variables of the models (m1, m2 and m3) the vif (variance inflation factor) and pearson correlation tests indicate that the correlation between the variables is acceptable since the variance inflation factors (vif) have values below 10. all pearson correlation coefficients do not exceed 0.8(tables 2). variables. in addition, the correlation coefficients are small (maximum of 0.3453 for prices and liq).this indicates a direct relationship between the dependent variables and the control variables. table 2: results o f the pearson correlation test (modified models of jones) liq tac1 dac1 ndac1 size vol sp r vr liq 1.0000 tac1 0.0117 1.0000 dac1 0.0231 0.9650 1.0000 ndac1 0.0405 0.2608 0.0015 1.0000 size 0.0682 0.3658 0.1649 0.7878 1.0000 vol 0.2556 0.0391 0.0400 0.0017 0.0024 1.0000 sp 0.3453 0.0505 0.0649 0.0465 0.0551 0.2247 1.0000 r 0.0247 0.0426 0.0543 0.0375 0.0525 0.0379 0.0801 1.0000 vr 0.1295 0.0135 0.0052 0.0321 0.0459 0.0200 0.1123 0.0389 1.0000 as shown in table 2 above, no significant correlation was found between the dependent and independen t mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 9 | p a g e the results conclude to a positive relationship between stock spreads and discretionary accruals (2). this result validates the considered hypothesizes. a second measure of multi co linearity was thus used basing on vif values. vif values were ranged within 1.02 and 2.69 when using the modified models of jones. these values are perfectly below the accepted critical value of 10, which leads us to conclude that there is no multi co linearity problem. second, before estimating our models it is necessary to run different preliminary tests in order to ensure an efficient use of data. indeed, panel data requires adapted estimation methods. the results of these tests are presented in table 4. table 4: results of the hausman test and the validity of specific, heteroscedasticity, autocorrelation effects f 1.26 1.938 the linearization of the panel data was performed and included the dependent variable ask-bid spread (liq). thus, the stata software version 13.0 for windows was used. at the beginning, the presence of specific effects was conducted and based on various homogeneity tests. the collected results led us reject the null hypothesis of homogeneity of all the parameters. the calculated fisher statistics clearly exceed the tabulated threshold with zero probabilities (prob> f = 0).therefore, panel data estimation method is that with specific effects. thus, fixed and random effects models were estimated in order to test whether the specific effects result from the heterogeneity of the constants or that of the coefficients. accordingly, the hausman test was applied. the probability of the chi-square statistics shows zero values for the modified models of jones (1), (2) and (3)leading us to select the fixed effects model. finally, the breush-pagan and wooldridge tests were conducted to control for heteroscedasticity and errors autocorrelation. the probabilities of each lr2test point to an errors heteroscedasticity problem and an absence of autocorrelation. a re-estimation of the model after correction using the white method with the robust command (petersen, 2009), was finally done. 3. results of the regressions the coefficients of determination (r²) of the first three models were compared when running multiple regressions, with the aim of identifying the variables determining stock liquidity. these variables are total accruals, discretionary accruals and non-discretionary accruals. it aims at assessing the p-value 0 wooldridge test ( 1 ) ( 2 ) ( 3 ) hausman test chi deux 40.30 41.51 61.09 p value 0 0 0 breuch pagan test lr2 53.34 53.44 52.40 0 0 0.978 p value 0.301 0.334 0.179 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 10 | p a g e explanatory power of the three models (1), (2) and (3) in the tunisian context. multiple regressions were run by disaggregating total accruals into discretionary and non-discretionary components (dac and ndac) in order to test the suggested hypotheses h1 and h2. the results are presented in table 5. table 5: results of the regressions: liquidity and acruals modified models of jones earnings management measures total accruals discretionary accruals nondiscretionary accruals (1) (2) (3) variable liq liq liq earnings management 1.287 1.243 01.411 (2.32)** (2.32)** (0.12) size -1.273 -1.293 -1.315 (41.06)*** (47.11)*** (18.59)*** sp 0.002 0.002 0.002 (1.09) (1.08) (1.19) vol 0.052 0.052 0.053 (1.95)* (1.96)* (1.76)* return -0.006 -0.006 -0.006 (1.56) (1.54) (0.19) vr 0.005 0.005 0.006 (0.14) (0.15) (0.19) constant -6.646 -6.918 -7.280 (10.04)*** (11.01)*** (6.59)*** observations 299 299 299 number of firmes 23 23 23 r² (0.82) (0.76) (0.70) stat -f 4.93 4.86 6.54 f prob 0 0 0 notes: ***, ** and * denote significance levels of 1%, 5% and 10% respectively. values in parentheses are "t-student". the investigated model has considerable explanatory powers. indeed, the respective coefficients of determination r2 are 82% for (1), 76% for (2) and 076% for (3). the fisher test on the overall model significance shows that at the 1% level there is at least one independent variable whose impact on the dependent variable is significant. the respective fisher's statistics for both models are f (6, 270) = 4.93 for (1), 4.86 for (2) and 6.54 for (3). the coefficients of determination of these regressions reveal the relevance of the different components of accruals in explaining the ask-bid spread. if the coefficients are all significant, then each accruals component carries information about the ask-bid spread. the regressions in tables n ° 5 estimate the effect of earnings management on stock liquidity. the results indicate a positive and a significant relationship between accruals (tac, cad) and the ask-bid mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 11 | p a g e spread. however, the relationship between non-discretionary accruals and the ask-bid is insignificant (3). in line with previous research, the results of the proposed study validate the hypothesis that market liquidity is a decreasing function of earnings management. these results are consistent with studies on the us market. this result corroborates those of ascioglu et al. (2012); bafghi et al. (2014); peterson et al. (2015) and sohn (2016). similarly, aharony, lee, and wong, (2000) indicated that chinese firms do not have the same motivations for managing earnings like us firms. worth noting is that the manager is not a shareholder in the chinese sample. these firms have no interest in managing earnings. in such a context, it is the state which encourages firms to manage earnings in order to increase profits earned in terms of foreign currencies through selling stocks to foreign investors. moreover, hepworth (1953) argued that investors show more confidence to firms that generate stable and regular profits. similarly, faez et al. (2014), using the modified models of jones on a sample of 72 firms examined over the 2005-2013period found that earnings management enhances information asymmetry and reduces liquidity. indeed, studying an american sample, ascioglu et al. (2012) found the same result using two measures of liquidity: ask-bid spread and transaction volume. the impact of the control variables on the ask-bid spread is assessed by the modified models of jones (2). the t-student test of the individual significance of the variables shows that firm size and volume significantly affect the ask-bid spread respective at the 1% and 5 % significance levels. this validates the hypothesis that firm size and transaction volume are complementary tools to the ask-bid spread. consistent with our predictions, size of tunisian firms negatively affects the ask-bid spread. this is consistent with several studies where size has a negative effect on the ask-bid spread. many authors found similar results, like durnev and kim (2003). these studies in different contexts found a negative relationship between size and the ask-bid spread. the obtained results also show that stock price, returns and volatility do not significantly affect the askbid spread. moreover, we found that total accruals better explain the ask-bid spread than nondiscretionary accruals. furthermore the collected results reveal that earnings management increases agency costs and information asymmetry. therefore, liquidity providers bear higher costs and therefore a higher ask-bid spread and a less liquid market. these results allowed us to conclude that liquidity providers are aware that earnings management of the tunisian firms of our sample is not very high. moreover, this result is in line with the thesis that investors prefer firms with more stable earnings. such a finding encourages us to test in a second phase the type of relationship between the direction of earnings management and market liquidity. researchers like easton, harris and ohlson (1992) argued that investors buy profits. institutional investors are not attracted by firms with highly volatile earnings and are considered to be risky. thus, institutional investors tend to favor firms that increase their profits. the finding on the study of the relationship between non-discretionary earnings and the ask-bid spread is that tunisian investors do not give non-discretionary accruals its fair value. the explanatory power increases from 82% (r²) for model (1) to 70% for model (3) (table n ° 5). however, the relationship between discretionary accruals and the ask-bid spread could be studied. the results presented above show that the amounts manipulated by tunisian firms positively correlate with the ask-bid spread. nevertheless, the importance given by tunisian investors to these accruals mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 12 | p a g e remains lower than that given to non-discretionary accruals insofar as the coefficient of discretionary accruals is 1,243 in model (2)and significant at the 5% level, while the coefficient of non-discretionary accruals, which is 1.411(3), is not significant. it should be mentioned that our interpretations rely on the ability of the models of jones (1995) to detect such accounting practices. thus, we validate the suggested second and third hypotheses indicating that the discretionary accruals of tunisian firms have an additional information content compared to the non-discretionary accruals and better explain stock liquidity. it should be noted that most of the studies, which used the ask-bid spread as a measure of liquidity, found a significant relationship with earnings management. however, using transaction volume as a measure of liquidity, some studies, such as those of nowghabi et al. (2015) foundnonsignificant results. v. conclusion this paper is focused on empirically evaluation of the impact of discretionary accruals on liquidity through the ask-bid spread and the effect of discretionary accruals direction. to this end, a research modified model of jones was selected to evaluate the linear relationship and the effect of earnings management direction on the relationship between the spread and accruals by integrating a dichotomous variable. an explanation of the value of questioning the classical framework treating the relationship between liquidity and earnings management was done, such as to validate the negative relationship between these two variables in an emerging country like tunisia. moreover, a study of various approaches was proposed, and motivated by a wide range of theoretical arguments. in addition to high risk and returns, liquidity is another factor that motivates investors to purchase a given stock or reduce their ownership of another. this is particularly important for investors insofar as it motivates them to compensate for their lack of liquidity. referring to experts' opinions, managing earnings is one of the factors that best determines liquidity. in the same vein, it is likely that upward earnings management will result in higher liquidity costs and lower stock liquidity. as a result, aggressive earnings management reflects low accounting information quality. as a first hypothesis, the relationship between earnings management (the various components of accruals) and the ask-bid spread was examined. we found that each of these earnings management components significantly informs about firm liquidity. in line with previous research, the obtained results reveal the positive relationship between the ask-bid spread and earnings management of tunisian firms. an increase in discretionary accruals is perceived as an earnings management reflecting an unethical behavior or an unsatisfactory source of information. moreover, our results corroborate those of ascioglu et al. (2012) kan (2013) and bafghi et al. (2014), who used the ask-bid spread as a measure of liquidity. the authors found that earnings management increases agency costs and information asymmetry. according to this finding, liquidity providers bear higher costs and thus a wider spread and a less liquid market. these results allowed us to conclude that liquidity providers are aware of earnings management and they prefer firms which generate more stable profits. in particular, such a practice is not observed in the tunisian firms of our sample. to support this observation, the relationship between earnings management direction and liquidity through the ask-bid spread and the different control variables (size, returns and transaction volume) was examined. the results pointed to a significant relationship between earnings management and the ask-bid spread. explicitly, investors react according to earnings management direction. as for the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 13 | p a g e control variables, the correlation analysis confirmed our conclusions as we found a negative and a significant correlation between the ask-bid spread and firm size in the two measurement models. this negative effect can be attributed to the substantial control practiced over large firms. appendix. earnings management and liquidity appendixi-1.vif tests references aharony, joseph, chi-wen jevons lee, and tak jun wong. 2000. “financial packaging of ipo firms in china.” journal of accounting research 38 (1): 103–26. ajina, aymen, faten lakhal, and danielle sougné. 2015. 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economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 16 | p a g e healy, paul m., and krishna g. palepu. 2001. “information asymmetry, corporate disclosure, and the capital markets: a review of the empirical disclosure literature.” journal of accounting and economics 31 (1): 405–40. hepworth, samuel r. 1953. “smoothing periodic income.” the accounting review 28 (1): 32–39. hirshleifer, david, siew hong teoh, and jeff jiewei yu. 2011. “short arbitrage, return asymmetry, and the accrual anomaly.” review of financial studies 24 (7): 2429–61. iatridis, george, and george kadorinis. 2009. “earnings management and firm financial motives: a financial investigation of uk listed firms.” international review of financial analysis 18 (4): 164–73. jones, charles i. 1995. “r & d-based models of economic growth.” journal of political economy, 759– 84. kothari, sagar p., andrew j. leone, and charles e. wasley. 2005. “performance 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liquidity*.” contemporary accounting research 20 (3): 552–78. shiri, mahmoud mousavi, and masomeh roshandel. 2015. “the relationship between stock liquidity risk and financial information quality criteria in tehran stock exchange.” iranian journal of management studies 8 (4): 503. so, eric c., and sean wang. 2014. “news-driven return reversals: liquidity provision ahead of earnings announcements.” journal of financial economics 114 (1): 20–35. sohn, byungcherl charlie. 2016. “the effect of accounting comparability on the accrual-based and real earnings management.” journal of accounting and public policy 35 (5): 513–39. stoll, hans r. 1978. “the supply of dealer services in securities markets.” the journal of finance 33 (4): 1133–51. wang, ashley w., and gaiyan zhang. 2009. “institutional ownership and credit spreads: an information asymmetry perspective.” journal of empirical finance 16 (4): 597–612. xu, xiaogang, dongfang lin, guoquan yan, xinyu ye, shi wu, yan guo, demei zhu, fupin hu, yingyuan zhang, and fu wang. 2010. “vanm, a new glycopeptide resistance gene cluster found in enterococcus faecium.” antimicrobial agents and chemotherapy 54 (11): 4643–47. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 40 | p a g e analyzing the impact of bank capitalization on profitability in nigeria adeola ogunjimi brickfield road associates limited. 16, akin adesola street victoria island, lagos, nigeria. abstract: the profitability of commercial banks is of paramount importance to the overall health and vitality of an economy. this study delves into the determinants of bank profitability in nigeria, particularly after a significant round of bank recapitalization in 2005. we address key questions regarding the factors influencing bank profitability in the post-recapitalization era and assess the impact of market power on bank returns. through empirical analysis, we identify the driving forces behind profitability in nigeria's commercial banks and examine the relative significance of market power among these determinants. our findings offer valuable insights for policymakers and stakeholders in fostering a robust financial sector that can effectively support economic growth. keywords: bank profitability, commercial banks, recapitalization, market power, nigeria. 1. introduction effective and efficient operations of the financial sector are very critical in any economy because the financial sector especially commercial banks serve as a fuel for running economic activities. therefore, more attention has been focusing on how well banks are running. this calls for numerous studies on what drives bank profitability within a country, a region, and at the global level. similarly, many studies have carried out for the nigerian banks because special features of the country and its past experience. nigerian banking industry experienced different reforms in order to ensure that the country has a strong banking industry that enhances the economic activities. this motivation led to the 2005 bank capitalization that reduced the number of commercial banks from 89 to 22 through merger and acquisition. a little concern has shown on how effective and efficient these 22 commercial banks operate. little studies on determinants of bank profitability in nigeria such as ani et al. [4], aburime [1] did not focus on the bank capitalization. owing to this, this paper intends to investigate factors that influence the level of bank profitability after bank recapitalization. in addition, it intends to provide answers to the following research questions: what are the determinants of bank profitability in nigeria after bank recapitalization? does any of these determinants reduce its strength because of the financial reforms? in addition, existing previous studies such as flamini et al. [12] consider the limitation of their research as the inability to investigate whether market power influences bank returns. this paper will address the identified limitation by providing an answer to the question: does relative market power matter after recapitalization? if yes, to what the extent and what is its magnitude compared to determinants of bank profitability in nigeria? in the light of this, the paper aims to understand the factors that drive the level of profitability of nigeria's commercial banks. in order to achieve this, the specific objectives are to empirically determine mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 41 | p a g e the factors that drive bank profitability in nigeria, analytically investigate whether market power has a significant influence on bank profitability, and analytically examine the relative magnitude of significant determinants of profitability in nigeria's commercial banks. also, the paper provides country-level policy conclusions that can boost private productive sector through a sound financial system. the rest of this paper is segmented as follows; section ii is on the stylized facts on the banking industry in nigeria while section iii reviews the existing studies. the analytical framework, as well as methodology, is discussed in section iv, while empirical results and discussion are presented in section v. section vi is on conclusion and policy implications. 2. stylized facts of banking industry in nigeria nigeria’s economy grew at 3.05 percent for the first three-quarters of 2015 compared to 6.33 percent in 2014. its low economic performance was as a result of continuous falling in the global crude oil price as well as reducing investor confidence arose from the delay in appointing the buhari-led government cabinet, and the reluctance to devalue the naira. however, the country experienced the worst with the negative growth rate of -3.00% due to the delay in the approval of 2016 budget. prior to the drastic fall in oil price that commenced in the mid-year of 2014, the nigerian economy was driven by non-oil sector. however, the oil sector witnessed a declining growth rate towards the last quarter of 2014. this triggers government efforts towards reducing the over-dependence on oil sector and diversifying the domestic economy. the 2015 election posed a great uncertainty that accounted for volatility in the financial sector in replicating to a continuous rise in yields among all fixed income securities. the trending fall in government revenue as well as foreign exchange scarcity led to the slow growth rate in nigeria in 2015. the country’s monetary authority reacted to the event by employing different policy interventions with the aim of curbing the demand for foreign currency and preventing the naira devaluation. in addition, the cash reserve ratio (crr) was put at 31 percent for both public and private deposits, banks were prevented from accepting foreign cash deposits from their customers, as well as the removal of 41 items from accessing foreign exchange at the official market rate. despite all these government measures, the country’s external reserves reduced substantially from about us$35 billion in 2014 to us$ 28 billion in april 2016. this points to a reason against the continuous devaluation of the naira by economists. however, since the introduction of naira for over the past four decades, its value was not eroded to the extent that a us$ 1 was exchanged for n282 in the parallel market in december 2015. whereas, the central bank of nigeria (cbn) still fixed the official exchange rate at us$1/197 in december 2015, even with the widely acceptable fact that floating exchange market might be the solution to the shortage of foreign exchange in the economy. nigeria being the largest economy in africa, was recovering from commodity price shock of 2008-2009 as well as the banking crisis. of recent, the country needs to address the issue of massive infrastructure deficits, and the high level of abject poverty and inequality. a sound banking system enhances channels for more savings into productive investments, particularly in quality infrastructure. the average contribution of the financial sector to the nigerian economy is with the range of 2.5 percent and 3.5 percent between the first quarter of 2014 and the first quarter of 2016(fig. 1). commercial banks are very important key players in the financial sector. for instance, the banks witnessed a peak growth rate of about 60 percent in their total assets at the end of 2005, indicating the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 42 | p a g e positive outcome of the nigeria’s bank capitalization. however, the growth rate declined to the lowest in 2009 as a result of the 2007-2009 global financial crisis. afterward, an upward trend was recorded in their asset growth rate (fig. 2).the poor performance of nigeria’s oil sector has significantly created a high pressure on the banking system in the country. banks confronted with the issues such as uncertainty before 2015 election. implementation of the treasury single account tsa) which mops cheap government deposits from banks, higher level of non-performing loans arising from a drastic fall in oil prices; and the cbn’s restrictive policies on foreign exchange, which hinders their lucrative foreign currency business. in addition, the nigerian banks are heavily dependent on oil and gas sector in the sense that about 23.8 percent of their loans is provided to the oil and gas sector in the first half of 2015 from 10 percent in 2014. the three largest banks in terms of asset raised their oil and gas portfolios by 101 percent, 47 percent, and 37 percent respectively in 2014(oxford analytica [23]). the recent falling oil prices have adversely affected banks’ performance in the country. therefore, there might significantly increase nonperforming loans in most banks, which invariably might lead to low revenue and profits for them. another issue is how honest banks are in disseminating their financial information on the nigerian stock exchange. nigerian banks are running in an increasing unfavorable business environment as a result of a drastic fall in their profitability, asset quality, liquidity, and capital ratios. their low performance is driven by their high exposure to their domestic market and the economic slowdown. the slowdown is attributed to lower oil prices, reduced government spending, and restriction on foreign exchange availability. since the implementation of tsa in august 2015, public deposits which account for about 8 percent of total deposit withdrew their money from commercial banks. this poses an added pressure to bank liquidity. loan growth rate was contracted in mid-year of 2015 and nonperforming loans were below 10 percent in 2015. some structural reforms have been implemented by developing economies like nigeria in order to ensure that the banking sector is financially and efficiently healthy. the banking system in nigeria was recorded better performance in the 1990s since there was adequate capital base in each bank to perform the financial operations. the sector experienced a high level of fragmentation complemented with alow level of financial intermediation at the end of 2014. this drives the banking sector reform by the central bank of nigeria to raise the capital base of the banks from 2 billion naira to 25 billion naira, and invariably reduce the number of commercial banks from 89 to 25 through the process of mergers and acquisition in 2006(hessen, 2007 as cited gil-alana . [14]). however, some of the 25 commercial banks were characterized with fund mismanagement and overvaluation of assets after cbn reform in 2006. this further reduced the number of banks to 22(cbn, 2014 as cited in gil-alana et al. [14]). a robust, stable and firmly anchored financial system is the key engine of a long-term sustainable economic growth. this is based on the fact that the banking industry provides required funds for carrying out production activities in the other sectors of the economy as well as money needed by final consumers. addressing this important and urgent issue motivates this study. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 43 | p a g e 3. literature reviews on the determinants of bank profitability the empirical studies on determinants of bank profitability have increased particularly those that investigated the level of profitability in the banking industry of advanced economies and more recently, in some developing economies like nigeria. table 1 summarizes the selected recent studies on the determinants of bank profitability at country-specific or cross-country levels. based on the literature, the existing studies on determinants of bank profitability can be broadly grouped into two. the first stream of research examined factors that drive the level of profitability in a bank using cross-country data while the second stream examined this based on the country-specific data. the first stream of research work includes flamini et al.[12], titko et al.[32], petria et al.[27] , djalilov and piesse [10], bourke [6], short [28], pasiouras and kosmidou [25], hsieh and lee [15], molyneux and thornton [20], naceur& omran [22], albertazzi and gambacorta [2]. for instance, djalilov and piesse [10] examined the factors that influence the level of bank profitability in transition economies particularly in central and eastern europe between 2000 and 2013 for 275 banks using the generalized method of moments (gmm) technique. they found that credit risk positively and significantly determined bank profitability in the early transition but exhibited a negative impact in the late transition countries. the adverse relationship was found between governance and bank profitability, and between monetary freedom and bank profitability only in late transition economies. in addition, better-capitalized banks were more profitable in early transition countries. however, titko et al. [32] conducted both multiple regression and correlation analyses to determine the drivers of bank profitability in latvia and lithuania from 2008 to 2014. their findings indicated the absence of a significant link between net interest margin (measures profitability for latvia), net commission and fees income as a percentage total assets (measure profitability for lithuania), and independent variables. petria et al. [27] employed panel data to analyze the determinants of bank profitability in the european union between 2004 and 2011 with the aid of fixed effect and random effect models. their result showed that bank profitability (returns on average assets and returns on average equity) received significant influence from credit and liquidity risk, management efficiency, the diversification of business, the market concentration/competition, and economic growth. however, bank size did not exhibit any significant influence on roae but had a small and weak significant impact in the case of roaa. furthermore, nuceur and omran [22] examined the influence of bank regulation and financial reforms on banks’ performance in mena region by applying the dynamic system generalized method of moments (gmm) technique for the sample period 1988-2005. they found that the bank-specific variables particularly bank capitalization and credit risk exhibit a positive and significant impact on net interest margin, cost efficiency and profitability of banks, but no significant influence from macroeconomic and financial development variables. in addition, they identified that regulatory and institutional variables have an influence on bank performance. in the same vein, hsieh and lee [15] empirically addressed the puzzle between banking competition and profitability for 61 countries from 1992 to 2006 using the dynamic generalized method of moments (gmm) technique. they concluded that higher degree of activity restriction with the change in market structure boosts banks’ profit; restriction of commercial banks to involve in non-banking related activities, as well as entry barrier for foreign banks, would weaken the positive link between banking competition and profit. in addition, the positive link might be weakening in economies with a sound mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 44 | p a g e financial system or high income per capita; and greater competition would mitigate the influence of banking competition on profit. on the other hand, albertazzi and gambacorta [2] investigated the link between business cycle fluctuations and banking sector profitability in selected 10 countries from euro area and the anglo-saxon region between 1981 and 2003 using the generalized method of moments (gmm) estimator. their findings indicated that gross domestic products (gdp) influenced both net interest income and loan loss provisions; and fluctuations of the long-term interest rate exhibited a slight impact on the net interest income in italy, spain and portugal but a substantial impact recorded from themoney market interest rate. similarly, flamini et al. [12] empirically investigated the determinants of bank profitability in subsaharan africa between 1998 and 2006 using the panel data. with the aid of arellano-bond two-step generalized method of moment(gmm), they found that variables such as bank size, activity diversification, and private ownership have apositive influence on the level of bank profitability(roa) in the region. also, their results revealed that returns on assets granger cause capital, implying that high returns are not instantly retained in the form of equity increases. however, pasiouras and kosmidou [25] analyzed the determinants of profitability in 584 commercial banks for selected fifteen european countries between 1995 and 2001 using a balanced panel dataset of 4,088 observations. they applied fixed effect estimation technique, and their findings indicated that all independent variables significantly influenced the level of profitability of both domestic and foreign banks. however, only the variable of concentration did not exhibit a significant influence in the case of domestic banks profit. studies with a country-specific focus include aburine [1], alkhazaleh and almsafir [3], tariq et al. [31], isaac boad [5], ani et al.[4], park et al. [24], naceur and goaied [21], mamatzakis and remoundos [19], sufian and habibullah [30], sufian and habibullah [29], trujillo-ponce [33], dietrich & wanzenried [8]. of recent, boad [5] investigated factors that determine the bank profitability in ghana with the aid of random effect and pooled models from 1997 to 2014. he concluded that internal and external variables significantly determine bank profitability unlike other studies found evidence of significant influence from only non-interest income. in addition, no significant impact is recorded from variables such as the number of employees, inflation and real interest rate in ghana. similarly, alkhazale and almsafr [3] conducted an empirical analysis of determinants of bank profitability in jordan between 1999 and 2013 using the fixed effect regression model. their result showed that capital structure, bank size, and liquidity exhibit a significant influence on bank profitability. tariq et al. [40] also analyzed the determinants of profitability level in pakistan banks for the sample period 2004-2010 by utilizing both fixed and random effect models. however, antonio (2013) investigated what determines the profitability of banks in spain using data from 1999 to 2009 with the estimation technique of generalized method of moments (gmm). he revealed that variables such as the percentage of loans in total assets, customer deposits, efficiency and low doubtful assets ratio positively affect bank profitability, but no impact of economies or diseconomies of scale when profitability is captured by return on assets (roa). sufian and habibullah [30] employed an unbalanced panel data of 153 banks to examine the effect of globalization on bank performance in china with the aid of panel regression method. their result revealed that bank profitability is positively and significantly determined by trade flows, cultural proximity, and political globalization. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 45 | p a g e on the other hand, dietrich & wanzenried [8] utilized unbalanced panel dataset of 372 commercial banks to examine the drivers of bank profitability in switzerland before and during the global financial crisis with the application of the dynamic system gmm estimator. their results revealed that capital ratio and credit quality exhibit no influence on bank profitability before the financial crisis but a negative and significant impact during the crisis. in addition, taxation significantly and negatively determines the level of bank profitability but market concentration (measured by herfindahl index) has a significant and positive influence before the crisis. whereas, ownership and market structure do not have any impact on the level of profitability in the banking sector. sufian and habibullah [29] provided an empirical answer on whether economic freedom influences banks’ performance in malaysia using panel data between 1997 and 2007 with the ols estimation technique. they found that economic freedom and business freedom have a favourable effect on banks’ performance while an adverse effect comes from monetary freedom. they concluded further that corruption has a corrosive impact on malaysian banks profitability. however, aburine [1] analyzed factors that influence the profitability level in nigerian commercial banks using panel regression technique for the period 2000-2004. he revealed that bank profitability is significantly influenced by variables such as capital size, the size of the credit portfolio, extent of ownership concentration, while no significant impact was recorded from the size of deposit liabilities, labour productivity, and the state of it ownership, control-ownership disparity, and structural affiliation. similarly, ani et al.[4] utilized pooled ordinary least square (ols) to investigate the drivers of bank profitability in nigeria between 2001 and 2010. they found that bank size, capital and asset composition mainly affect the level of profitability (roa, roe, nim) in nigeria. based on the above literature reviews, it is obvious that little research has been carried out for nigeria where commercial banks are so relevant for driving economic growth and development. in addition, the existing works found mixed and inconclusive results while none of the studies reviewed pays attention to the effect of 2005 bank capitalization in nigeria. the need to fill this relevant gap motivates this study. to support the main contribution of the present study, table 1 summarizes a recent documentation of the empirical evidence so far. 4. analytical framework and methodology 4.1 analytical framework 4.1.1 conceptual framework bank profitability is measured in three different ways. some studies measured bank profitability using returns on assets (roa) and returns on equity(roe)(see antonio trujillo-ponce,[33]; naceur & omran,[22]) while another stream of research extends the measure of bank profitability by including net interest margin (nim) (see ani et al.[4], andreas dietrich and gabrielle wanzenrid [8].andreas and gabrielle [8] and pasiouras and kosmidou [25] used returns on average assets (roaa) instead of roa in their empirical work. in addition, the formerly employed returns on average equity (roae) in place of roe to measure bank profitability. however, short [28] used the profit rate to capture the bank profitability. in the light of this, this study employs returns on assets (roa), returns on equity (roe), and net interest margins (nim) as a proxy for bank profitability. 4.1.2 theoretical framework two broad approaches have been employed to examine the market structure, namely; traditional and empirical approaches. the traditional approach supports the structure conduct performance (scp) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 46 | p a g e hypothesis which states that greater concentration leads to less competitive bank conduct and invariably results in higher bank profitability. therefore, it uses concentration indices such as market share of the largest banks or the herfindahl index ((fungáčová et al. [13]).however, the empirical approach carries out non-structural tests to address the problem of indirect proxies for market competition under the traditional method. the non-structural measures under the banks’ conduct directly through indices such as lerner index with the aid of micro-level bank data (fungáčová et al., [13]). however, the argument against lerner index is that it is applicable in the case of a monopoly situation. consider the nature of nigeria's banking industry; it is a widely acceptable fact that the industry is not a monopoly. therefore, the study will employ herfindahl index based on the nature of data availability and the real situation of commercial banks in nigeria. 4.2 methodology 4.2.1 nature of data table 2 provides the description of variables utilized for this study as well as their data source. 4.2.2 panel unit root panel unit root is analogous to unit root in time series data. however, the main difference is testing the asymptotic behavior of time series (t) only, while panel unit root considers asymptotic behavior in both time series (t) and cross-sectional (n). to determine the asymptotic behavior of estimators, we will critically examine how n and t converge to infinity. thus, this is used for testing non-stationary panels. the asymptotic behavior can be achieved through the following: (a) sequential limit theory whereby a dimension, say t is fixed and dimension n is allowed to move to infinity, giving an intermediate limit, then allows t to move to infinity successively; (b) diagonal path limits that allowed both dimensions n and t to approach infinity along a diagonal path; and (c) joint limits, also allowed both cross-sectional (n) and time-series (t) to approach infinity simultaneously without placing diagonal path restrictions on the divergence and these are more robust than the other ones (sequential limit theory and diagonal path limits).let us consider the model: = ∝ + , , = 1, 2, … , = 1, 2, … , (1) where is the exogenous variables, is the autoregressive coefficients and is the error term which assumed to be independent idiosyncratic disturbance. in series is said to contain a unit root if | | = 1 and it is weakly stationary if | | < 1. 2.2.2.1 levin-lin-chu test levin, lin and chu [24] suggest that each time series contains a unit root and the lag of k is allowed to vary across individuals. levin et al. [17] showed that individual unit root tests have limited power against the alternative hypothesis that has high persistent deviations from equilibrium. ∆ = , + ∑ ∅ ∆ (2) under : = 0 versus : < 1 2.2.2.2 im, pesaran and shin w-stat test in the case of im, pesaran and shin (ips) test allows for heterogeneous coefficients. the test assumes that all individuals cross-sectional have unit roots. this can be represented mathematically as follows: ∆ = , + ∑ ∅∆ (3) : = 0 for all individuals in the panel however, the test assumes that some of the individuals cross-sectional have unit roots. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 47 | p a g e = 1, 2, … , : = , … , individual t-statistic ( ) is used to test the null hypothesis : = 0 ∀ , then t-statistic is obtained from the average individual unit root test. thus, ∼ (0,1). 2.2.2.3 adf-fisher chi-square test adf-fisher chi-square test is the extension of fisher [11] which was proposed by maddala and wu [18] to test panel unit root. this test uses the p-values of the test statistics for each residual crosssectional component i. the test is a symptotically chi-square distributed with 2n degree of freedom and where n is the number of cross sections in the panel. it is a robust test for unbalanced panels. the test can be represented in the form: n 2 loge pi (4) i 1 where is the p-value of the test statistic in unit i. 2.2.2.4 pp-fisher chi-square test choi [7] proposes two test statistics to test for unit roots in the panel data. the tests are inverse normal test and logit test. the inverse normal test is represented as follows: (5) where is the standard normal cumulative distribution function and = [0,1], φ ( ) has a standard normal distribution as the time series observations for the ith group ( ) tends to infinity, therefore, z also approaches standard normal with mean 0 and variance 1. the logit test is of the form: (6) where ln has a logistic distribution with mean zero (0) and variance . when ⟶∞ ∀ , √ ~ and 4.2.3 co-integration test to test for the existence of long-run relationship among the variable in the panel, residual-based cointegration tests were used in this paper. these tests are kao residual co-integration test and pedroni residual cointegration test. 4.2.3.1 kao residual co-integration test kao [16] proposed df and adf types tests for testing co-integration in panel data. from the panel regression model: , = ∝ + , , , i= 1, 2, . . ., n ; t= 1, 2, . . ., t (7) ~ (0, ) where and are integrated at order 1 and non-cointegrated. the residual based cointegration , = , + , where is estimated as to test the null hypothesis of no cointegration, then, the t-statistic is: mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 48 | p a g e 4.2.3.2 pedroni residual co-integration test pedroni [26] proposed some tests for the testing null hypothesis of co integration in panel data. the test allows for heterogeneity across units of a panel. considering this model: , = ∝ + , + + , (8) where , and , are i(1), , and are slope coefficients, specific fixed effect and deterministic trends respectively. the slope coefficients vary by individual cross-sectional, thus cointegrating vectors are heterogeneous across units of the panel. from equation (8), ̂ , = ̂ , + , ̂ , = ̂ , + , ∆ ̂ , + , under the null hypothesis : = 1 against : < 1. pedroni has five-panel statistics: panel variance ratio statistics, panel rho-statistic, panel pp-statistics, group rhostatistic and group pp-statistic. the panel statistics obtained by pooling the data across the within group of the panel while group statistics derived by pooling the data along the between group of the panel. the followings are the statistics for each of the pedroni residual co-integration test statistics. i. panel variance ratio statistic = , ii. panel rho-statistic = , ∆ ̂ , ̂ , − iii. panel pp-statistic = , ∆ ̂ , ̂ , − iv. group rho-statistic ̃ = ( , (∆ ̂ , ̂ , − v. group pp-statistic / vi. = ∑ (∑ , ) ∑ (∆ ̂ , ̂ , − where = ∑ , for some lags , =∑, =∑ , = ω −ω ω ω , is a consistent estimate of and is the estimator of contemporaneous covariance of = δ , , δ = ( − 1 ) ∑ ∑ , ∑ ∑ ( , − , ) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 49 | p a g e 4.2.4 model specification the model to be estimated in the analysis is of the form: = + ∑ + ∑ + ∑ (9) = + , where ~ (0, ) and ~ (0, ) where is the profitability of bank i at time t, with i = 1,…, n; t = 1,…, t, is a constant term, , , are the coefficients for bank-specific, sector-specific and macroeconomic determinants. χit is a set of independent variables, is the disturbance having as the unobserved bank-specific effect and as the idiosyncratic error. to measure the persistence of bank profits over time, we adopted the dynamic specification of the model in (1) as: = + + ∑ + ∑ + ∑ (10) where measures speed of adjustment to equilibrium and = [0,1]. due to the development that occurred in the banking system over time, we introduced a dummy variable to account for unobservable time effects and the model in (10) is augmented as follows: = + + ∑ + ∑ + ∑ (11) where is the dummy variable for the nationality of the bank ownership? hypothesis testing : relative market power has significant effect on bank profitability : relative market power has no significant effect on bank profitability 4.2.5 method of analysis this study uses unbalanced panel data of the nigerian 20 commercial banks listed in nigerian stock exchange covering 2001 to 2015. 4.2.5.1 gmm dynamic panel model the dynamic model is of form: = ∝ + , + + + + (12) = ∝ + , + + + + (13) = ∝ + , + + + + (14) where roa is returns on assets, roe is returns on equity, nim is net interest margin, mcon is market concentration, infl is inflation rate, lris is liquidity risk, rgdp is real gdp growth rate, cris is credit risk, bmix is business mix indicator, cade is capital adequacy and er is efficiency ratio. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 50 | p a g e 4.2.5.2 sargan test the sargan test is employed to test for the validity of over-identifying restrictions. this test ensures that the instrumental variables are not correlated with the error terms. : over-identifying restrictions are valid (instruments are valid) : over-identifying restrictions are invalid (instruments are invalid) 5. empirical results and discussions the study commences its empirical analysis by conducting pre-test investigations that include the descriptive patterns of the concerned variables, correlation matrix as well as stationary test etc. the descriptive results as presented in table 3 reveal that the expected value of efficiency ratio(er) accounts for the highest with about 76.9 percent, followed by inflation rate with 12.05 percent, while credit risk has the lowest expected value with 0.02. in addition, the efficiency ratio is highly volatile as showed by the standard deviation of 63.46 while credit risk (cr) experiences the lowest level of fluctuation with as standard deviation of 0.06. the implication is that any shock in the banking industry leads to a change in the efficiency ratio of the industry. therefore, there is ahigh level of uncertainties in the movement of the efficiency ratio. table 4 provides the outcomes of a simple correlation matrix for all the level series for the entire sample period 2001-2015. as shown in the table, the roa has a highest negative correlation with the cris, a correlation of about -83 percent while there is a very weak and negative correlation between the roa and the bage. in addition, strong and positive correlation is evidently found between the mcon and the rgdp whereas no correlation is established between the er and the mcon. the least correlation occurs between the bmix and the cade; and between the roe and the mcon with a correlation coefficient of 1 percent. the study prevents spurious results that would lead to a wrong policy decision by subjecting all the variables to unit root test using four techniques applicable to panel dataset. as illustrated in table 5 below, all variables except the lris, the nim, and the mcon are stationary at level implying that they are zero order of integration i.e i (0) when estimated without intercept and without trend. however, only the lris and the nim are not stationary at the level when estimation is carried with intercept only. in addition, the number of non-stationary variables at the level increases to include the cris, and the roe when estimation is conducted with intercept and trend. by comparing the three conditions, each of the series excluding the lris and the nim is stationary at its level. however, there is likely that ols technique might break one of its assumptions especially the assumption of exogenity of the explanatory variables. owing to this, the study carries out the granger causality test for all the series. as revealed in table 6, the roa granger causes the rgdp, the er, and the infl while a bi-directional granger causality exists between the roa and the size; between the infl and the rgdp; between the size and the rgdp; between the roe and the er; between the infl and the mcon; and between the size and the mcon. furthermore, the mcon granger causes the roa, and the infl granger causes the nim (table 6). in order to address the problem of endogeneity as identified in the results of granger causality test, the study also includes the generalized method of moments (gmm) among its estimation techniques as suggested in flamini et al.[12]. table 7 displays the outcomes of the panel cointegration test using the kao and the pedroni approaches. based on the kao residual cointegration test, the result reveals evidence of cointegration among the series with the inclusion of the lris. however, the pedroni result mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 51 | p a g e indicates no cointegration among the selected series in line with the granger causality output. therefore, the study utilizes both ols and gmm estimation techniques to test the hypothesis of the influence of relative market power on banks’ performance in nigeria. table 8 shows the result of the estimated equation 1. the study reveals the regression results with a statistical significance level of 5 percent in relation to the hypothesis. the details of results are as follows: 5.1 regression results with roa as a dependent variable commencing with the fixed effect model, the market concentration negatively influences the level of profitability in nigeria’s commercial banks but the statistical significance of the impact is nil. in addition, both credit risk and capital adequacy have a significant and negative impact on the bank performance in the country even at 1 percent level of significance. however, the efficiency ratio significantly and positively affects the banks ‘profitability. the credit risk exhibits a higher relative impact with a coefficient of -0.51. this implies that a unit increase in the level of credit risk will reduce the bank performance by about 0.51 percentage on average holding other factors being constant. similarly, both random effect model and pooled regression model reveal the same outcomes as in the fixed effect model except that market concentration exhibits a positive and insignificant effect on the level of profitability. this is in line with the results of pasiouras and kosmidou [25]. 5.2 regression results with roe as a dependent variable for the fixed model, none of the explanatory variables has a significant effect on the level of bank but the market concentration and the capital adequacy exhibit a negative sign. in the random effect and pooled regression model, only the credit risk has a significant and positive impact on the bank performance with a coefficient of 2.51. djalilov and piesse [10] and naceur and omran [22] also found the significant influence of the credit risk. 5.3 regression results with nim as a dependent variable the results of models where net interest margin is used as the measure of banks ‘profitability indicate that only efficiency ratio significantly and positively determine the level of profitability in commercial banks, with a coefficient of about 0.39. this is in line with the findings of antonio (2013) for spain. however, the market concentration has a negative and statistically insignificant effect on bank performance with a coefficient of -26.28 and -31.68 respectively. 5.4 testing for the appropriate model as presented in table 9 below, the result of hausman test reveals that the fixed effect model is appropriate for roa and roe models while random effect model is considered as the appropriate model for nim. based on this, the model for roa and roe is subjected to wald test to determine the appropriate model between fixed effect and pooled regression models, the outcome shows that pooled regression model is appropriate for both roa model and roe model (see table 10). 5.5 results of gmm dynamic panel estimates for the sub-sample period 2005-2015 in the roa model, the efficiency ratio, the credit risk, the business mix indicator and the capital adequacy have a significant influence on the bank performance after bank capitalization in nigeria at 5 percent level of significance. other factors such as one year lag of returns on assets, market concentration, economic growth, inflation rate, and liquidity risk do not significantly determine the level of profitability. however, only the business mix indicator exhibits a positive influence with a mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 52 | p a g e coefficient of 0.0149 while the credit risk has the highest significant coefficient of -0.5423 (see table 11). for the case of the roe model, all action variables except the efficiency ratio have no significant influence on the bank performance after bank capitalization in nigeria at 5 percent level of significance. efficiency ratio negatively and significantly affects the level of profitability. however, the highest impact on the level of profitability comes from the capital adequacy with a coefficient of -4.2238, with an insignificant effect (table 12). similarly, in the nim model, as reported in table 13, only the efficiency ratio and the credit risk pose a significant effect on the bank profitability after bank capitalization in nigeria at 5 percent level of significance. the efficiency rate affects the level of profitability in a positive direction while the credit risk affects the bank performance in a negative manner. in addition, the credit risk has the highest significant magnitude with a coefficient of about 21.71. however, explanatory variables such as one year lag of net interest margin, market concentration, real gross domestic product, inflation rate, liquidity risk, business mix indicator, and capital adequacy do not significantly influence the level of profitability at 5 percent level of significance. 5.6 sargan test in order to test for the validity of the instrumental variables utilized in the gmm estimator, sargan test is conducted. based on table 14, the null hypothesis that instruments are valid fails to be rejected with aprobability value of about 0.99 in roa model, roe model, and nim model. this implies that the instrumental variables employed in this study are uncorrelated with the disturbance term. in addition, this indicates that instrumental variables are exogenously determined. 6. conclusion and policy implications this study sets out to examine the determinants of banks ’profitability in nigeria using an annual panel dataset for the period 2001-20015. the analysis was conducted for the full sample as well as the subsample period in order to capture the effect of the 2005 bank capitalization in nigeria. the empirical analyses consisted of unit root, cointegration, fixed effect, random effect, pooled regression and dynamic models. the findings of this study have a number of implications for macroeconomic policies especially monetary measures. first, the significance of efficiency ratio in both roa model and nim model suggests efficiency ratio is a crucial factor among bank-specific variables that can influence the level of profitability. therefore, each of commercial banks in the country needs to make adequate strategies on the level of efficiency ratio. similarly, more attentions are also required for other bankspecific factors such as the credit risk, the business mix indicator (used to capture business strategy) and capital adequacy both in the short term and long term. second, external factors such real gross domestic product and market concentration (as a proxy for market power) do not significantly influence the level of profitability in the short run period. therefore, any policy measure designed to improve the bank performance in nigeria’s commercial bank needs to consider the influence of bank-specific factors especially in the short term. references aburime, t. u. (2008), determinants of bank profitability: company-level evidence from nigeria. ssrn electronic journal, (1231064), 31. http://doi.org/10.2139/ssrn.1106825 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 53 | p a g e albertazzi, u. and gambacorta, l (2009). bank profitability and the business cycle. journal of financial stability, 5(4), 393-409. alkhazaleh, a. m., & almsafir, m. (2014), bank specific determinants of profitability in jordan. journal of advanced social research, 4(10), 1–20. ani, w. u., ugwunta, d. o., ezeudu, i. j.& ugwuanyi, g. o. (2012). an empirical assessment of the determinants of bank profitability in nigeria: bank characteristics panel evidence. journal of accounting and taxation 4(3), pp. 38-43.http://doi.org/ 10.5897/jat11.034 boadi, i (2015). profitability determinants of the ghanaian banking sector in ongoing wave of consolidation. international journal of business and management, 10 (12), 1-11. bourke, p. (1989). concentration and other determinants of bank profitability in europe. journal of banking and finance, pp 65-80. choi, i (2001). unit root tests for panel data. journal of international money and finance, 20:249– 272. dietrich, a., & wanzenried, g. (2011), determinants of bank profitability before and during the crisis: evidence from switzerland. journal of international financial markets, institutions and money, 21(3), 307–327. http://doi.org/10.1016/j.intfin.2010.11.002 dietrich, a., & wanzenried, g. (2014), the determinants of commercial banking profitability in low-, middle-, and highincome countries. quarterly review of economics and finance, 54(3), 337– 354 http://doi.org/10.1016/j.qref.2014.03.001 djalilov, k., & piesseb, j. (2016), determinants of bank profitability in transition countries: what matters most? research in international business and finance, 38, 69–82. http://doi.org/10.1016/j.ribaf.2016.03.015 fisher, r.a. (1932). statistical methods for research workers, forth edition, edinburgh, oliver and boyd. flamini, v., mcdonald, c., & schumacher, l. (2009). the determinants of commercial bank profitability in sub-saharan africa. international monetary fund, wp/09/15. fungáčová, z., solanko, l., & weill, l. (2010), market power in the russian banking industry. international economics, 124(2010), 127–145. http://doi.org/10.1016/s2110-7017(13)60022-0 gil-alana, yaya, o.s. & adepoju, a.a. (2015). fractional integration and structural breaks in bank share prices in nigeria. review of development finance 5 (1), 13– 23.http://dx.doi.org/10.1016/j.rdf.2014.07.004 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 54 | p a g e hsieh, m. & lee, c. (2010). the puzzle between banking competition and profitability can be solved: international evidence from bank-level data. journal of financial services research, springer; western finance association, 38(2), 135-157. kao, c. (1999). spurious regression and residual-based tests for cointegration in panel data. journal of econometrics, 90:1–44. levin, lin and chu (2002). unit root tests in panel data: asymptotic and finite-sample properties. journal of econometrics, 108 (1), 1–24. maddala, g.s. and wu, s., (1999). a comparative study of unit root tests with panel data and a new simple test. oxford bulletin of economics and statistics, 61, 631-652. mamatzakis, e. c., remoundos, p. c., (2003). determinants of greek commercial banks profitability, 1989-2000. spoudai 53(1), 84-94. molyneux, p. & thornton, j. (1992). determinants of european bank profitability: a note. journal of banking & finance, 16(6), 1173-1178.http://doi.org/10.1016/0378-4266(92)90065-8 naceur, s. b & goaied, m (2008). the determinants of commercial bank interest margin and profitability: evidence from tunisia. frontiers in finance and economics, 5(1), 106-130 naceur, s. b. & omran, m. (2011). the effects of bank regulations, competition, and financial reforms on banks' performance. emerging markets review, 12 (1), 1-20. oxford analytica. daily brief on finance. ttps://dailybrief.oxan.com/sectors/finance park, k. h., & weber, w. l. (2006), profitability of korean banks: test of market structure versus efficient structure. journal of economics and business, 58(3), 222–239. http://doi.org/10.1016/j.jeconbus.2005.09.003 pasiouras, f. & kosmidou, k. (2007). factors influencing the profitability of domestic and foreign commercial banks in the european union. international business and finance, 21, 222-237. pedroni, p. (2004). panel cointegration; asymptotic and finite sample properties of pooled time series tests, with an application to the ppp hypothesis. econometric theory, 20:575–625. petria, n., capraru, b., & ihnatov, i. (2015), determinants of banks’ profitability: evidence from eu 27 banking systems. procedia economics and finance, 20(15), 518–524. http://doi.org/10.1016/s2212-5671(15)00104-5 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 55 | p a g e short, b. (1979). the relationship between commercial bank profit rates andbanking concentration in canada, western europe and japan. journal of banking and finance, 3(3), 209-219 sufian, f. & habibullah, m.s. (2010).developments in the efficiency of the thailand banking sector: a dea approach. international journal of development issues, 9(3), 226 – 245 http://dx.doi.org/10.1108/14468951011073316. sufian, f. & habibullah, m.s. (2012). developments in the efficiency of the malaysian banking sector: the impacts of financial disruptions and exchange rate regimes. progress in development studies, sage publishing, 12(1), 19-46. tariq, w., usman, m., mir, h.z., aman, i. & ali, i. (2014). determinants of commercial banks profitability: empirical evidence from pakistan. international journal of accounting and financial reporting, 4(2), 2162-3082. http://dx.doi.org/10.5296/ijafr.v4i2.5939 titko, j., skvarciany, v., & jurevičienė, d. (2015), drivers of bank profitability: case of latvia and lithuania. intellectual economics, 9(2), 120–129. http://doi.org/10.1016/j.intele.2016.02.003 trujillo-ponce, a. (2013). what determines the profitability of banks? evidence from spain. accounting & finance, 53: 561–586. doi:10.1111/j.1467-629x.2011.00466.x. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 77 | p a g e investigating racial/ethnic disparities in loan approval: a mississippi perspective dr. james a. smith, and dr. gail g. fulgham, professor of economics, jackson state university abstract: discrimination in homeownership access has long hindered minority populations, particularly african americans, from accumulating wealth through housing investments. this study delves into the pervasive issue of discrimination in american society, which denies certain social groups the privileges enjoyed by others. this discrimination, rooted in various factors such as race, ethnicity, religion, gender, and more, permeates multiple facets of american life, including education, political participation, employment, and housing. as a consequence, the quintessential "american dream" remains elusive for many citizens through no fault of their own, making the prospect of purchasing a home in a desirable location or neighborhood an uphill battle. this research investigates how institutions controlled by privileged groups perpetuate this discriminatory practice and its farreaching implications on wealth accumulation. keywords: discrimination, homeownership, wealth inequality, minority populations, access to housing introduction homeownership is one of the major sources of wealth for american families. however, the lack of access for minority populations and especially african americas to loan approvals for housing purchases have limited their ability to accumulate wealth from the housing stock. the issue of discrimination has been a prevalent and highly debated topic in american socio-economic literature. discrimination occurs when there is evidence that certain social groups are denied benefits naturally extended to other privileged groups. it may be based on religion, gender, sexuality, race, ethnicity or other factors. the practice of discrimination affects numerous aspects of american life, ranging from education to political participation, to employment and housing. as a result, the pursuit and achievement of the “american dream” may be out of reach for many american citizens through no fault of their own. for many individuals, the simple notion of purchasing a home in a desirable location or neighborhood can be an uphill task. institutions controlled by the privileged class are usually manipulated to deny access to the other groups. in the housing industry, in particular, banking laws and processes are sometimes violated to deny prospective buyers access to funds necessary to acquire desirable properties. historically, the southern region of the united states has been plagued by numerous incidents of discrimination. the state of mississippi has often been cited as one of those southern states where the practice of discrimination is still rampant. thus, several mississippi banks have been investigated and sanctioned by the united states department of justice for violations of the community reinvestment act (cra) and for unfair banking practices. generally, eligibility for loan financing requires that borrowers meet requirements of credit worthiness and ability to pay, regardless of race, ethnicity, gender and religion. according to the u.s. census bureau, between 1994 and 2013, home ownership among u.s. families rose from 63.9% mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 78 | p a g e in 1994 to 65.1% in 2013. however, when taking race into account, the rates of increase in home ownership revealed some distinct disparities. home ownership rates among black families rose by 1.89%, from 42.3% to 43.1% between 1994 and 2013. hispanic families saw an 11.89% increase, from 41.2% to 46.1% over the same period. while white families experienced an increase of 4.8%, from 70% to 73.35%. in absolute terms, the 2013 census data reveal ownership rates of 73.35% for white households, 43.1% for blacks or african americans, and 46.1% for hispanics. the appreciable increase in home ownership for hispanics over that period may be attributed to the significant increase in the hispanic population. comparably, black households experienced the lowest rate of homeownership as well as the lowest ownership growth (u.s. census bureau, 2013). the process of lending discrimination or loan denial based on location is generally referred to as redlining. in an effort to address this issue and to promote transparency and accountability, the united states congress passed the home mortgage disclosure act (hmda) of 1975, requiring lending institutions to disclose to the public, annually, detailed information about their home lending activities. additionally, congress passed the community reinvestment act of 1977. the act requires that commercial banks demonstrate through their activities that they meet the credit needs of their community, including low and moderate-income neighborhoods. as indicated previously, discrimination is evident when mortgage lending is denied to certain population groups based on race, gender, religion or other non-economic factors. over the years, disparities in home ownership rates and in ownership growth have attracted the attention of economists, social scientists and government institutions, seeking to investigate the possible causes of this troubling phenomenon. as possible causes, some assertions refer to the concept of redlining, the propensity of financial institutions toward differential or unequal use of credit risk instruments for different racial and ethnic groups, the use of statistical discrimination, and the profit motive of banks and mortgage lenders. one of the early analyses on race and mortgage lending is attributed to john mcknight, a sociologist and community activist who, in the 1960s, brought special attention to the concept of redlining in residential mortgages. thus this study examines the loan denial rate in the three counties within jackson metropolitan statistical area (msa). the three counties studied are hinds, madison, and rankin counties. this study will examine loan approval rates and loan denial rates among the different racial and ethnic groups in three adjacent mississippi counties with different ethnic and racial population distributions. the study examines the role of location, minority population of location, and the ratio of loan amount to income on loan denial rate. literature review anyamele (2015) established that the recent financial crisis impacted minorities more than whites. the study used 2001, 2004, 2007, and 2010 surveys of consumer finances (scf) data. ezeala-harrison et. al (2008) found consistent high denial rates in housing loan decisions against minorities in metrojackson, southern mississippi corridor, and the northern district of mississippi. their study used a combination of data from western economic services (wes) and home mortgage disclosure act (hmda) that covered 1993 to 2003 period. one of the major contributions of their study is that redlining still exist in mississippi. redlining is the uniquely american phenomenon where large areas of center city neighborhoods are deemed unsafe for home mortgage investments (greer 2012). the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 79 | p a g e word, redlining, is particularly fitting, because historically these agencies would draw red lines around the inner city areas and neighborhoods that were deemed “hazardous” or “definitely declining,” which led to the creation of “residential security maps” (greer 2012). more importantly, these areas were predominantly occupied by non-whites and non-white hispanics, which suggested some form of racial profiling. redlining was not only a concept but also an action that was practiced on a regular basis as the interests of both public and private institutions merged. furthermore, redlining was formulated greatly in response to the great migration of rural african americans from the south to northern cities (greer 2012). this transition of people was inevitable, because it was believed that the redlined areas, or people living in those areas, would degrade the land and the neighboring areas. according to greer (2012), redlining emphasizes four main factors: the decline of inner city areas, the inability of non-whites to take on loans, the racial beliefs and actions of federal agencies, and the codependence of the financial and real-estate markets. as a result, the urban and rural dichotomy was forcefully formed not only through association but also through governmental pressures. in other words, the u.s. government implemented discriminatory acts that were carried out by the people. james greer (2012), proposed that the racialization of the american real estate market is not wrong, but instead incomplete. he points out the fact that race is only one explanatory variable on the disinvestment of mortgage lending in the u.s. economy and although it may be a contributing factor, it is certainly not the sole factor that redlining rhetoric seems to suggest. phillips-patrick and rossi (1995) observed evidence of red-lining in their analysis of mortgage loans approval and denials in the washington, dc metropolitan area. examining mortgage loan approvals within and across census tracks, they discovered that the ratio of mortgage originations in black neighborhoods was significantly lower than in non-black areas. they also found that as the percentage of black households in a neighborhood rises, the ratio of mortgage applications to units rises and that originations drop in neighborhoods as the percentage of black residents rises. the results could indicate redlining or it could reflect the omitted variables such as creditworthiness. on the other hand, some researchers questioned the red-lining phenomenon in mortgage lending. for example, in challenging findings of redlining by other researchers, carr and megbolugbe (1993) cited the work of benston and horsky which found no differences between households in allegedly redlined areas and those in control areas in terms of their ability to secure mortgage financing in cincinnati, indianapolis, and nashville. carr and megbolugbe also asserted that the boston fed study found no evidence that lenders in boston denied loans to an area because it has a large proportion of minority residents. they further contended that a limitation of research which attempts to show redlining is that important information which contributes to the borrower’s creditworthiness is disregarded. in an investigation of the determining factors to differential lending rates, ferguson and peters (1995) found that some commercial banks and mortgage lenders applied different credit standards to different population groups. therefore, since credit risks were unequally assigned to different population segments, they concluded that “color blind” lending would not result in equal denial or default rates across different segments of the population. other definitions of lending discrimination centered on the basis of the concept of statistical discrimination (phelps, 1972; han, 2004). according to phelps, statistical discrimination is a practice in which a lender, lacking full information on a borrower’s creditworthiness, applies group stereotypes mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 80 | p a g e to individual borrowers in evaluating loan applications. in han’s study, the reiteration of this type of discrimination was investigated and it was determined that since statistical discrimination implied higher rejection rates for minority applicants, rejection rates would not be a reliable measure of discrimination in lending. han concluded that statistical discrimination would imply that loans to minority borrowers have smaller sizes than those to majority borrowers with the same characteristics observed by lenders at the time of loan originations. also, han (2004) found that loans to minority borrowers carried higher interest rates. ladd (1998) attributed a profit motive for financial institutions in discriminating against minority borrowers. ladd asserted that, despite the efforts of the federal government through actions such as the fair housing act of 1968 and equal credit opportunity act of 1974, to promote fairness and to combat discrimination in lending, lending institutions could still have a profit-oriented motive towards discriminating against minorities. in her study, if institutions expected minorities on average to have higher default rates than whites, then lenders might believe that discrimination against minorities in the labor market could make the income of minorities more volatile on average over the economic cycle than that of whites and hence making minorities more likely to default. the notion speculated by these lenders would be cheaper screening device than other ways which would be used to distinguish between the quality of similar applicants. although much of the research conducted concerning lending discrimination was based on denial and default rates, discrimination can also exist by lenders refusing to service a particular area which is within their servicing area typically known as redlining. numerous studies have indicated evidence that discrimination may have been committed through the use of this tool as well. in a comprehensive study of lending behavior, schafer and ladd (1981) analyzed lending data on commercial banks, mutual savings banks, and savings and loan companies in california and new york, and tested for discrimination against a wide variety of groups based on race, gender, and marital status. from their investigation, they found evidence of discrimination based on races. in 18 of the 32 california areas and six of the ten new york areas, black applicants had significantly higher chances of loan denials than similar white applicants. furthermore, they found that black applicants were 1.58 to 7.82 times as likely to be denied as whites. ladd (1998) found that the issue with loan denials stemmed around setting higher cutoffs in terms of creditworthiness for minorities than for whites so that the minorities who received loans would be more creditworthy than the whites who received loans. the situation places a standard higher than the requirements set forth by the lending company. the model similar to previous studies, we posit that loan denial rates will be higher for minority populations in the three jacksonmetropolitan counties of hinds, madison, and rankin in mississippi. also, we expect higher loan denial rates for individuals with lower income, high loan amount to income ratio, and individuals who live in high minority population. the analysis will rely primarily on (hmda) data. furthermore, this study is the first attempt to examine the loan denial rate in these counties post the 2008 financial crisis. thus, it makes a significant contribution in appraising and documenting the loan denial rate in jackson (msa) post the great recession. the results derived from this analysis will then be compared with other national studies previously conducted in other regions of the country. the analysis will rely primarily on census data and banking data for the three adjacent counties. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 81 | p a g e the loan denial rate equation can be written as follows: yit = βxit + µit (1) where yit is a binary variable that takes the value of 1 or 0. if the ith loan application is denied, yit is 1; otherwise, it is 0. x is a vector of independent variables, and β is the vector coefficients to be estimated, while µ is the error term. thus, we can write the loan denial equation as follows: d=1 if the loan application is denied, or d=0 otherwise. p (denied = 1 |x) =f (x, β) or p (denied = 0|x) = 1-f (x, β) (2) where x represents a vector of economic and demographic characteristics, β represents a vector of the estimated coefficients, and f is the cumulative distribution function. definition of variables the variables for the logistic regression are applicant’s race (white, african american, hispanics, and asians); the ratio of loan amount to applicant’s income; this is transformed into a categorical variable of normal or high. it is normal if it is <= 3, it is high if it is > 3. income level, which has six categories < $45,000, 1, $45,000 to $75,000 = 2, $75,001 to $85,000 = 3, $85,000 to $95,000 = 4, and > $95,000 = 5; loan total variable has six categories < $100,000 = 1, $100,00 to $200,000 = 2, $200,000 to $300,000 = 3, $300,000 to $400,000 = 4, $400,001 to $500,000 = 5 and>$500,000 = 6. other variables are loan purpose which has three categories namely home purchase, home improvement, and home refinance. loan type has four categories conventional loan, veterans administration loan, federal housing administration loan, and farm service agency or rural housing service loan. therefore, the variable ratio of minority population in a census tract is divided into two categories: low minority population in the census tract or high minority population in the census tract. this is ratio is considered high if it is >= 50 percent and low minority if it is < 50 percent. location is represented by the three counties. the survey years of hmda data represents the environment. model results table 1present the results of the logistic regression for loan denial in three mississippi counties of hinds, madison, and rankin from the years 2007 to 2013. compared with asian americans, african americans are 1.54 times more likely to be denied loan. whites are 32.06% less likely to be denied loans than asian americans while hispanics are 1.55 times more likely to be denied loans when compared to asian americans. living in a high minority population area has a 1.34 times likelihood of being denied loans. moreover, having a high loan ratio to income increases the likelihood of denial. the probability of loan denial is inversely related to the level of income and appears to have a gradient. loan denial is 3.62 times higher for loans for home improvement compared to home purchase. the figure is also high for loans on home refinance. compared to loans for home purchases, loans for home refinances is 1.88 times higher. on the basis of county, loans from madison county are 14.18% less likely to be denied when compared to hinds county while loans from rankin county are 1.03 times likely to be denied as compared to hinds. loans that range from $200,000 to $500,000 are more likely to be approved while loans that are greater than $500,000 are 1.33 times more likely to be denied compared to loans of $100,000 or less. loan type compared to conventional loan, such as fha loans, va loans, and fsa/rhs loans are more likely to be approved. table 1: logistic regression on loan denial 2007-2013 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 82 | p a g e independent combined all races white african americans asian americas hispanics variables model 1 model 2 model 3 model 4 model 5 no race -0.107 (-1.50) asian americans referent0 1.00 african americas 0.434*** (6.16) white -0.386*** (-5.57) hispanics 0.436*** (6.26) high minority pop 0.297*** 0.415*** 0.184*** 0.0876 0.266 (15.66) (13.00) (6.52) (0.49) (1.24) hlv to income 0.0695*** (3.37) income <$45,000 referent referent referent referent referent 1.00 1.00 1.00 1.00 1.00 $45,001<=$75,000 -0.421*** -0.497*** -0.388*** -0.419* -0.382 (-21.79) (-16.63) (-13.03) (-2.34) (-1.96) $75,001<=$85,000 -0.639*** -0.676*** -0.565*** -0.405 -0.556 (-18.59) (-13.84) (-9.58) (-1.45) (-1.66) $85,001<=$95,000 -0.679*** -0.770*** -0.625*** -0.572 -0.507 (-17.46) (-14.15) (-8.83) (-1.65) (-1.40) >$95,000 -0.930*** -0.999*** -0.775*** -0.944*** -0.584* (-34.27) (-25.64) (-16.50) (-3.82) (-2.40) home purchase referent referent referent referent referent 1.00 1.00 1.00 1.00 1.00 home improvement 1.287*** 0.989*** 1.108*** 1.232*** 1.874*** (46.82) (22.33) (27.80) (4.94) (6.50) home refinance 0.630*** 0.537*** 0.528*** 0.401* 0.920*** (35.15) (20.22) (18.84) (2.45) (5.65) hinds county referent referent referent referent referent 1.00 1.00 1.00 1.00 1.00 madison county -0.153*** -0.180*** -0.0562 -0.0890 -0.132 (-7.41) (-5.84) (-1.64) (-0.46) (-0.72) rankin county 0.0342 0.0992*** 0.0293 0.101 -0.173 (1.66) (3.53) (0.69) (0.51) (-0.87) loan <$100,000 referent referent referent referent referent mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 83 | p a g e 1.00 1.00 1.00 1.00 1.00 $100,001<=200,000 -0.348*** -0.460*** -0.253*** -0.693*** -0.549** (-18.14) (-16.42) (-7.93) (-3.89) (-2.65) $200,001<=300,000 -0.300*** -0.358*** -0.236*** -0.0486 -0.379 (-9.93) (-8.60) (-4.25) (-0.18) (-1.36) $300,001<=400,000 -0.217*** -0.327*** -0.112 -1.072 -0.0306 (-4.63) (-5.12) (-1.24) (-1.95) (-0.08) $400,001<=500,000 -0.362*** -0.518*** -0.102 -0.0735 -0.0421 (-5.36) (-5.80) (-0.71) (-0.10) (-0.09) >$500,000 0.315*** 0.180 0.480** 0.335 -0.680 (3.99) (1.81) (2.63) (0.53) (-0.82) conventional loan referent referent referent referent referent 1.00 1.00 1.00 1.00 1.00 fha loan -0.303*** -0.0155 -0.694*** -0.615** 0.157 (-14.13) (-0.46) (-21.53) (-2.90) (0.71) va loan -0.0625 0.178* -0.487*** -0.175 1.078 (-1.24) (2.31) (-6.34) (-0.41) (1.59) fsa/rhs loan -0.939*** -0.527*** -1.543*** -0.577 -0.662 (-13.67) (-5.69) (-14.45) (-1.00) (-0.64) year 2007 referent referent referent referent referent 1.00 1.00 1.00 1.00 1.00 2008 0.0533* 0.0911* 0.134*** 0.382 -0.00623 (2.36) (2.55) (3.79) (1.83) (-0.02) 2009 -0.273*** -0.317*** -0.0367 0.0525 -0.348 (-10.30) (-7.35) (-0.89) (0.21) (-1.32) 2010 0.0237 0.00812 -0.0139 0.269 -0.264 (0.73) (0.16) (-0.30) (0.83) (-0.69) 2011 0.00317 -0.162*** 0.0509 0.216 -0.324 (0.12) (-4.09) (1.15) (0.85) (-1.24) 2012 -0.0566* -0.201*** -0.0152 -0.00278 -0.394 (-2.19) (-5.31) (-0.36) (-0.01) (-1.52) 2013 -0.00951 -0.0934* 0.00370 0.0889 -0.435 (-0.37) (-2.48) (0.09) (0.37) (-1.72) nlv to income -0.0180 -0.128*** -0.138 -0.801*** (-0.57) (-3.89) (-0.69) (-4.07) constant -1.237*** -1.424*** -0.567*** -0.734** -0.707* (-16.84) (-31.28) (-12.72) (-2.74) (-2.37) n 138802 78775 36965 1638 1333 thus, the environment can be captured in the different survey years. from table 1, we see that loan denial was more likely to occur in 2008 compared to 2007 and less likely to occur in 2009, 2010, 2011, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 84 | p a g e 2012, and 2013. models1, 2, 3, 4, and 5in table 25 is the logistic regression of loan denial rates for all races, white, african americans, hispanics, and asians from 2007 to 2013. model 1, suggeststhat whites who apply for loans in high minority areas are 1.51 times more likely to be denied loans. the higher your income the less likely you will be denied loan. compared with home purchase applications, home improvement loans, and home refinance loans are more likely to be denied for white applicants over the study period. model 2 shows that whites who live in madison are less likely to be denied loans compared to whites who live in rankin county and more likely to be denied loan compared to whites in hinds county. these results are significant both in magnitude and coefficients on loan total or amounts. the results are consistent with the results from model 1 that shows that loan amounts greater than $500,000 are more likely to be denied. however, whites who apply for va loans are more likely to be denied loans. this result is not consistent with the result frommodel 1 that shows that va loans are more likely to be approved compared to conventional loans. further, the results on environment in model 2 is similar to the results frommodel1. model 3 represents the results for african americans. african americans who live in high minority tract population are 1.2 times more likely to be denied loans. it is interesting to note that african americans who have loan to income ratio that is three times or less are 11.98% more likely to be approved for a loan compared with those with loan to income ratio that is more than 3 times the loan amount. the result on income is consistent and appears to show that there is a gradient in loan denial with income. the result on loan purpose is consistent with both models 2 and 3 that show that loan applications for home improvement and home refinance are more likely to be denied compared to home purchase. although not significant at 5% significant level, african americans who live in madison are less likely to be denied loans compared to hinds county and african americans who live in rankin county are more likely to be denied loans compared to hinds county. the results on loan amount are consistent with both the results from models 2 and 3, respectively. however, the results on types of loans in model 3 is similar to the results frommodel 1 and different frommodel 2 which showed va loans to be more likely to be denied for whites. environment is similar for both models 1and 2 with the exception of 2008, which is significant in loan denial for african americans. model 4 shows the results for hispanics on loan denial. the result seems to follow a similar pattern, however some of the variables are insignificant although the signs are consistent with results from models1, 2, 3, 4, and 5. further, model4 shows that income is consistent in determining loan denial. model4 also shows that loans for home improvement and home refinance are more likely to be denied compared to loans for home purchase for hispanics. model 5 which represent the logistic regression for asian americans also show that income, loan to income ratio, and purpose for the loan are significant in determining loan denial over the study period. these results are similar to the findings of anyamele (2015) and weller (2009) that showed that african americans are more likely to be credit constrained. to further understand the impact of location or county on loan denial in mississippi, a logistic regression is ran for each county. table 2, models 6, 7, 8 and 9 represent results for all three counties combined, hinds, madison, and rankin counties, respectively. table 2: logistic regression on loan denial in jackson msa 2007-2013 independent model 6 model 7 model 8 model9 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 85 | p a g e variables combined hinds madison rankin no race -0.0145 0.0143 -0.0230 -0.0181 (-1.52) (0.77) (-1.68) (-1.07) asian americas referent referent referent referent 1.00 1.00 1.00 1.00 african americans 0.0820*** 0.0940*** 0.103*** 0.111*** (8.68) (5.12) (7.55) (6.45) white -0.0473*** -0.0451* -0.0519*** -0.0198 (-5.12) (-2.46) (-3.98) (-1.21) hispanics 0.0634*** 0.0398* 0.0690*** 0.0792*** (6.23) (2.21) (4.08) (4.64) high minority pop 0.0557*** 0.0737*** 0.0320*** 0.0747 (20.42) (18.93) (7.33) (0.71) nlv to income 0.00378 0.00291 0.00134 0.0314*** (1.31) (0.60) (0.26) (6.32) income <$45,000 referent referent referent referent 1.00 1.00 1.00 1.00 $45,001<=$75,000 -0.0747*** -0.0713*** -0.0768*** 0.0682*** (-26.49) (-15.95) (-13.40) (-14.14) $75,001<=$85,000 -0.106*** -0.114*** -0.0941*** 0.0949*** (-23.23) (-14.72) (-11.24) (-12.40) $85,001<=$95,000 -0.111*** -0.130*** -0.0952*** 0.0926*** (-22.14) (-14.93) (-10.62) (-10.89) >$95,000 -0.141*** -0.157*** -0.120*** -0.131*** (-38.66) (-27.09) (-16.96) (-20.39) home purchase referent 1.00 home improvement 0.234*** (55.23) home refinance 0.0797*** (35.77) loan <$100,000 referent referent referent referent 1.00 1.00 1.00 1.00 $100,001<=$200,000 -0.0474*** -0.0522*** -0.0869*** 0.0859*** (-17.65) (-12.22) (-16.49) (-19.32) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 86 | p a g e $200,001<=$300,000 -0.0314*** -0.0436*** -0.0745*** 0.0649*** (-8.15) (-6.39) (-11.58) (-9.65) $300,001<=$400,000 -0.0228*** -0.0209 -0.0684*** 0.0627*** (-3.99) (-1.83) (-8.31) (-5.49) $400,001<=$500,000 -0.0347*** -0.0630*** -0.0649*** 0.0742*** (-4.69) (-4.17) (-6.64) (-4.30) >$500,000 0.0352** 0.00942 0.00803 0.0256 (3.26) (0.42) (0.60) (0.91) hinds county referent 1.00 madison county -0.0176*** (-6.50) rankin county 0.00545* (2.00) year 2007 referent referent referent referent 1.00 1.00 1.00 1.00 2008 0.00732* 0.0353*** -0.000118 0.0200*** (2.29) (6.71) (-0.02) (3.72) 2009 -0.0332*** 0.00164 -0.0298*** 0.0626*** (-9.48) (0.29) (-5.32) (-8.09) 2010 0.00193 0.0137* 0.112*** (0.42) (2.27) (11.97) 2011 -0.00170 0.0325*** 0.00466 0.0171** (-0.46) (5.01) (0.74) (2.90) 2012 -0.00887* 0.0105 -0.000757 0.0213*** (-2.54) (1.70) (-0.12) (3.82) 2013 -0.00144 0.0125* 0.000346 0.0213*** (-0.41) (2.01) (0.06) (3.73) conventional loan referent referent referent referent 1.00 1.00 1.00 1.00 fha loan -0.0433*** -0.120*** -0.0128* 0.0489*** (-15.67) (-27.62) (-2.37) (-10.79) va loan -0.0117 -0.0688*** -0.0388*** -0.0241* (-1.83) (-5.94) (-3.32) (-2.49) fsa/rhs loan -0.0997*** -0.227*** -0.120*** -0.116*** mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 87 | p a g e (-15.31) (-17.71) (-11.39) (-12.12) constant 0.241*** 0.301*** 0.305*** 0.260*** (24.24) (15.88) (20.88) (15.08) n 138802 61556 35642 41604 t statistics in parentheses *p< 0.05, **p< 0.01, ***p< 0.001 frommodel 6 in table 2, african americans and hispanics are more likely to be denied loans compared to asian americans while whites are less likely to be denied loans compared to asian americans over the study period. frommodel 7, we see that census tracts with high minority populations are more likely to be denied loans. income, purpose of loan, loan to income ratio, loan amount and environment all are significant and consistent with results from earlier tables. model 8 is the logistic regression result for madison county. the result is similar and consistent with the results frommodels 6 and 7 in table 26. model 9 presents the logistic regression results for rankin county. with the exception of 2010 loan denial, all the other results are similar. although high minority population tract is not significant, the sign is consistent with models 6, 7, and 8. the result is consistent with the results of ezeala-harrison et al (2008). blinder-oaxaca decomposition and loan denial discrimination to further understand the burden imposed by discrimination on loan denial to different ethnic groups we employ the blender-oaxaca decomposition method to analyze the loan denial rates in the counties of hinds, madison and rankin from 2007 to 2013. oaxaca and ranson (1994) concluded that the pooled method of decomposition provides the best estimate of the combined effects of pure nepotism and pure discrimination. nielson (1988) found discrimination to be responsible for 26% of the greater difference in formal sector employment in zambia. anyamele (2015) found that 32.17% of the differences in loan delinquency rates are attributable to discrimination either legally or illegally. blinder (1973) concluded that 40% of age differences between whites and african americans came from discrimination of different sorts. jann (2008) and sinning et al (2008) showed how to interpret the results of both linear and non-oaxaca decomposition regression models. fairlie (2005) extended the blinder-oaxaca decomposition into a non-linear model. this study employs the blinder-oaxaca decomposition to measure the difference between the whites/african americans andwhites/hispanics loan denial rate. we express the average value of the dependent variables denial rate, y, is expressed such that y ̅w y̅b = [(x ̅w x ̅b) β̂w] + [x̅b (β̂w β̂b)] (3) where x ̅j is a row vector for of average values of the independent variables and β̂j is a vector of coefficient estimates for race j. the decomposition for a non-linear loan denial rate equation, y = f (xβ̂), may be written as: y ̅w y̅b = [(∑_(i=1)^nw▒〖f (x〗iwβ̂w)/nw ∑_(i=1)^nb▒〖f (x〗ibβ̂w)/nb] + [∑_(i=1)^nb▒〖f (〗 xiββ̂w)/nb -∑_(i=1)^nb▒〖f (〗 xiββ̂b)/nb] (4) where nj is the sample size for race j. both equations 3 and 4 show that the first term in brackets represents the part of the racial loan denial difference that isdue to group differences from the independent variables. the second term is the group differences from unobserved endowments or unexplained difference in loan denial rates among the different racial groups. this is the part that some mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 88 | p a g e researchers have attributed some part of it as discrimination. the data shows that the group mean for non-whites loan denial rates is 0.272 while the group mean for whites is 0.129, yielding a loan denial differences of 0.143. further, 31.18% of the differences in loan denial between whites and nonwhitescomes from differences in endowments. thus, 56.15% is the change in loan denial rate if nonwhite characteristics apply to whites and12.31% is the simultaneous effect of the loan denial differences from both the endowments and non-white characteristics. similarly, for african americans, the group mean for the loan denial for whites is 0.141 while the group mean for loan denial of african americans is 0.329 yielding a loan denial rate of 0.188. furthermore, 28.19% of the differences in loan denial comes from endowments difference between african americans and whites, while 63.30% is the change in loan denial rate that will occur if white characteristics apply to african americans and8.51% is from both endowments and non-african american characteristics. for asians, the group mean for loan denial for whites is 0.191 and the group mean of loan denial difference of 112.8% of the differences in loan denial rate comes from endowments between asians and whites; while 54.91% is the change in loan denial rates that will occur if white characteristics apply to asians. moreover, 42.08% of the loan denial rate is from endowments and non-asian characteristics. for hispanics, the group mean for loan denial of whites is 0.1904 and the group mean for the loan denial for hispanics is 0.2431 resulting in a denial difference of8.02% of the difference is loan denial come from endowments between hispanics and whiteswhile 92.41% is the change in loan denial rate that will occur if white characteristics apply to hispanics. table 3 is the pooled, blinder-oaxaca decomposition that show the contribution of the independent variables used. first, for all the races, income explains the differences in loan denial rates with the exception of hispanics, high minority population explains the differences in loan denial rate in the three counties between the years 2007 to 2013. this result is consistent with both the descriptive statistics and the logistic regression that shows that loans from high minority tract population are more likely to be denied. furthermore, it also gives credence to the findings of previous studies that redlining exists in the housing market in mississippi (ezeala-harrison et al.2008). mailto:contact@americaserial.com mailto:contact@americaserial.com anyamele, fulgham & claude assad 89 american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 89 | p a g e journal of economics and development studies, vol. 5(3), september 2017 table 3: blinder-oaxaca decomposition of loan denial in jackson msa 2007-2013 white loan denied african americ an loan denied asian loan denied hispan i c loan denied differenti al prediction _1 0.272*** 0.141*** 0.191*** 0.190*** (149.67) (129.19) (180.07) (179.80) prediction _2 0.129*** 0.329*** 0.166*** 0.243*** (108.15) (134.60) (18.06) (20.69) difference 0.142*** -0.188*** 0.0251** 0.0527** * (65.55) (-70.30) (2.72) (-4.46) explained % explaine d % explaine d % explaine d % explaine d hm pop 0.0231*** 16.24 0.0240*** 12.75 0.0148** * 58.79 0.0007 68 1.46 (27.78) (-23.82) (15.54) (-0.59) nlv to income 0.00012 4 -0.09 0.00000 41 4 -0.02 0.0000 83 7 0.33 0.0000 17 6 -0.03 (-1.05) (0.06) (0.58) (0.49) post crisis 0.00136* ** 0.96 0.00109* ** 0.58 0.00253 *** 10.05 0.0004 59 0.87 (4.48) (-7.36) (7.20) (-1.58) income 0.0244** * 17.14 0.0271*** 14.41 0.0127** * 50.33 0.00558 *** 10.59 (36.03) (-35.01) (8.42) (-3.53) loan amount 0.00388 *** 2.72 0.00470* ** 2.50 0.0032 9*** 13.09 0.00118 *** 2.24 (8.60) (-8.78) (7.24) (-3.60) mailto:contact@americaserial.com anyamele, fulgham & claude assad 90 american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 90 | p a g e conventio na l 0.0118*** -8.28 0.0124*** -6.60 0.0116** * -46.01 0.0001 08 -0.20 (-19.78) (19.98) (-11.08) (0.09) fha loan 0.00567 *** 3.98 0.00566* ** 3.01 0.00501 *** 19.93 0.00013 0 -0.25 (11.36) (-12.48) (7.76) (0.19) va loan 0.00073 6** * 0.52 0.00089 7*** 0.48 0.00169 *** 6.71 0.00116 * 2.20 (7.44) (-7.43) (6.29) (-2.21) home improvem en t 0.0122** * 8.58 0.0192*** 10.22 0.00742 *** 29.50 0.0005 91 -1.12 (26.97) (-31.03) (5.18) (0.31) -2.67 home refinance 0.00508 *** -3.56 0.00627* ** -3.33 0.0029 9** 11.88 0.00140 (-19.80) (21.11) (3.02) (1.29) total 0.0544** * 38.19 0.0640*** 34.01 0.0389* ** 154.61 0.0068 9* 13.09 (47.94) (-47.98) (14.92) (-2.16) unexplain ed unexplai ne d unexplai ne d unexplai ne d unexplai ne d hm populatio n 0.00552 *** 0.0112*** 0.00510 0.0173* (3.95) (4.71) (1.32) (2.30) nlv to income -0.0106* 0.0224*** 0.0800* ** 0.00554 (-2.42) (4.30) (4.32) (0.23) post crisis 0.0182** * -0.00267 0.0124 0.0054 6 (7.08) (-0.87) (0.84) (-0.40) income 0.0370** * 0.0237*** 0.0723** 0.00325 (-7.93) (4.41) (-3.27) (0.14) loan amount 0.00196 0.00899 -0.0197 0.0111 mailto:contact@americaserial.com anyamele, fulgham & claude assad 91 american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 91 | p a g e (-0.37) (1.34) (-0.89) (0.39) conventio na l 0.0744** * -0.119*** 0.0105 0.00861 (10.35) (-15.41) (0.18) (0.14) fha loan 0.00616 ** 0.00994* ** 0.00375 0.0180 (2.96) (-3.97) (-0.42) (1.12) va loan 0.00124* * 0.00148* * 0.00118 0.0023 6 (3.22) (-3.12) (-0.94) (0.67) home improvem en t 0.0133*** 0.00261* 0.00411 0.00245 (16.71) (-2.35) (-1.46) (-0.61) home refinance 0.0312*** 0.0138*** -0.0141 0.0085 3 (12.84) (-4.78) (-1.52) (0.66) constant -0.0123 -0.0404** 0.0066 4 -0.112 (-1.14) (-3.15) (-0.10) (-1.38) total 0.0881** * 61.81 -0.124*** 65.99 -0.0137 -54.61 0.0458* ** 86.91 (38.73) (-43.77) (-1.52) (-4.02) n 78775 36965 1638 1333 t statistics in parentheses *p< 0.05, **p< 0.01, ***p< 0.001 conclusion income has a significant impact in denial rate in the three counties. this finding suggest that this increases the likelihood of one obtaining a loan approval in the state of mississippi. anyamele (2015) found income to be significant in explaining loan delinquency rate. previous studies have found that african americans and hispanics tend to have higher credit constraints than whites (crook 1996, 2001; and weller 2009). rugh and massey (2010) concluded that housing segregation was an important predictor of the number and rate of foreclosures across us metropolitan areas. their study found that hispanics and african americans bore the brunt of the recent financial crisis. philips (2010) concluded that the housing and the related economic crisis that disproportionally affected african american communities are inextricably linked to the persuasive forces of inequality and uneven investment in african american communities.as shown from the results of decomposition, high minority population tract contributes more to loan denial rates in the three counties studied. this result points to the existence of redlining in loan denial in the counties and which is similar to previous mailto:contact@americaserial.com anyamele, fulgham & claude assad 92 american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 92 | p a g e findings on this subject (rugh and massey, 2010). moreover, this paper has investigated the loan denial rates in three counties of mississippi. this study used hmda data from 2007 to 2013. the study found that african americans and hispanics are more likely to be denied loans compared to asians, while whites are less likely to be denied loans compared to asians. also important, loans from high minority population tracts are more likely to be denied compared to loans from low minority population tracts. this result is consistent in hinds, rankin, and madison counties. this finding is a strong indication that redlining exists in all three counties. this finding may lead to policymakers and the regulatory agencies to quickly act to redress the situation. as noted earlier, loan denial due to discrimination reduces the ability of african americans and hispanics to acquire wealth through the housing stock which has been a historical investment for many in america, especially minorities. references anyamele, okechukwu. 2015. racial/ethnic differences in household loan delinquency rates. review of black political economy 42 (4): 415-442. carr, james h. & issac f. megbolugbe. 1993. "the federal reserve bank of boston study on mortgage lending revisited." fannie mae office of housing policy research. crook j. 1996. credit constraints and us households.applied financial economics6:477-85. crook j. 2001. the demand for household debt in the usa: evidence from the 1995 survey of consumer finances. applied financial economics. 11:83–91. ezeala-harrison, fidel. 2008. determinants of housing loan patterns towards minority borrowers in mississippi. journal of economic issues 35 (1): 43-54. ferguson, michael f. & peters, stephen r. 1995. what constitutes evidence of discrimination in lending? the journal of finance 50 (2): 739-748. greer, james. 2012. race and mortgage redlining in the united states. western political science association meetings. portland, oregon. march 22 -24, 2012. han, song. 2004. discrimination in lending: theory and evidence. journal of real estate finance and economics 29 (1): 5-46. home mortgage discloure act of 1975. section 301 of title iii of the act of december 31, 1975 (pub. l. no. 94-200; 89 stat. 1125), effective june 28, 1976. housing and community development act of 1977. section 801 of title viii of the act of october 12, 1977 (pub. l. no. 95--128; 91 stat. 1147), effective october 12, 1977. jann b. 2008. the blinder-oaxaca decomposition for linear regression models. stata journal (4):453–79. ladd, helen. 1998. evidence of discrimination in mortgage lending. journal of economic perspective 12 (2): 41-62. mailto:contact@americaserial.com anyamele, fulgham & claude assad 93 american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 93 | p a g e oaxaca r, ransom m. 1994. on discrimination and decomposition of wage differentials. journal of econometrics 61:5–21. phelps, e.s. 1972. the statistical theory of racism and sexism.american economic review 64 (4): 659-661. phillips s. 2010. the subprime crisis and african americans. review of black political economy 37:223–9. phillips-patrick and rossi, clifford. 1996. statistical evidence of mortgage redlining? a cautionary tale.the journal of real estate resarch 11 (1): 13-23. phillips-patrick and rossi, clifford. the effects of community reinvestment on local communities. consumers bankers association, arlington, va, 1995. rugh js, massey ds. 2010. racial segregation and the american foreclosure crisis. american sociological review 75(5):629–51. schafer r, ladd hf.1981.discrimination in mortgage lending. cambridge, massachusetts: mit press. sinning m, hahn m, bauer tk. 2008. the blinder-oaxaca decomposition for nonlinear regression models. stata journal 4:480–92. surveys of consumer finances. board of governors of the federal reserve system. washington, d.c. 2001-2010. u.s. census bereau. housing vacancies and ownership. final report: washington government printing office, 2013. weller ce. 2009. credit access, the cost of credit and credit market discrimination. review of black political economy 36:7–28. western economic services. mississippi: analysis of impediments to fair housing. report submitted to the missis sippi development authority, april 2004. mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 46 | p a g e bride payments and fertility choices: a mena perspective dr. fatima a. al-mansoori and dr. ahmed m. al-saud islamic economics institute, king abdul-aziz university, jeddah, saudi arabia abstract: this study examines the impact of bride payments, a significant cultural and economic element within the mena (middle east and north africa) region, on the economic independence of women within households and its potential influence on fertility decisions. previous research has highlighted the pivotal role of economic independence in shaping fertility choices among women. greater economic autonomy may expand women's decision-making power within households, potentially affecting fertility outcomes. in the context of the mena region, where women's roles in economic and public life have evolved significantly, the study investigates the empirical relationship between bride payments and women's empowerment. these payments, intrinsic to marriage contracts and often associated with the mahr in islamic law, play a crucial role in the financial dynamics of marriages in the region. despite their historical and cultural significance, bride payments remain relatively unexplored by economists in the context of the mena region. utilizing data from egypt, tunisia, and algeria, this research seeks to shed light on the economic implications of bride payments and their potential influence on women's economic autonomy within households. the study's findings aim to contribute to a deeper understanding of the complex interplay between cultural practices, economic dynamics, and women's empowerment in the mena region. keywords: bride payments, economic independence, fertility decisions, women's empowerment, mena region 1. introduction several studies have documented the effect of economic independence of female position within the household on fertility decisions, both in developed and developing countries and found different outcomes. greater economic independence of the wife may increase her options within a household, thereby increasing her options for fertility (jennings & pierotti, 2016). reducing the male-female wage gap increases women's choice of several children by improving the woman's intra-household bargaining power (siegel, 2017). several methods can be used to increase an individual's independence. while the participation of women in the labor force is the most extensively investigated, the investigation of the effects of alternative indicators that could boost the status of women within the household has been comparatively limited. several extant literatures on intra-household decision-making have demonstrated that women's empowerment significantly impacts further economic development (pierre et al., 2018). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 47 | p a g e the mena region has seen a significant change in the role of women in economic life and politics. there are about 22 countries located in the mena region that have improved women's status, especially in the gulf countries, where women have become more active in business, education, and public activities. the bride payment, which is a fundamental element of the marriage contract and coincides with women's right to have it at the time of marriage from their husbands, has not been examined empirically by economists in the case of the mena region. the ancient civilizations of egyptians, mesopotamians, hebrews, aztecs, and incas all used bride prices (quale, 1988). the muslim marriage contract differs from a standard western civil marriage license in terms of the bride price or what is called mahr, which can be a sum of money or any other valuables such as gold that the husband gives or undertakes to give to the bride upon marriage (ambrus et al., 2010). more than 70% of the costs of marriage in mena countries are paid by the groom and his family (goodarzi, 2018). this study uses data from three countries in the mena region, namely egypt, tunisia, and algeria, and most of their population follows the islamic religion. more importantly, islamic law requires a form of a bride price to make any marriage valid (rapoport, 2000; quale, 1988). it is widespread in societies of the mena region for the bride and her family to use money from the mahr to help cover the bride-side contribution of furniture and other household items (elbadawy, 2009). in this paper, i use the number of children to indicate a female's bargaining power to see how it varies with mahr payments. two recent articles find ambiguous results in studying the impact of bride prices on women's fertility. mbaye and wagner (2017) found a significant effect with a negative sign on examining the relationship between bride price payments and fertility for women in the case of rural senegal. in contrast, lowes and nunn (2018) found no evidence that a high bride price payment is linked with earlier marriage or higher fertility in the democratic republic of the congo. it is, therefore, important from a policy point of view to understand the effect of bride prices on women's bargaining power in each country through the lens of the traditions and institutions specific to that country's culture. i employed the instrumental variable estimation technique to address the endogeneity of bride price payment. i use the average price of gold at the time of marriage as a source of exogenous variation to proxy for bride price payment since the price of gold provides information on how much gold the bride can receive from the groom at the time of marriage. i assume that the groom's side will react to a high gold price at the time of marriage and estimate its effect on fertility decisions inside the marriage. because the price of gold is established worldwide outside of the mena region, it allows for reasonable exogenous fluctuation in the groom's and bride's first payments. since the groom or groom's family is responsible for paying the amount of gold at a given price of gold, the amount of gold does provide if the bride price is low or high and would affect the psychology of the couple. this paper contributes to a better understanding of the impact of bride price payment by examining the link between the bride price value and fertility rate in the mena region. moreover, i conduct a detailed heterogeneity analysis by exploring various variables through which the (mahr) influences fertility decisions, such as education, age, and urbanization. due to the absence of empirical studies of bride price payments for the mena countries, this paper is the first empirical study to analyze such a relationship by using a unique dataset of married couples consisting of 54,800 observations. this paper's main result confirms that a high bride price paid by the groom is associated with less mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 48 | p a g e bargaining power for women by giving more birth. these results are robust to conditioning on a variety of socio-demographic, temporal, and spatial parameters. 2. related literature based on the theoretical literature, several factors are essential in changing fertility preferences, such as access to information, control of resources, and participation in decision-making (hindin, 2000). also, education and social media access can help empower women and positively impact the ideal family size. other essential factors critical in household decisions about reproduction and overall fertility levels are culture, religious beliefs, and gender relations (atake & gnakou, 2019). according to the literature that studies the association between women's empowerment and fertility preferences in the mena (the middle east and north africa) and ssa (subsaharan african) countries, there are three dimensions of a woman's empowerment. one dimension is the sociocultural dimension which contains education achievement and access to information. the second dimension focuses on economic participation as the ownership status and sustainable income. the third dimension focuses on the familial dimension and contains factors such as age and participation in household decisions. horne et al. (2013) and kaye et al. (2005) find evidence that bride price payment strengthens normative constraints on women's reproductive autonomy and limits their fertility preferences to their partners in ghana. zhang and chan (1999) find that the bride price does not affect the bargaining position within marriage in taiwan. a related contribution is the case study of mbaye and wagner (2017), who found that the higher bride price payments decrease the fertility rate for women in rural senegal. recent literature by lowes and nunn (2018) found evidence that women who receive more wealth at the time of marriage are less likely to accept domestic violence and are happier. these contradictory empirical findings may be attributed to the fact that bride price has a different influence over variety in the norms and social institutions of countries and cultures. the study contributes to the existing literature by employing a large sample of three essential countries in the mena region, namely egypt, algeria, and tunisia, to better understand the impact of bride price payment on the fertility rate. on the other hand, suran et al. (2004) find the opposite outcome in explaining the bequest theory. that is, married women who paid dowry at marriage have a higher probability of reporting domestic violence than those who did not. this paper concentrates on studying the bride price variable's mechanism rather than the dowery variable since it is the fundamental tool of marital payments and understanding marriage practices in the mena region. several studies, such as (mincer, 1963; becker, 1981; willis, 1973), find a strong relationship between women's salary and time allocation for raising children. that is, an improvement in females' salaries increases the opportunity cost of time allocation for raising children, encouraging women to engage in the labor market. in other words, female employment has a negative impact on the fertility rate. similarly, phan (2016) examined the link between women's empowerment and fertility preferences of women in four southeast asian countries and found that women's empowerment factors are one of the keys to women's fertility preferences, including the ideal number of children and their preference for sons. two types of instruments for dowry and bride price payments are used by zhang (1999), which are regional grain yield shocks to have an important influence on household wealth accumulation and sibling sex composition to likely affects the savings available for marital payments. however, these mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 49 | p a g e instruments are not appropriate for this study since their sample of surveyed households is in rural areas where livelihoods have long depended on farming. in contrast, this study used a random sample between rural and urban areas. the second instrument used by them is the sibling sex composition of the bride and groom, which is not an essential determinant of a household's wealth, and it has been approved by (rajan et al., 2018) that wealth or sibling sex composition and education are not associated with the fertility. average gold price is used as an instrument for bride price values when estimating the effect of pre-marital endowments on the decision of fertility rate in this study. there is more information about this type of instrument in the identification section. 3. data & descriptive statistics 3.1 data the study is based on micro-level data on egypt and tunisia from the 1998 integrated labor market panel survey (ilmps). based on a nationally representative household sample, the survey provides data for 54,832 households. the ilmps is a data set that integrates and harmonizes data and variables from five rounds of the egypt labor market panel survey (in years 1988, 1998, 2006, 2012, and 2018), two rounds of the jordan labor market panel survey (2010 and 2016), and the 2014 tunisia labor market panel survey. it contains created, compatible variables that are harmonized (to the extent possible) across all rounds. the questionnaire was carefully designed to understand marriage practices in mena countries comprehensively. in the data collection, three separate questionnaires were used to collect information from the selected sample: the household survey, the women's survey, and the men's survey. this paper uses data from the women's questionnaire, which was used to collect information from all cases, and i restrict the sample to married individuals at the time of the survey. these women were asked questions about themselves and their children born on topics including but not limited to education, bride price, wealth, health, marriage, occupation and husband's background characteristics, childhood mortality, and domestic violence. the survey collects data on bride price payments to capture women's empowerment effect. women have been asked about the value of the bride price (mahr) given. 3.2 dependent variable i measure the fertility rate by using the number of children at the time of the survey. it is a continuous variable of all births reported in a woman's history. in the sample, women were asked about the number of births they gave, and most had only 4. the global fertility rate declined from 3.2 births per woman in 1990 to 2.5 in 2019 (united nations, 2020). also, the fertility rate declined in northern africa and western asia over the same period (from 4.4 to 2.9). in addition, the highest proportion of women who reported having more children than their ideal number was found in egypt (42%), followed by jordan (31%) and tunisia (13%). this dependent variable type has been used widely in the literature and linked with women's empowerment (see jejeebhoy & sathar, 2001; seetha, 2020). the robustness of the result is conducted by employing different types of dependent variables, including a survey question asking women whether the husband is justified to beat his wife when she burns food and whether women are afraid of disagreeing with the husband or other males in the household. 3.3 descriptive statistics the summary statistics for all the variables used in the empirical models are shown in table 1. table 1 shows that the average fertility rate is four children. the average age of the sample mothers and fathers mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 50 | p a g e is 30 and 37, respectively. the proportion of literate men (.56 %) exceeds the proportion of women who are literate (.37 %) by 19 percentage points. around six household members live in a typical household. on average, the age of the wife and husband at first marriage is 20.8 and 26.4, respectively. i differentiate between households who do live in urban and rural areas to control for influential geography. fifty percent of the household live in urban areas. to capture the household characteristics, i use ownership status at the time of the marriage, showing that only 22 percent own their house. women's well-being and empowerment would improve if the husband were related to the wife by blood (institute for women's policy research, 2015). in the sample, 6% of wives are related to their husbands. 4. identification & empirical specification 4.1 identification different methodological approaches have been used to analyze bridal payments. most literature presents descriptive statistics based on data collected from household surveys and specifically from women's questionnaires on topics including but not limited to education, bride price, wealth, health, marriage, occupation and husband's background characteristics, childhood mortality, and domestic violence (zhang & chan, 1999; horne et al., 2013; kaye et al., 2005; mbaye & wagner, 2017; bishai & grossbard, 2010; gaspart & platteau, 2010; ashraf et al., 2016). instrumental variables for bride price to control for both simultaneity and omitted variables in the case of china, namely the deviation from the trend in provincial per capita grain yield in the year immediately preceding marriage, the sibling sex composition of the bridegroom, and parental education to reflect savings available at the time of marriage (zhang & chan, 1999; brown, 2009). the methodology in this study differs from (lowes & nunn, 2018) in dealing with bridal payments as an exogenous variable ignoring several issues that may arise, such as omitted variables. hence, their identification strategy is thus subject to endogeneity problems. (zhang & chan 1999) used two types of instruments for dowry and bride price payments in the case of china, which are regional grain yield shocks to have an important influence on household wealth accumulation and sibling sex composition to likely affects the savings available for marital payments. however, these instruments are not appropriate to be used in the case of our sample since their sample of surveyed households is only in rural areas where livelihoods have long depended on farming. therefore, i implement a two-stage estimation strategy in which the deflated average gold price at the time of marriage is used as an instrument for bridal payments when estimating the effect of pre-marital endowments on the decision of fertility rate in our sample. 4.2 empirical specification following (becker, 1981; mcelroy and horney, 1981), i use the number of births given by the wife as the dependent variable υ and bp as the independent variable reflecting the average bridal payment during the first marriage; to see each couple in the dataset of observations was above or below the average bride price for the year they were married. specifically, i apply the bridal payments ln(bp+1) logarithm to account for any payment equal to 0 and incorporate the control variables to construct the following fixed effect model: υ whtc = α + β1 ln (bp)whtc + z1 β2 whtc + δt + γc + ɛ whtr (1) the subscript w denotes wife, h household, t year, and c country. z is a vector of demographic and explanatory variables, including differences in the husband and wife's age and differences in education mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 51 | p a g e levels, as well as household characteristics, including ownership status at the time of the marriage and whether the husband is related to the spouse. the reason behind adding these vectors of variables is that the groom's and bride's characteristics would play a vital role if the bride's wealth were paid to attract a better bride or if the bird's family demanded it. finally, i control for the fixed effect to account for survey fe, δ, and location fe, γ, to reflect women's bridal payment differences at the country level. since many of the younger women are not completed their fertility, i include age-fixed effects in the regression models to compare women of the same age. marriage payments are unlikely to be exogenous in equation (1) since any unobserved characteristic of the female that affects these payments may also affect her decision to have a certain number of children. in addition, females with very likable personalities may receive higher wealth from their spouses and have a better household position than those with unsavory characters. in either case, using ordinary least squares (ols) to estimate equation (1) would produce biased and inconsistent estimators. the bridal payments may thus be estimated by: bp whtc = α2 + z1 δ1 + z2 δ2 + + δt + γc + ɛ 2 (2) the instrumental variable is represented by z2, which explains bp and should be independent of y. several channels could potentially affect intra-household bargaining, and bridal payments at the time of marriage are one of these channels. i use the average deflated price of gold at the time of marriage as a source of exogenous variation to reflect the bridal payments. since the gold price is set internationally, this exogenous shock affects household wealth accumulation and households' ability to make transfers linked with marriage. plus, it provides plausibly exogenous variation in the initial endowment of the bride and groom. figure.1 presents the average deflated trend of the price of gold at the time of marriage. since gold is an integral part of the mahr basket, the unusually high price of gold at the time of marriage and an economic slowdown has negatively affected the wedding season demand. table 2 presents first-stage estimates for the determinants of bride price. column 1 shows the determinants of bride price, including exogenous shocks to gold prices, and controlling for the characteristics of the wife cw and husband ch respectively by using age, age of the spouse at marriage, and a binary variable equal to 1 if the spouse is literate. also, i consider household characteristics, chh, by controlling the type of ownership status at marriage to proxy for the wealth and whether a husband is related to his wife or not, column 2 including the squared for some variables to see a nonlinear relationship. the results of the first stage estimation in table 2 are consistent with the second scenario with a fixed mahr basket. that is, a high average price of gold at the time of marriage increases the value of the bridal payments if the amount of these payments. the coefficient of the gold price is highly significant. it indicates that, on average, a 1% increase in average gold price at the time of marriage is associated with a 0.6 % improvement in the bridal payments. 5. empirical results 5.1 main result table 3 presents the ordinary least squares and the iv regression results investigating the relationship between the average price of bridal payments at the time of marriage and fertility decision proxied by the number of children. the fertility decision is measured by the number of children as a continuous variable. column 1 presents the bivariate estimates conditions on year fixed effects, survey fixed effects, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 52 | p a g e and characteristics of both couples. column 2 additionally conditions contemporaneous age and its square, the woman's age at her current marriage, and its square. i find that a higher average of price payments at the time of marriage increases the predicted probability of giving more children by the married women within the household with an estimated coefficient of 0.15 in column 2. that is, at the mean bride price of 4084, a woman gives birth to about .015 children more if the average bride price increase by 10%. the result is consistent with previous studies; such payment is considered one of the critical factors associated with domestic violence and reduces women's bargaining power options within the household (kaye et al., 2005; bishai & grossbard, 2010; gaspart & platteau, 2010; ashraf et al., 2016). from the iv estimation, the coefficient linked with bride price payment remains significant and positive in all specifications and highly significant at 1% in table 3, columns 3-4. the coefficient is 0.09 in column 4 and indicates that increases in the average bride's wealth by %10 are associated with about 0.009 more birth given by married women in the mena region. the pattern of predictors on other controls is informative and presented in full in columns 1-4 of table 3 although the education variable for both males and females are insignificant in explaining the variation of the outcome, they appear with the correct sign. the result shows that the younger wife at the time of marriage has given less birth at the survey date. it seems that related spouses are more likely to have more children compared to non-related families. the binary variable of ownership status at marriage appears with a negative sign, and it is statically significant to explain the variation of our outcome. also, both co-efficient of the iv estimation are higher than the co-efficient of the ols estimation. 5.2 robustness check instead of using the primary outcome variable of fertility decision to see the impact of bride price payments increase, i alternatively tried to employ different types of dependent variables. women can shop without permission, whether the husband is justified to beat his wife when she burns food, and women are afraid to disagree with the husband or other males in the household. i present the results in tables 4-6. the statistical significance of the estimates of the correlation between the different outcome coefficients implies that there is evidence that women in the mena countries lose their autonomy in the case of receiving the full mahr basket. table 4 shows the estimated result of the bride price and shopping without getting permission. the coefficient associated with bride price payments remains significant and negative, suggesting that married women classified in shopping without getting approval are more likely to influence by increasing the bride price payments relative to those classified in shopping with getting a permit. having a related household (within blood relations) increases the rate of doing shopping without getting permission by 0.8 ppts. table 5 provides the estimated result of bride price payments and whether women fear disagreeing with their husbands or other males. the coefficient associated with bride price payments remains significant and positive in both specifications. it indicates that married women who receive a high rate of bride price payments are more likely to be afraid of disagreeing with their husbands or other males in the household. tale 6 shows that married women who justify their husband beating them when they burn food rises by.008 ppts as pride price payments increase. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 53 | p a g e by using alternative methods of coding, the measure of women's bargaining power. firstly, i created an ordinal measure of women's bargaining power equal to the above three outcome variables of intrahousehold bargaining to the respondent is exposed to. this is an index (0,3) which is 0 if women's bargaining power does not change in the household and gradually adds 1 for a non-zero response to each of the 3 questions mentioned above. table 7 provides the result of the iv estimation, and the coefficient linked with bride price payment remains significant and positive in column 4. it indicates that married women are more likely to face domestic violence by lowering their bargaining power with an estimated coefficient of -0.12. another robustness check is conducted in this study by using the oil price as an alternative to the gold price. historically, fertility tends to decline during the fluctuation of oil prices (sobotka, 2011). since gold and oil prices have correlated positively in the previous 50 years (shahbaz et al.,2017), i used the average price of crude oil adjusted for inflation at the time of marriage to examine if the effect is an artifact of unobservable market fluctuations. table 8 provides evidence that a higher average of price payments at the time of marriage increases the predicted probability of giving more children by the married women within the household, with an estimated coefficient of 0.53 in column 2. the result is similar to the main result in table 6, with a slight difference in the coefficient magnitude. it suggests that increases in the average bride's wealth by %10 are associated with about 0.053 more birth given by married women in the mena region. 5.3 heterogeneity analysis i conduct a detailed heterogeneity analysis by exploring different variables over which the (mahr) influences the fertility decisions, such as religion, education level, year of marriage, and the location of the household. table 9 provides the heterogeneity estimation of the average bride price and fertility rate to compare different groups. the result in table 9 shows that, under the high average value of the bride's wealth, married women characterized as rural, less educated, poorest, unemployed, and aged at first marriage between 21-35 years are more likely to give more birth compared to the contradictory groups. the result indicates that non-educated married women are more likely to give birth than educated women as the payments of (mahr) increased. it has been proven (lundberg & pollak, 1993) that education is vital in improving women's bargaining power within their households since it gives them knowledge, skills, and resources to make life choices that enhance their welfare. due to access to services and infrastructure, more opportunities are available to engage in paid employment and enjoy a relaxation of sociocultural restrictions; urban women generally are better off compared to women living in rural areas (institute for women's policy research, 2015). table 9 distinguishes between urban and rural women to see how they respond to a change in the bride price wealth (mahr). the coefficient associated with average bride price payments indicates that rural married women would be less bargaining power by giving more birth as the value of the average bride price increases. mahr dynamics can be further differed by analyzing the nature of the marriage, namely age at first marriage. the coefficient associated with married women aged at first marriage between 21-35 years average would be less bargaining power by giving more birth as the value of the average bride price increases. 5. conclusion mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 54 | p a g e in many arab countries, the bride's wealth system has a long history and is still ingrained in the culture there. this marriage payment system dramatically impacts women's position and bargaining power. such payments are essential in the marriage market institution even as countries and regions develop. this paper has examined the mechanism of average bride price payments and its impact on the intrahousehold bargaining of panel survey data on egypt, jordan, and tunisia. the dataset used in this study covered five rounds of the egypt labor market survey (1988, 1998, 2006,2012, and 2018), two rounds of the jordan labor market survey (2010 and 2016), and the 2014 tunisia labor market survey. i contribute to the existing literature by providing a better understanding of the impact of average bride price payment on the fertility decision by using two crucial instruments: the average price of gold and oil. due to the absence of empirical studies of bride price payments for the mena countries, this paper is the first empirical study, based on reviewing the existing literature, that concentrates on analyzing such a relationship in this area. this study shows that the price of gold at the time of marriage is a source of exogenous variation in the initial endowment of the bride at the time of marriage. the persistent precision of the estimates adds to the existing literature by showing that mahr practices continue to be widespread in the mena region, and on average, a mahr basket is likely to contain a high amount of gold along with cash. this paper's main result confirms that an increase in the average price payments paid by the groom is associated with many births by married women. these findings provide significant empirical support for the theoretical literature that links resource control to marital outcomes. moreover, based on the robustness of these findings, it is plausible that the bride price will lead women to lose their autonomy, and these results are compatible with anthropological literature. references ambrus, a., field, e., & torero, m. (2010). muslim family law, prenuptial agreements, and the emergence of dowry in bangladesh. the quarterly journal of economics, 125(3), 1349–1397. https://doi.org/10.1162/qjec.2010.125.3.1349 ashraf, n., bau, n., nunn, n., & voena, a. (2016, july 21). bride price and the returns to education for women (unpublished working paper). atake, e. h., & gnakou, a. p. (2019). women's empowerment and fertility preferences in high fertility countries in sub-saharan africa. bmc women's health, 19(1), 54. https://doi.org/10.1186/s12905019-0747-9 becker, g. s. (1981). a treatise on the family. harvard university press, cambridge. bishai, d., & grossbard, s. (2010). far above rubies: bride price and extramarital sexual relations in uganda. journal of population economics, 23(4), 1177–1187. https://doi.org/10.1007/s00148-0080226-3 elbadawy, a. (2009). education returns in the marriage market: does female education improve marital outcomes in egypt? 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(2010). strategic behavior and marriage payments: theory and evidence from senegal. economic development and cultural change, 59(1), 149–185. https://doi.org/10.1086/655457 mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.1186/s12905-019-0747-9 https://doi.org/10.1186/s12905-019-0747-9 https://doi.org/10.1080/13691058.2012.74484 https://doi.org/10.1086/655457 american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 55 | p a g e goodarzi, l. s. 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(2001). women's autonomy in india and pakistan: the influence of religion and region. population and development review, 27, 687–712. https://doi.org/10.1111/j.17284457.2001.00687.x kaye, d. k., mirembe, f., bantebya, g., ekstrom, a. m., & johansson, a. (2005). implications of the bride price for domestic violence and reproductive health in wakiso district, uganda. african health sciences, 5(4), 300–303. lowes, s., & nunn, n. (2018). bride price and the well-being of women. towards gender equity in development (pp. 117–138). oxford university press. https://www.wider.unu.edu/publication/towards-gender-equity-development lundberg, s., & pollak, r. (1993). family decision-making. in s. lundberg & r. pollak (eds.), the new palgrave dictionary of economics. palgrave macmillan. mbaye, l., & wagner, w. 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(1990). a history of marriage systems. greenwood press. new york: greenwood. 1990. the american historical review, volume 95, issue 1, pages 131–132, https://doi.org/10.1086/ahr/95.1.131 rajan, s., nanda, p., calhoun, l. m., & speizer, i. (2018). sex composition and its impact on future childbearing: a longitudinal study from urban uttar pradesh. reproductive health, 15, 1–9. https://doi.org/10.1186/s12978-018-0482-y rapoport, y. (2000). matrimonial gifts in early islamic egypt. islamic law and society, 7(1), 1–36. https://doi.org/10.1163/156851900507553 mailto:contact@americaserial.com mailto:contact@americaserial.com https://conference.iza.org/conference_files/gender_2018/salarpour_goodarzi_l26070.pdf https://doi.org/10.1016/s0277-9536(00)00051-4 https://doi.org/10.1177/0003122413484923 https://doi.org/10.1111/j.1728-4457.2001.00687.x https://doi.org/10.1111/j.1728-4457.2001.00687.x https://scholar.harvard.edu/nunn/publications/bride-price-and-wellbeing-women https://scholar.harvard.edu/nunn/publications/bride-price-and-wellbeing-women https://doi.org/10.1080/00220388.2016.1208178 https://doi.org/10.2307/2526280 https://doi.org/10.1016/0378-5122(95)00985-x https://doi.org/10.1086/ahr/95.1.131 https://doi.org/10.1186/s12978-018-0482-y https://doi.org/10.1163/156851900507553 american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 56 | p a g e institute for women's policy research (iwpr). (2015). gender, urbanization, and democratic governance. the national democratic institute commissions the institute for women's policy research. https://www.ndi.org/ seetha, m. (2020). the effect of marital endowments on domestic violence in india. journal of development economics, 143, 102389. https://doi.org/10.1016/j.jdeveco.2019.102389 srinivasan, s., & bedi, a. s. (2007). domestic violence and dowry: evidence from a south indian village. world development, 35(5), 857–880. https://doi.org/10.1016/j.worlddev.2006.08.005 suran, l., amin, s., huq, l., & chowdhury, k. (2004). does dowry improve life for brides? a test of the bequest theory of dowry in rural bangladesh. policy research division working paper 195, population council. https://doi.org/10.31899/pgy2.1017 united nations development program (undp). (2009). human development report 2009 http://hdr.undp.org/en/reports/global/ willis, r. j. (1973). a new approach to the economic theory of fertility behavior. journal of political economy, 81(2), s14–s64. https://doi.org/10.1086/260152 zhang, j., & chan, w. (1999). dowry and wife's welfare: a theoretical and empirical analysis. journal of political economy, 107(4), 786–808. https://doi.org/10.1086/250079 appendix table 1. descriptive statistics mean std.dev. min max number of children 3.90 1.97 0 17 gold price at time of marriage 1075.80 451.27 294.12 1668.86 bride price (mahr) 2152.39 5527.41 0 90000 average bride price grouped by the first year of marriage (mahr) 4083.98 831.17 106.14 5581.44 characteristics of the wife age of the wife 30.88 8.38 15 75 age of the wife at marriage 20.84 4.17 7 52 literacy of the wife characteristics of the husband 0.37 0.48 0 1 age of the husband 37.14 16.39 16 82 age of the husband at marriage 26.40 4.86 14 73 literacy of the husband characteristics of the household 0.56 0.49 0 1 ownership status at marriage husband related to wife 0.22 0.06 0.41 0.24 0 0 1 1 mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.ndi.org/ https://doi.org/10.1016/j.jdeveco.2019.102389 https://doi.org/10.1016/j.worlddev.2006.08.005 https://doi.org/10.31899/pgy2.1017 http://hdr.undp.org/en/reports/global/ https://doi.org/10.1086/260152 https://doi.org/10.1086/250079 american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 57 | p a g e table 2. results of first stage iv regressions dependent variable: average bride price payment variable fsls (1) fsls (2) log of gold price .214 (.002) *** .626 (.002) *** age of the wife -.0140 (.0043) *** -0.0107 (.0225) the age of the wife squared 0.0003 (0.0003) age of the wife at marriage -0.0105 (0.007) -0.0101 (0.041) age of the wife at marriage squared .0014 (0.0009) wife's education -1.366 (5.566) -0.344 (5.566) age of the husband -.1032 (0.1169) -0.0824 (0.1175) the age of the husband squared 0.0048 (.0244) age of the husband at marriage -0.0119 (0.0021) -.0780 (.0451) * literacy of the husband .7438 (5.565) .7329 (5.566) ownership status at marriage -0.204 (.0414) *** -.2051 (.0413) *** husband related to wife 0.5531 (0.0850) *** 0.2032 (0.0609) *** country dummies yes yes year dummies yes yes constant 421.059 (19.888) *** 420.807 (19.904) *** observations 54,832 54,832 ftest 471.22 392.96 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 58 | p a g e r^2 0.224 0.224 note: 1the f test has normal distribution n (0,1) and tests the null hypothesis of the insignificance of the estimated parameters against the alternative hypothesis of the significance of the estimated parameters. 2*** and *denote significance at 1 and 10 % significance levels, respectively. 3the figure in parenthesis below the coefficient estimates are standard errors. table 3. ols and instrumental regression of bride price and fertility rate variable dependent variable: number of children ols(1) ols(2) iv(3) iv(4) log of average bride price .110 (.016)*** .111 (.014)*** 0.110 (.020) *** 0.090 (.020) *** age of the wife 0.162 (0.001) *** 0.398 (0.015) *** 0.187 (0.001) *** 0.299 (0.008) *** the age of the wife squared -.0041 (.0002) *** -0.0015 (0.0001) *** age of the wife at marriage -0.162 (0.002) *** -0.251 (0.016) *** -0.1990 (0.0026) *** -0.410 (0.003) *** age of the wife at marriage squared 0.010 (0.005) * 0.021 (0.004) *** wife's education -1.200 (1.195) -1.148 (1.180) -1.110 (2.123) -1.006 (2.226) age of the husband 0.016 (0.025) .032 (.025) 0.0025 (0.0446) * 0.013 (0.046) the age of the husband squared 0.001 (0.001) 0.001 (0.001) age of the husband at marriage -0.013 (0.005) ** -0.026 (0.002) *** -0.012 (0.003) *** -0.010 (0.001) *** literacy of the husband -1.112 (1.194) -1.064 (1.180) -1.018 (2.123 -1.423 (2.537) ownership status at marriage -.002 (0.008) -.001 (0.008) -0.179 (0.017) *** -0.141 (0.016) *** husband related to wife .085 (0.016) *** 0.086 (0.016) *** 0.0746 (0.0234) *** 0.142 (0.028) *** country dummies yes yes yes yes year dummies yes yes yes yes mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 59 | p a g e constant .942 (0.102) *** -1.311 (0.218) -.336 (0.119) *** -2.195 (.271) *** observations 54,832 54,832 54,832 54,832 wald chi2(2) . . 23646.42 21690.42 ftest 1058.11 924.32 . . r^2 0.512 0.524 0.530 0.484 note: 1the f test has normal distribution n (0,1) and tests the null hypothesis of the insignificance of the estimated parameters against the alternative hypothesis of the significance of the estimated parameters. 2*** and *denote significance at 1 and 10 % significance levels, respectively. 3the figure in parenthesis below the coefficient estimates are standard errors. 4instrument variable: the gold price at the time of marriage (log). table 4. estimation result of average bride price and if a married women shopping without getting permission variable dependent variable: shopping without getting permission (0,1) ols(1) ols(2) iv(3) iv(4) log of average bride price -0.0051 (0.0006)*** -0.0061 (0.0006)*** -0.001 (0.0060)*** -0.0012 (0.0007)* wife's characteristics controlled controlled controlled controlled husband's characteristics controlled controlled controlled controlled household's characteristics controlled controlled controlled controlled country dummies yes yes yes yes year dummies yes yes yes yes constant 0.255 (0.006) *** 0.285 (0.006) *** .097 (0.058) * .180 (0.057) *** observations 54,832 54,832 54,721 54,721 f – test 55.22 58.56 62.67 182.46 r^2 0.002 0.008 0.017 0.086 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 60 | p a g e note: 1the f test has normal distribution n (0,1) and tests the null hypothesis of the insignificance of the estimated parameters against the alternative hypothesis of the significance of the estimated parameters. 2*** and *denote significance at 1 and 10 % significance levels, respectively. 3the figure in parenthesis below the coefficient estimates are standard errors. 4instrument variable: the gold price at time of marriage (log) table 5. estimation result of average bride price and whether women are afraid of disagree. with husband or other males in hh dependent variable: whether women are afraid of disagreeing with the husband or other males in hh (0,1) variable ols(1) ols(2) iv(3) iv(4) log of average bride price .0047 (.0009) *** .0041 (.0009) **** .0440 (.008) *** .0356 (.008) *** wife's characteristics controlled controlled controlled controlled husband's characteristics controlled controlled controlled controlled household's characteristics controlled controlled controlled controlled country dummies yes yes yes yes year dummies yes yes yes yes constant 0.447 (0.009) *** 0.412 (0.012) *** .0422 (0.034) * .101 (0.105) observations 54,832 54,832 54,721 54,721 f – test 8.16 10.34 7.13 6.03 r^2 0.000 0.001 0.015 0.016 note: 1the f test has normal distribution n (0,1) and tests the null hypothesis of the insignificance of the estimated parameters against the alternative hypothesis of the significance of the estimated parameters. 2*** and *denote significance at 1 and 10 % significance levels, respectively. 3the figure in parenthesis below the coefficient estimates are standard errors. 4instrument variable: the gold price at the time of marriage (log). table 6. estimation result of average bride price and husband justify beat his wife when she burns the food dependent variable: spouse justifies beating his wife when she burns food variable ols(1) ols(2) iv(3) iv(4) log of average bride price .0001 (.0005) .0009 (.0005) * .0081 (.0009) *** .0074 (.0009) *** wife's characteristics controlled controlled controlled controlled husband's characteristics controlled controlled controlled controlled household's characteristics controlled controlled controlled controlled mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 61 | p a g e country dummies yes yes yes yes year dummies yes yes yes yes constant 0.068 (0.004) *** 0.041 (0.006) *** .052 (0.030) * .115 (0.109) observations 54,832 54,832 54,721 54,721 f – test 0.05 21.20 7.98 6.06 r^2 0.000 0.002 0.015 0.016 note: 1the f test has normal distribution n (0,1) and tests the null hypothesis of the insignificance of the estimated parameters against the alternative hypothesis of the significance of the estimated parameters. 2*** and *denote significance at 1 and 10 % significance levels, respectively. 3the figure in parenthesis below the coefficient estimates are standard errors. 4instrument variable: the gold price at the time of marriage (log). table 7. estimation result of alternative ways of coding women’s bargaining power. dependent variable: women’s bargaining power (0-3) variable ols (1) ols (2) iv (3) iv (4) log of average bride price -.274 (.008) *** -.301 (.008) *** -.059 (.024) ** -.123 (.034) *** age of the wife -.004 (.0007) *** -.004 (.002)*** -.028 (.001)*** -.017 (.001)*** the age of the wife squared -.0007 (.0002) -.0001 (.0001) age of the wife at marriage -.0001 (.0004) -.0001 (.0005) -.0007 (.0014) -.0141 (.0110) age of the wife at marriage squared .0003 (.0028) .0003 (.0022) wife’s education -.0541 (.0025) *** -.0592 (.0020) *** -.0540 (.0085) *** -.0532 (.0082) *** age of the husband .001 (.0015) -.002 (.002) -.0012 (.0061) -.0004 (.0060) the age of the husband squared .0011 (.0160) .0014 (.0141) age of the husband at marriage -.0132 (.0241) -.0140 (.0254) -.0164 (.0401) -.0180 (.0351) literacy of the husband -.0017 (.0168) -.0042 (.0110) -.0015 (.015) -.0080 (.0151) ownership status at marriage -.0085 (.005) -.0042 (.0025) -.0019 (.0024) -.0030 (.0024) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 62 | p a g e husband related to wife -.0065 (.002) -.0038 (.0070) -.0031 (.0080) -.0038 (.007) country dummies yes yes yes yes year dummies yes yes yes yes constant 3.03 (0.092) *** 3.29 (0.090) *** .825 (0.260)*** 1.57 (0.391) observations 54,832 54,832 54,832 54,832 f – test / wald 816.30 850.86 733.42 728.38 r^2 0.05 0.07 0.14 0.13 note: 1the f test has normal distribution n (0,1) and tests the null hypothesis of the insignificance of the estimated parameters against the alternative hypothesis of the significance of the estimated parameters. 2*** and *denote significance at 1 and 10 % significance, respectively. 3the figure in parenthesis below the coefficient estimates are standard errors. 4instrument variable: the gold price at the time of marriage (log). 5the dependent variable is a count from 0 to 3. table 8. effect of price of bride’s wealth on number of children when introduces oil price as iv variable iv (1) iv (2) log of average bride price .867 (.063)*** .531 (.041)*** age of the wife -.166 (.004)*** -.147 (.002)*** the age of the wife squared age of the wife at marriage -.0003 (.0010) -.0003 (.0011) age of the wife at marriage squared wife’s education -.0254 (.0063) *** -.0224 (.0068) *** age of the husband -.0025 (.0085) -.0021 (.0080) the age of the husband squared age of the husband at marriage -.0120 (.0352) -.0119 (.0358) literacy of the husband -.0020 (.005) -.0020 (.005) ownership status at marriage -.0021 (.0022) -.0017 (.0020) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 63 | p a g e husband related to wife -.0029 (.0012) -.0024 (.0012) country dummies yes yes year dummies yes yes constant 8.930 (0.657)*** 5.808 (0.440)*** observations 54,832 54,832 wald 1827.52 1124.52 r^2 0.23 0.326 note: 1the f test has normal distribution n (0,1) and tests the null hypothesis of the insignificance of the estimated parameters against the alternative hypothesis of the significance of the estimated parameters. 2*** and *denote significance at 1 and 10 % significance, respectively. 3the figure in parenthesis below the coefficient estimates are standard errors. 4instrument variable: the average price of oil at the time of marriage (adjusted for inflation). table 9. the heterogeneity impact of average bride price on the number of children dependent variable : number of children group categories ols (1) iv (2) religion muslim .067 (.020)*** .535 (.050) *** christian .204 (.080) ** .040 (.180) ** country jordan .181 (.042) *** .664 (.073) ** tunisia .100 (.077) .752 (.132) *** egypt .300 (.017) *** .249 (.028) *** work status employed -.294 (.02) *** -.136 (.045) *** unemployed .160 (.093) ** .610 (.041) *** mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 64 | p a g e out of work .247 (021) *** .529 (.036) *** location of household rural .145 (.021) *** .569 (.054) *** urban .049 (.023) ** .032 (.001) ** wealth quintile poorest .266 (.043) *** .799 (.101) ** poorer .316 (.039) *** .443 (.090) ** middle .266 (.039) *** .163 (.006) *** richer .324 (.036) *** .134 (.005) *** richest .200 (.039) *** .451 (.077) *** years of schooling no schooling .075 (.040) * .540 (.100) *** < 5 years .073 (.034) ** .524 (.084) *** 6-10 years .009 (.01) * .152 (.044) ** >10 .029 (.01) .132 (.002) *** age at first marriage < 20 years .278 (.029) *** .552 (.062) *** mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 65 | p a g e 21-35 years .168 (.016) *** .694 (.243) ** >36 years .192 (.077) ** .021 (.010) ** characteristics of the wife yes yes characteristics of the groom yes yes characteristics of the household yes yes country dummies yes yes year dummies yes yes observations 54,832 54,832 figure 1. average price of gold series internationally from dec 1960 to dec 2018. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 25 | p a g e examining the nexus between factor price manipulation and bureaucratic corruption: a state capacity perspective dr. wei-chen lin department of economics, chinese culture university, taiwan abstract: the conventional wisdom suggests that a prudent fiscal stance accompanied by low taxes should foster economic growth. however, empirical evidence reveals a paradox: tax revenue-to-gdp ratios tend to be higher in developed countries compared to less developed ones. this inconsistency between theory and observation can be illuminated through the lens of north's insight, which underscores the influence of political structures on tax regimes and economic welfare. north (1981) argued that political systems may prioritize maximizing returns for rulers or elite groups rather than promoting efficiency and social welfare. such a perspective leads us to question not whether high taxes stimulate growth, but whether the political regime is extractive or inclusive. in many less developed countries (ldcs), economic stagnation and low tax revenues can be attributed to the extraction practices of corrupt governing elites. this article extends north's framework by categorizing ldcs into two groups: weak states and strong states. weak states are characterized by their limited capacity to levy taxes effectively, often hindered by resistance from local power brokers. these governments struggle to govern effectively, leading to economic failures related to a lack of tax collection, public goods provision, and incentives for sound economic behavior. even in cases of low taxes, the absence of strong governance hampers economic progress. keywords: taxation, economic growth, political regime, extractive institutions, weak states, strong states. i. introduction an interesting paradox ubiquitously observed in the literature is a seemingly true proposition that a prudent fiscal stance accompanied by a low tax will generally stimulate growth.2however, there is much evidence to show that the ratios of tax revenue to gdp are higher on average in developed than in less developed countries (ldcs).for instance, the heritage foundation (2015) shows that tax ratio for sweden is 50%, for france 48%, and for the us 26%, which is much higher than that for gabon of 10%, that for the congo of 6%, and that for chad of 4%. in our opinion, rather than focusing on the association between these two variables, the inconsistency between theoretical predictions and observational data can be explained by using the insight of north (1981, p. 25):“the politically determined structure of society [e.g., tax regimes] does not necessarily maximize the efficiency and social welfare; instead, it strives to maximize the returns to the monarchs or politically strong mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 26 | p a g e groups.” north argues that there always existsa persistent tension between the political structure which maximizes the rents to the elite ruler and an efficient system that encourages growth. he further suggests that this kind of elite extraction is the root cause of the failure of societies to experience sustained economic growth. therefore, the insight is not whether a high tax can promote growth, but whether the political regime is extractive or not. for most of the ldcs, their economic failures and low tax revenues are mainly caused by the extraction of corrupt governing elite. to further north’s insight into the problem, this article classifiestheldcsinto two categories: first, weak states arecountries in which the main barriers to economic development are those that arise due to the lack of state capacity or state power to levy tax effectively. as indicated by acemoglu (2005) and besley and persson (2010), most of the ldcs fall into the category of weak states, in which the inability to govern stems from the resistance posed by local chiefs, rich landlords, and clan leaders. basically, their economic failures are related to their governments’ inability to dominate subjects, collect taxes, and provide public goods. this provides the opposing elites with an opportunity to establish entry barriers, regulations and inefficient institutions to extract their economic rents. at this point, even though the tax is low, the government still does not provide much of an incentive for economically sound behavior. second, a minority of ldcswith strong centralization of authority (e.g., north korea)have enough capacity to tax more resources from their societies. however, as indicated by north, this does not imply that the monopoly of legitimate violence will be used to tax and provide public goods. this is because pervasive corruption constrains how the country is governed. if the ruler is unable to keep corruption in check, then he has to keep the tax rate low to reduce rebellion threat arising from overtax. for instance, north korea is ranked as the third most corruption-ridden country in the word. instead, its personal income tax rate is only 0 20%, which is much lower than 11.4% 41.8% of south korea, not to mention high tax rates of the european countries. in both cases, state capacity does not guarantee tax collection, and tax levying also does not necessarily reflect a predictable and beneficial effect on public goods provision or economicgrowth, since theselfinterested elite mostly use the ability of the state to tax and coerce citizens in ways that might be detrimental to economic performance. therefore, if political organizations are structured to maximize the rents captured by the ruling elite, it is meaningless to discuss whether there exists any association between taxation and economic growth. one might argue that, since both strong and weak states lead to poor economic outcomes in the ldcs, their state capacity should be balanced at an intermediate level between weak and strong states, so as to encourage entrepreneurship and achieve an efficient allocation of resources, such as the possibility suggested by acemoglu (2005, p.1203). however, in differentiating from this, this article proposes that the key issue is not whether state capacity is balanced or not, or whether the state can collect the tax, but rather whether the self-interest of ruling elites is checked by the rule of law or not. we believe that, although the contrast between economically weak and economically strong states is an interesting point, the power of the elite still has to be constrained by the political power of the citizens, in particular their power to replace the ruler. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 27 | p a g e to support this idea, we use a case regarding oriental despotism, whichconcernsa comprehensive change in historical chinese society, including its politics, demography and economy, that occurred in the period of the song dynasty in the 9th to 13th centuries. the literature commonly referstothis as the “tang-song transition (唐宋變革),” which may be seen as a watershed in the transition from the medieval (中古) to early modern (近世) period of chinese history (naitō konan, 1922). among these changes, the most important one with profound political implications was the collapse of the medieval aristocracy of local lineages that had dominated china politically from roughly the 1stcentury bc through to the 9thcentury ad and the growing powers of central emperors since the 10th century. the interesting point is that the state’s capacity to tax in the former period was extremely weak dueto the local lineages’ boycott. by contrast, in the latter period, central emperors had successfully consolidated the political power and could strengthen the state’s capacity totax. however, due to bureaucratic corruption arising from principal-agent problem, the government still failed to collect appropriate level of tax for public goods. regarding to this issue, this article shows that, if the power of the elite is not constrained by the rule of law, then, regardless of whether political power rested in the hands of central emperors or local lineages, and regardless of whether the tax was high or low, poor economic outcomes would still emerge. therefore, the key issue is not whether or not a high tax rate can promote growth, but rather whether the political regime is extractive or not. if political organizations are structured to maximize the rents captured by the elite, it is meaningless to discuss whether there exists any association between taxation and economic growth. this result thus suggests the importance of building a better political institutional framework to control the power of the state rulers. the remainder of this paper is organized in the following manner. section ii presents some basic features of chinese politics. sections iiiand iv describe the politically unified and fractious periods in chinese history, respectively. section v concludes the paper. ii. some features of chinese politics a. china as a case study. there are two advantages of using chinese politics as evidence to support the proposition of north (1981). first, between 3000 bc and 1800 ad, there were more than sixty mega-empires that used to control at least one million square km of territory (turchin, 2009). however, the chinese empire was the only one that continually maintained an autocratic and unitary state during the entire period. second, china had evolved in relative isolation in the corner of southeastern eurasia, and had maintainedvery little contact with the foreign world for at least three millennia. this naturally prevents the possibilities of foreign political interference and offers a fascinating case to investigate the relationships among state capacity, tax collection, and politics. from both theoretical and practical perspectives, these advantages allow researchers to conduct their experiments in a designated environment almost like in a science laboratory. b.tang-song transition. this article focuses on a comparison based on the tang-song transition (唐 宋變革 論), which characterizes the changes in chinese political status from fragmentation to unification. as shown by ge (2008), before tang dynasty, the 2,135 years of chinese political development from the qin to qing dynasties can be roughly divided into two regimes: political fragmentation in the first millennium (qin to tang, 221bc907ad) and political unification under one ruler in the second one mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 28 | p a g e (tang to qing, 908-1911). naitō konan (1922) also shows that song dynasty is a period in which china witnessed a series of technological innovations, the rise of commercial wealth, and, more critically, the replacement of hereditary aristocracy by a system of emperor’s autocracy. however, despite the changes in many aspects of society, we barely see any change in government tax revenue. in the former period tax collection was low due to ineffective taxation caused bya “weak central statevs. strong local powers”. alternatively, in the latter period, the state capacity held by central emperors was strong enough to enable them to collect more tax. however, due to the pervasive bureaucratic corruption, the emperors still had to keep taxes low to mitigate the “tyranny at the bottom” effect and to preempt the farmers’ revolt(sng, 2014). based on these facts, the following sections of this paper will use the theoretical perspective of the new institutionalism to investigate how taxation and politics were interrelated during these two periods. iii. political fragmentation period: weak state capacity a. weak central emperors. before the song dynasty, chinese politics exhibited a type of political fragmentation. as in medieval europe, the central emperors faced impenetrable restraints from the resistance of local nobles to state predominance. in fact, most of the economic rents gained from the autocratic ruling accrued to the local noble lineages. besides, the evidence also suggests that the economic failure of fragmented china is directly related to the central government’s inability to extract resources through taxation from the locals (ma, 2012). seen from the viewpoint of politics, the regional noble lineages had strong influences on both central and local governments. they had enough political power to dismiss the authority of emperors, which can be evidenced by several facts. first, although the dejure tax was extremely high, however, the landlord lineages not only held the right to be exempted from tax obligations, but were also bestowed with the privilege of legal immunity. in the local power structure, theyheldthe ultimate power of land expropriation, such as mining, fishing, and commercial privileges. nevertheless, the common landowners were subject to a full tax liability that they could not afford, and hence were forced to dedicate their land to noble lineages and turned themselves in as slavesso as to evade the tax on labor and land. these slaves or serfs settled in nearby satellite villages and played a key role in cultivation. as a later section will show, this institution is in essence a redistribution mechanism that transfers income from middle-class entrepreneurs to lineage landlords through the lineages’ manipulation of factor prices to employ labor at the subsistence wage. it is unlikely to generate a spirit of entrepreneurship in society that will promote economic growth. second,government officials, at both the central and local level, were appointed based on the recommendation of regional noble lineages through the cha ju（察舉）andchiu-p’inchung-cheng (九 品中正). hence, it is not surprising that central governments were ruled by these aristocratic elites who colluded to monopolize the affairs of state by dominating the appointment of officials and practicing endogamy. they developed and implemented state policy within closed cabinet meetings chaired by the chancellor (宰相). a chancellor had considerable power and shared final decisions with the emperor and could challenge or even veto (封駁) imperial edicts drafted by the imperial secretariat. therefore, the bureaucrats had enough power to act independently of, and against the interest of the emperors, since they were supported by the political power from the local all the way up to the national level. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 29 | p a g e on the other hand, the central emperor was weak vis-à-vis the local lineages. the post of the emperor sometimes even became the property of the aristocratic families and their relatives. sporadically, emperors could be dethroned or even murdered if the interests of the aristocracy were violated. although the emperors in the sui and tang dynasties attempted to implement examination systems to recruit civilian scholars to staff the government and replace the lineage officials, however, these policies did not last for long due to the bitter opposition from the lineages (quan, 1972). b. structure of economic equilibrium. to investigate this issue, this article extends the models of acemoglu (2006, 2010) and sng (2014) to explain the relationships between state capacity and taxation in historical china. we hope that this might provide some hints to understand the causes of low tax collection in contemporary ldcs. consider an infinite horizon economy populated by a continuum 𝐿+𝜃𝑚 +𝜃𝑒 of risk neutral agents. there is a unique non-storable final good denoted by y. agents are divided into three groups. the first comprises a total mass of farmers, 𝐿>1, whose only action in the model is to supply their labor inelastically. in addition, assume that the subsistence wage is zero for convenience of analysis. second, there are two sets of potentially competing producers: (1) middle-class entrepreneurs; (2) local elite (noble lineages or bureaucrats). the middleclass group has a total population 𝜃𝑚 >1 of entrepreneur agents, who hire farmers (𝑙𝑚) to produce y. they can work as an owner of a farming business, a selfemployed farmer, or a household farming in which the labor forces are mainly family members. the local elite has size 𝜃𝑒 and hires farmers(𝑙𝑒)to produce and become entrepreneurs. the sets of elite producers and middle-class producers are denoted by 𝑆𝑒 and 𝑆𝑚, respectively. each agent in local elite and middle-class has an access to the following cobb-douglas production technology to produce: , (1) where𝑙𝑗 (𝑗∈𝑆𝑒 or 𝑆𝑚)denotes the labor employed by agent j, and𝑘𝑗denotes the capital (mainly land). the key difference between an elite producer and a middle-class producer lies in the productivity, meaning that the productivity of a middle-class agent is higher than that of a local elite agent 𝐴𝑚 ≥𝐴𝑒. also assume that there is a maximum scale of production, so that each entrepreneur can hire at most λworkers, i.e., 𝑙𝑗 ≤𝜆. as to the policy side, there is a linear tax rate on production for local lineages and middle-class ( 𝑚 ≥0), respectively. the proceeds of taxes can be redistributed as nonnegative lump-sum transfers to the agent in the groups of elites, middle-class, and farmers(𝑇𝑒 ≥0, 𝑇𝑚 ≥0 and𝑇𝑓 ≥0).since the farmers constitute the majority of the population, 𝑇𝑓is thus specified to include a public goods provision. 𝐿𝑇𝑓 +𝜃𝑚𝑇𝑚 +𝜃𝑒𝑇𝑒 ≤ 𝑗∈𝑆𝑚∪𝑆𝑒 𝜏𝑗 𝑦𝑗 (2) since only farmers can be employed, the labor market clearing condition can be expressed as: 𝑗∈𝑆𝑒∪𝑆𝑚 𝑙𝑗 𝑑𝑗≤𝐿. (3) c. factor price manipulation. we now characterize the first best solution of the allocation of labor to different entrepreneurs (𝑙𝑒 and 𝑙𝑚). since, under a given set of tax and the wage (𝜏𝑗and ), the transfers do not affect the economic equilibrium, the planner takes𝐴𝑗as given and chooses𝑙𝑗 and𝑘𝑗to maximize the net output (total surplus) for both the elite and middle-class entrepreneurs: mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 30 | p a g e in which w is the wage and the capital price is normalized to 1. the maximization of equation (4) yields: , and(5) in equation (6), , which represents the marginal product of a farmer. if the wage rate is above𝑀𝑃𝐿, the producer will not employ any workers; if it is equal to 𝑀𝑃𝐿, the employment will be any amount between 0 and λ; and if it is lower than 𝑀𝑃𝐿, the producer will prefer to hire as many workers as possible until the maximum rate is reached. we now use this model to illustrate how the elites ’rent extraction may lead to economic inefficiency. this is done by introducing political institutions to the model such that local elites could decide the policies, which include the levying of a high tax on middle-class producers as an entry barrier. during the fragmentation period, the combination of policy tools constituted an entry barrier 𝐵𝑀for the lineages to expropriate rents. the barrier not only prevented the entry of middle-class agents wishing to become entrepreneurs and to hire labor, but also turned them into slaves. the concrete method was to set an extremely highde jure tax rate for the middle-class farmers. the tax, was so high that the middle-class farming entrepreneurs could not afford to pay it, and hence they were forced to dedicate their land to noble lineages and sell themselves as slaves in order to evade the tax. besides, the elite would never have taxed themselves 𝜏𝑒 =0, and middle-class farmers have evaded all of the tax by abandoning their land and citizenships. hence, the de facto tax was zero. also note that since local elites control the state, central emperors had no power to tax. next, for a given set of taxes and entry barriers, , the middle-class producers choose the labor employment optimally and the labor market clears. by substituting (5) into (4) and incorporating an entry barrier for each individual middle-class farmers caused by an unaffordable tax, we can obtain the profit function for the middle-class entrepreneurs: we also obtain the profit function for the elite entrepreneurs who were exempted from tax, and hence did not face entry barriers: by following acemoglu (2010) and setting an employment constraint as shown below: . (8) if this constraint holds, then there will be enough middle-class entrepreneurs to employ all workers, but there can never be full employment for labor demand coming only from the elite groups. finally, by combining equations (6), (7-1) and (8), one can obtain the equilibrium wage mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 31 | p a g e . (9) given this model of wage determination, if the elite set 𝐵𝑚 =0, they will generate zero profits, but farmers are paid their marginal productivity. on the contrary, by setting (and they will certainly do so), they can ensure that they will become entrepreneurs by drivingmiddle-class producers out of the market. more importantly, this kind of entry barrier could also push the equilibrium wage rate down to zero(or the subsistence wage) by manipulating labor prices and enslaving farmers. since 𝑤𝑡 =0<𝑀𝑃 , each elite entrepreneur could hire λworkers and earn a profit of . at this point, the total net output becomes , (10) and all output is produced by elite entrepreneurs. but, there is no tax or public goods provision. there are three sources of inefficiency under entry barriers due to the unfair tax system. first, from the viewpoint of efficiency, since𝐴𝑚 ≥𝐴𝑒, it is better to let middle-class entrepreneurs produce the entire output. this arrangement not only maximizes the total surplus, but also guarantees a wage rate that is better than the subsistence wage (i.e., ). however, the real world results were actually the opposite of the ideal one: the farming slaves had to work for a subsistence wage; and the high-efficiency producers were driven out of business by the low-efficiency ones. second, since𝜃𝑒 <𝐿 𝜆, the elite producers cannot provide employment for the entire workforce. there always remains some unemployment. finally, the inefficiency of slave farming would reduce agricultural productivity even in the case of large-scale slave farming (schaefer and schmitz, 1979). d. political conflicts. since there are two sets of competing elites to extract economic surplus of the commoners (central emperors/local elite), the political wrangling as to who could grab the surplus should be determined by the political power of central emperors and local lineages. evidently, the local elite grabbed all the surplus created by famers in the fragmentation period. however, as explained in the following section, the allocation of power was altered by two exogenous events, rice technology innovation and the improvement and renovation of the canal system, which both by coincidence took place during the song dynasty. iv. political unification period: strong state capacity a. from political fragmentation to political unification. prior to the song dynasty, the political structure granted the lineages huge benefits, and allowed them to manipulate factor prices through unfair and inefficient taxation regimes. however, from the song dynasty onwards, the balance of power had decisively tilted towards the emperors and that allowed the central emperors to take over all governmental functions and achieved enough political power to suppress local lineages. by the ming dynasty, even the post of chancellorship was abolished and replaced by the secretariat of the emperors (殿閣大學士), who, like faithful servants, could be dismissed at will by a capricious emperor. this enabled the emperor to wield ultimate power without institutional constraints. the only restraint on the emperors was the insurrection constraint, meaning that, if farmers at the bottom of the ladder were pushed below subsistence by excessive imperial abuses, they would resort to a violent rebellion to overthrow the imperial power. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 32 | p a g e this transformation from fragmentation to unification provides a vital division between medieval and modern times of china. it encompasses at one end the collapse of the medieval aristocracy at the fall of the tang, and at the other end the unification of china under the emperor’s autocratic regime staffed by mobilized bureaucrats dedicated to fortifying the central government. the highly centralized power of the emperors can be seen by the change in the appointment of officials through the imperial examinations ( 科舉 ) rather than through the recommendations of the local lineages. although the imperial examination system was initiated in the sui and tang dynasties, however, the candidates were largely restricted to the graduates of official schools already monopolized by elite lineages (ma, 2012). moreover, passing the exam merely means being qualified to be a candidate of bureaucrat. it still needed the approval of the lineages to be a formal officer. therefore, the fair and competitive system that allowed more people to sit for the examinations and to facilitate the formation of a new bureaucracy did not begin until the song dynasty. the opening up of the examination system for bureaucratic recruitment undoubtedly weakened the pre-existing social structure rooted in the hereditary control of the aristocratic lineages. more importantly, because the plebeian officials lacked of the support from local political elites, they unsurprisingly did not have sufficient power to counterbalance the power of the emperor. basically, the song dynasty marked the transition from feudalism to central rule. but, why could the central emperors have political power to repress the nobles, to implement imperial examination, and to possess the ultimate authority after song dynasty? as is well known, a dictator’s capacity to control his serving men varied with the technical and organizational conditions under which he operated. hence, the answers in the literature are diverse, ranging from heavy reliance on the construction of large-scale irrigation work making bureaucratic despotism inevitable (wittfogel, 1957) to military conflicts between han and nomadic societies (ma, 2015). nevertheless, this article focuses on the influences of rice technology innovation and the grand canal on the state’s capacity to levy taxes. b. state capacity and taxation. due to china’s huge territory, its state capacity to tax encountered two significant difficulties: tax evasion and the transportation cost of taxed grain. however, these difficulties were progressively overcome in the post-song era. b-1: prevent tax evasion by taxing land rather than people. due to the small population relative to land mass, land per capitain the pre-song era (e.g.,0.15square kilometers in the tang dynasty) was much higher than that of the post-song (e.g.,0.07 in the ming dynasty), as indicated by table 1. therefore, in the former case, the constraint on agricultural production was labor rather than land, which made the labor price much higher than the land price. for instance, the han wooden strips found in inner mongolia (居延漢簡) show that a female slave was worth 20,000 coins in the han dynasty, but 50 mu of land was only worth 5,000 coins. this means that a female slave was worth 200 mu of land, which was enough land for 10 farming households to cultivate crops in the song dynasty (ho, 1990). owing to the low value of land in the pre-song era, the principal source of tax revenue was based on labor rather than on land. however, in a vast country like china, information asymmetry often led to serious underreporting of population (especially the number of adult males), that in turn led to tax evasion and an enfeebled state capacity. nevertheless, after the song dynasty, china’s fiscal revenue mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 33 | p a g e begun to shift from a “tax on labor” to a “tax on land.” (please refer to table 2.) as indicated by wang (1973), land taxes accounted for 74% of officially-recorded revenue in 1753 ad and became the main source of government revenue. since land tax cannot be evaded, this change thus facilitated the building of the state capacity to collect tax residency information and secure tax revenues. the basic reason that allowed a shift in the tax base from labor to land was a huge population which enhanced the land’s value. more importantly, the huge population could not be sustained for long without technical progress in rice production. after the song dynasty, there was a dramatic population increase driven by a food increase due to technological innovation in rice production (e.g., the adoption of early-ripening strains of rice and the intensive development of irrigation systems). technical progress in rice production mainly occurred in the rice-growing territory of southern china. henan tz《河南志》shows that the productivity of the rice wetlands in southern china was four times higher than that of the wheat dryland in northern china. as shown by elvin (1973), this innovation not only made chinese fields produce the highest yields in the world, but was also the most important factor in stimulating population growth. before the song dynasty, china’s population largely remained at a stable size of 50-60 million (maddison, 2007). after the technical progress in rice and its extensive cultivation in central and southern china, the chinese population grew rapidly to 100 million in the ming dynasty and to 400 million by the end of the qing dynasty in the 1900s. the dramatic population increase unsurprisingly raised the relative scarcity and value of land, and that allowed central emperors to substitute it for labor as the main tax base. since the land is immovable and cannot be hidden. this change thus facilitated the development of an efficient tax administration. b-2 reduce transportation costs by constructing the great canal. rice technology innovation would not have been worthwhile in a subsistence economy without the ability to transport the rice from the surplus-producing area to the populous market area (especially the capital city). therefore, transportation improvement driven by technical progress of canal navigation was another factor that strengthened the state’s capacity to levy taxes. since china was vast in terms of territory, the farflung regions could only be linked to the central capital by networks of slow preindustrial transport. in pre-song china, transportation costs seriously limited the ability to raise taxes. the government had to waste a lot of resources to deliver taxed grain from the collecting place to the capital or military front. for instance, pingjin hou in the shiji (史記．平津侯主父列傳) shows that, in the qin dynasty, it took up 192 tams(石) of forage to feed the mules in order to transport one tam of grain from langya shandong (山東琅琊) to hetao (河套). hence, the delivery of taxed grain involved extremely high transaction costs. these difficulties unsurprisingly weakened the political power of the central government to control local authorities. hence, as long as communications were poor (highways and navigation canals not well developed …) and as long as a natural economy prevailed, the ranking officials tended to hold their office land hereditarily (wittfogel, 1957, pp.355-356). however, the improvement of the canal system greatly enhanced the ability to transport the taxed grain. early chinese canals (from qin to tang) were mainly developed for military use given the limited traffic volume (kelly, 1997). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 34 | p a g e from economic considerations, it is unfeasible to use canal transportation to move taxed grain from surplus districts to the capital. however, after the song dynasty, the central government began constructing and renovating a national waterway network – the great canal, which provided great convenience to imperial taxation. the change was based on two reasons. first, on the supply side, technical progress in industrial transport raised the carrying capacity of great canal. as indicated by joseph needham (1954), the industrial technology in china reached its peak in the song dynasty, which caused china to become a global leader in many fields of technological progress, such as the invention of “navigation lock” to raise and lower ships between stretches of water of different levels on canal waterways. second, on the demand side, huge transportation demand arising from marketable surplus of rice output created a derived demand for the transportation systems. both factors henceallowedthe government capable of developing a canal system through the construction of new waterways and the improvement of existing ones by deepening, removing rapids, and adding locks. over that period of time, this waterway network was the world’s largest artificial waterway, and came increasingly to be used for transporting taxed grain from southern to northern china, in which the capital city was located (wittfogel, 1957). through the 30,000-mile-long national network of canals and navigable rivers, all economically important regions of china had been linked into a single territory (chi, 1936),and 30-40% of agricultural products were marketed during the early 12thcentury (perkins, 1969). brandt et al. (2014) also indicate that, roughly, one-fourth of these shipments were used in long-distance trade. besides, a wide literature surveyed by quan (1972) also shows that the grand canal facilitated the northward shipment of taxed grain to the capital, and allowed the central government to tax entrepreneurs nationwide. seen from the viewpoint of politics, the waterway network played a key role in strengthening the political power of central emperors. it helped the emperors to exert political control over the locals. prior to the song dynasty, the central government was faced with the difficult logistical task of transporting large quantities of taxed grain from the south to support the imperial court and armies that were concentrated in the north. however, the great canal provided central emperors with the ability to transport grain cheaply over long distances and helped to strengthen the state capacity. this not only transferred political power from local lineages to central emperors, but also changed the source of economic inefficiency from factor price manipulation to bureaucratic corruption. bureaucratic corruption under strong states. when the state’s capacity to tax was strong, it “seems” likely that the central emperor could levy taxes efficiently and raised the ratio of tax to gdp. however, the real world is far from being that simple. although central emperors might eliminate entry barriers created by local lineages, and might avoidthe inefficiency resulted from factor price manipulation, so that high efficiency producers (middleclass farmers) could produce without interferences. however, they are still subject to a practical difficulty to tax enough. this is because china’s size is too large to avoid the principal-agent problem. huge size of territory imposed substantial complexity and difficulty in transmitting information over distance, especially in the premodern world. in addition, regional differences in climate and crops also bestowed local agents (bureaucrats) with high flexibility in implementing central government decrees, and made gathering information for anti-corruption mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 35 | p a g e investigations more difficult. given these information asymmetries, it was difficult for a central emperor to monitor the tax over-collection by local bureaucrats. thisgavelocal bureaucrats strong incentives to extort the farmers and engage in corruption. although the evidence is sketchy and fragmented, it still suggests that low threat of detection of corruption led to a pervasive corruption. for instance, sng and moriguchi (2014) indicate that regional diversity forced the government to collect land taxes ina variety of ratios between crops and silver money. this means that the farmers had to pay part of their taxes in kind, which, depending on the region, might be rice, wheat, millet, or other staple crops. the remaining part of the tax denominated in silver also had tobe paid in copper coins when and where silver was scarce. to deal with such kind of diversity, the central government had no choice but to allow native magistrates to set commutation rates based on local conditions. however, the heterogeneity across regions made it difficult to monitor the tax over-collection by local administration and led to endemic corruption. one popular form of over-collection was the manipulation of commutation rates, wherein magistrates demanded households to pay taxes in copper (instead of the officially stipulated silver or grain) and set the commutation rate above the market rate … commoners paid up to 16,000wen of copper cash for every shi of rice that they owed in taxes, when the market price of rice was less than 3,000 wen per shi (sng and moriguchi, 2014, p.457). historians also agree that bureaucratic corruption grew over time in ming and qing dynasties (de bary, 1993; rowe, 2009). in particularly, ni and van (2006) empirically estimate that corruption consumed more than 20% of china’s agricultural output in 1850. ma and rubin (2019) also find that, in 1884, the unofficial income for officials above the provincial level was 63 million taels, amounted to 81% of the total official tax quota. on an individual basis, a magistrate in the early 19th century could embezzle 30,000 silver taels annually, which were about 12.8 times of his legal income, 2340 taels (chang, 1962). besides, the corruption ranged from bottom to top. provincial level officials relied on the contributions from the lower level officials (magistrates), who were asked to pay for bribes, and were often punished for any shortfall in quota payments. worse still, the rulers were completely unable to keep corruption in check through any monitoring institution. these problems were difficult to resolve under the existing political institution as efforts from the center to monitor bureaucrats only multiplied the problem of monitoring the monitors. indeed, internal staffers sent initially as imperial plenipotentiaries to control the outer layers of administration often found themselves turned into a new layer of formal bureaucracy superimposed on the external bureaucratic structure stationed outside the imperial capital. the subsequent dispatch of another layer of inner court personnel to monitor the previous monitors could end up repeating the process, leading to what many historians referred as the “externalization” [localization] of [central emperor’s] inner staff(ma, 2012, pp.1617).hence, the improvement in fiscal capacity merely turned the political conflict from a contest between central emperors and local lords into a contest between central emperors and local bureaucrats. the qing dynasty and was extended northward to connect with commodity flows along the liao river in manchuria (brandt et al., 2014). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 36 | p a g e d. corruption leads to low tax and under-provision of public goods. in ming and qing, china was a typical small peasant economy, in which 50%-60% of farmers were tenants (perkins, 1984). on the other hand, as corruption become rampant, most of the wealth was concentrated in the hands of few bureaucratic families. therefore, the landlords were also bureaucrats who passed the imperial examinations (moore, 1966). under such production relation, the middle-class farming was conducted by the small farming in which a household rented the land (𝑚) from the land lords, and labor forces (𝑙𝑚 ) were mainly family members. because𝐴𝑚 >𝐴𝑒, and there were enough middle-class farming households to employ all workers (𝐿>𝜃𝑒𝜆), the misallocation of resources resulting from factor price manipulation disappeared. hence, total output was larger than that in the case of the period of fractiousness (see equation 10) and became the economic intuition is easy: with the factor price manipulation mechanism, the objective of the local elites is to impoverish the middle-class as much as possible so as to prevent them from competing for labor, whereas for revenue extraction, the emperors would like the middle-class to produce and generate more revenue. ideally, this kind of production arrangement has the potential to fuel a burgeoning middle class that leads to wages higher than subsistence level, more tax revenue, and pubic goods provision in china. however, bureaucratic corruption destroyed this potential, because the corruption of local bureaucrat would force the emperors to levy a low tax rate and provide an insufficient public goods for economic development. first, assume that a middle-class farmer had to pay 𝑙𝑚𝐶𝑚 to local bureaucrats as the bribery or extortion. second, his profit function wassubject to corruption and tax, but did not have to face entry barriers: . (12) since the middle-class farming can ensure full employment, the equilibrium wage became: equation (13) is different from (9) by the source of unfairness and inefficiency. in (9), local lineages decided entry barriers to drive middle-class producers out of the market, and pushed the equilibrium wage rate down to subsistence wage. conversely, in (13), it was the central emperor who decided the tax rate .the higher the tax rate is, the more likely that 𝒘∗ would be lower than subsistence wageand triggers the rebellion.hence, as indicated by sng (2014), the emperors were forced not to overtax the farmers to preempt rebellion. this means that they had to set a tax rate not to exceed marginal productivity minus the corruption of bureaucrats. after some manipulation, this leads to (14) the higher bureaucratic corruption was, the lower the tax rate that the emperor had to set in order to preempt rebellion. at this point, low tax revenues and pervasive corruption predictably led to extremely low provision of public goods(𝑇𝑓 →0.) and poor economic performances, which is the same as that of the fractious period. the crucial point is that no-revolt constraint applied only to emperors but not to local bureaucrats. in this setting, pervasive bureaucratic corruption was pre-given and determined by exogenous factors, such as: large corruption rents (population growth increased economic surplus available for corruption), and low probability to be detected (large size and heterogeneity rendered the detection of corruption particularly difficult). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 37 | p a g e as in the fractious period, it is still the case that local elite extracted the farmers, rather than central emperors. kiser and tong (1992), brandt etal. (2014), and ma and rubin (2019) unanimously indicate that the state in late imperial china can best be described as a large dictatorship where excessive exploitation came not from the emperors, but from their agents who had shorter decision horizons and less encompassing interests than the “benevolent” emperors themselves. sng (2014) and sng and moriguchi (2014) also empirically show that norevolt constraint applied only to emperors but not to local bureaucrats. hence, the emperors were motivated not to overtax the population to preempt rebellion, but, on the other hand, his agents had sufficient private incentives to expropriate rent from the farmers. basically, this setting is a typical principal-agent game, in which the sequence of events is as follows: first, the emperors have to set a tax rate low enough to ensure a farmer’s income to be higher than or at least equal to “taxes plus corruption “as shown in equations (13) and (14).second, the nature gives a positive and high-level of𝐶𝑚. at this point, in order to ensure 𝑤∗ ≥0,even though the emperor is a dictator, in practice, he still could hardly obtain any surplus exceeding 𝑦 −(𝑤∗+𝐶𝑚)from a farmer.10therefore, high corruption in the second 10 stage would force the ruler in the first stage to keep taxes low to mitigate the “tyranny at the bottom” effect as referred to by sng (2014).as he shows,“… the qing state taxed lightly. its annual tax revenue between 1650 and 1850 averaged around four billion liters of rice in real terms. this is equivalent to less than 4% of china's hypothetical output in 1800 (sng, 2014, p.118).” more importantly, it is the informal extractions from local bureaucrats that can explain the apparent simultaneity of low tax and insufficient public infrastructure to support modern industrial growth. this makes the source of inefficiency results from bureaucratic corruption rather than factor price manipulation. e. bureaucratic corruption and government inefficiency. bureaucratic corruption inevitably created resource misallocation and governmental inefficiency. for instance, due to the pervasive corruption, the emperors had to implement a vertically integrated monitoring system to avoid corruption. however, the use of the power vertical as a pillar of political order inevitably involved huge agency costs, such as monitoring performance, gathering information, and enforcing decisions, especially at the local level (gel’man and ryzhenkov, 2011). this led to a highly inefficient administrative structure. even the emperors set up multiple layers of bureaucracies in order to ensure the monitoring system, however, the problem is that the monitoring is done by individuals who may themselves be corruptible. this means that more anti-corruption institution, in fact, increased rather than decreased corruption. in the end, nothing gets accomplished since everyone is corruptive. more importantly, this kind of regime of brought about an environment that was inhospitable to the incentive of entrepreneurship (such as business and industry) without which a jump from the traditional technology to the modern technology is not possible. not to mention that the low taxation also led to a sustained decline in public goods provision which caused the military and socioeconomic failures of the 19th century. although some literature identifies the source of the problem as the empire being too large for the principal to effectively monitor the agents’ behaviors, this article emphasizes that the root cause of the failure still lies in the lack of checks on elite power. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 38 | p a g e there has always existed persistent tension between the political structure that maximizes the rents to the elite rulers and the efficient system that reduces transaction costs and encourages growth. for this reason, the system of centralized rule merely replaced the problem of there being a conflict between the central emperors and local lineages with a set of principal-agent problems within a centralized hierarchy (laffont and guessan, 1999; ma, 2012). f. farmers’ position. dynastic struggles largely involved matters between central emperors and local lineages (or bureaucrats), but were completely unrelated to the lives of the farmers. despite the change in the distribution of political power between central and local elites, the farmers’ position remained the same in that their wages were still at the subsistence level, there being no improvement. regardless of whether they were in a strong or weak state, the political institutions were always developed to be beneficial for the ruling elite at the expense of the people. this argument can be verified by the long-run analysis of perkins (1969, pp.16–17) and maddison (2007), which shows that the annual consumption of grain for a chinese farmerconstantlyremained within a range of about 10% on either side of 285 kg from the 13thto the 20th centuries. adam smith even wrote that “the poverty of the lower ranks of people in china far surpasses that of the most beggarly nations of europe. … many thousand families have no habitation on the land, but live constantly in little fishing boats upon the rivers and the canals. the subsistence which they find there is so scanty that they are eager to fish up the nastiest garbage thrown overboard from any european ship.” (wealth of nations, chapter viii, p. 86). v. concluding remarks this article draws on the insights of new institutional economics to investigate the relations among state capacity, taxation, and economic performance in historical china. the results show that, throughout the history of autocratic rule, most of the agricultural surplus was extracted by the elites in the form of factor price manipulation or corruption. however, regardless of whether the political power was concentrated at the central or local level, the backward outcome of bureaucratic governance would emerge. based on unfavorable outcome, our results imply that efficient resource allocation requires an environment that allows a well-functioning political replacement mechanism to control the power of the rulers and to ensure tax revenues are used for the provision of public goods. therefore, the insight is not whether or not a high tax can promote growth, but rather whether the political regime is extractive or not. this provides a solid framework to explain why the governments of developed countries mostly impose significantly high tax burdens, and function better than the weaker states in sub-saharan africa. it also appears that: (1) although china’s historically autocratic framework might be effective in exploiting the potential of a traditional technology and in increasing the ruling elite’s benefit, it cannot ensure the welfare of the public; and (2) the same setting has given rise to an environment that is inhospitable to the incentive of entrepreneurship without which a jump from the traditional technology to the modern technology is not possible. references acemoglu, d. 2005. “politics and economics in weak and strong states.” journal of monetary economics 52(7): 1199–1226. acemoglu, daron. 2006. “modeling inefficient institutions.” in advances in economics and econometrics: theory and applications, ninth world congress, vol. 1, 341-380. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 39 | p a g e acemoglu, d. 2010. “institutions, factor prices, and taxation: virtues of strong states? “american economic review 100(2): 115–119. barro, r. 1990. “government spending in a simple model of endogeneous growth.” journal of political economy 98(5): s103-s125. besley, t.j., and t. persson. 2010. “state capacity, conflict and development.” econometrica 78(1): 134. brandt, l, d. ma and t.g. rawski. 2014. “from divergence to convergence: reevaluating the history behind china's economic boom.” journal of economic literature. 52(1): 45-123. chang, c.i. 1962. the income of the chinese gentry. seattle: university of washington press. chi, c.t., 1936. key economic areas in chinese history. london: george allen and unwin. elvin, m. 1973. the patterns of the chinese past. stanford, calif.: stanford university press. de bary, w.t. 1993. waiting for the dawn: a plan for the prince, huang tsung-his's ming-i-tai-fang lu. new york: columbia university press. ge, j.x. 2008. 统一与分裂 (unification and fragmentation: lessons from chinese history). beijing: zhonghuashuju. gel’man, v. and s. ryzhenkov. 2011. “local regimes, sub-national governance, and the power vertical in contemporary russia.” europe-asia studies 63 (3): 449-465. heritage foundation. 2015. macro-economic data and index of economic freedom. heritage foundation. available at: https://www.heritage.org/index/explore?view=by-variables ho, c.h. 1990. 中國財經制度史論 (essays on chinese economic and fiscal institutions). taipei: linking publishing. imf. 2014. the fiscal position–sound for now, but significant challenges ahead. luxembourg. selected issues imf country report 14119. kelly, m. 1997. “the dynamics of smithian growth.” quarterly journal of economics 112(3): 939-964. published by: oxford university press kiser, e. and x. tong. 1992. “determinants of the amount and type of corruption in state fiscal bureaucracies: an analysis of late imperial china.” comparative political studies 25(3): 300– 331. mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.heritage.org/index/explore?view=by-variables https://www.heritage.org/index/explore?view=by-variables american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 40 | p a g e kuan, s. (鄺士元). 1992. discussions on history vol. iii (國史論衡第三卷). taipei: li-jen press. laffont, j.j. and guessan, t. n. 1999. “competition and corruption in an agency relationship.” journal of development economics 60(1): 271-95. ma, d. 2012. “political institution and long run economic trajectory: some lessons from two millennia of chinese civilization.” discussion paper no. 8791, centre for economic policy research. ma, d. and j. rubin. 2019. “the paradox of power: principal-agent problems and administrative capacity in imperial china (and other absolutist regimes).” journal of comparative economics 47(1): 277-294. ma, t.c. 2015. “the impact of weather changes on the chinese political regime: a viewpoint from the weak prime minister (從相權的衰落看氣候變遷對中國政治制度的影響).” journal of applied economics《應 用經濟論叢》97(1): 211-259. maddison, a. 2007. chinese economic performance in the long run 960-2030 ad. oecd. moore, b. 1966. social origins of dictatorship and democracy: lord and peasant in the making of the modern world. boston, ma: beacon press. naitō konan (內藤湖南). 1922. “gaikatsutekitō-sō jidai kan概括的唐宋時代觀”， rekishi to chiri《 歷史と地理》9(5): 1 12. needham, j. 1954. science and civilization in china. cambridge, uk: cambridge university press. ni, s., and p. h. van. 2006. “high corruption income in ming and qing china.” journal of development economics 81(2): 316–336. north, d.c. 1981. structure and change in economic history. new york: w.w. norton & co. perkins, d.h. 1969. agricultural development in china 1368-1968. chicago: aldine. perkins, d.h. 1984. agriculture development in china, 1368-1958. (transplanted by h.w., sung 宋海 文等譯：《中國農業的發展，1368-1968 年》，上海：上海譯文出版社，1984）。 quan, hansheng (全漢昇).1972.zhongguojingjishiluncong (中國經濟史論叢). hong kong: new asia institute of advanced chinese studies. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 41 | p a g e rowe, w. 2009. china's last empire: the great qing. cambridge: harvard university press. schaefer, d.f. and m.d. schmitz. 1979. “the relative efficiency of slave agriculture: a comment.” american economic review 69(1): 208-212. smith, a. 1776. an inquiry into the nature and causes of the wealth of nations. carmel, in: library of economics and liberty. sng, t.h. 2014. “size and dynastic decline: the principal-agent problem in late imperial china.” explorations in economic history 54(1):107–127. sng, t.h. and c.moriguchi. 2014. “asia’s little divergence: state capacity in china and japan before 1850.” journal of economic growth (2014) 19(2): 439–470. turchin, p. 2009. “a theory for the formation of large empires.” journal of global history4(2): 191217. un. 2017. tax incentives and tax base protection in developing countries. bangkok: economic and social commission for asia and the pacific (unescap). wang, y. 1973. land taxation in imperial china, 1750-1911. cambridge and london: harvard university press. wittfogel, k.a. 1957. “chinese society: an historical survey.” journal of asian studies 16(3) 343-364. table 1: chinese population and land period (1) (2) (3) population (thousands) land (square kilometers) land per capita (square kilometers) west han (157 bc) 60,000 666 0.11 east han (28 ad) 60,000 655 0.11 jin (236 ad) na 616 na tang (685 ad) 50,900 890 0.15 song (1010 ad) 100,000 483 0.05 ming (1447 ad) 100,300 750 0.07 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 42 | p a g e qing (1711 ad) 130,800 1,284 0.09 * sources: maddison, a. 2007. chinese economic performance in the long run 960-2030 ad. oecd. * although in the qing dynasty, the land per capita (0.09) seems to be larger than that in the song dynasty (0.05), this merely reflects the fact that the qing dynasty’s territory was larger than that of the song dynasty due to the addition of xinjiang (the “new frontier”), which is a remote desert region incapable for cultivation. table 2：classification of the chinese tax system tax based on labor tax based on land spring and autumn xiāngdìérshuāizhēng (相地而衰征) spring and autumn chūshuìmǔ (初稅畝) west han biānhùqímín (編戶齊民) sui and former tang zu yongdiao (租庸調) later tang liǎngshuìfǎ (兩稅法) north song fāngtiánjūnshuìfǎ (方田均稅法) later ming single whip law (一條鞭法) qing de dīngyín (地丁銀) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 1 | p a g e impact of corporate social responsibility on stock prices: a study of nigerian manufacturing firms dr. amina zubairi director, zonal offices coordination department, securities and exchange commission-abuja. abstract: the past three decades have witnessed a substantial surge in corporate social responsibility (csr) investments, driven by growing awareness of the adverse impacts of corporate operations on communities, the environment, and society at large. this has prompted heightened scrutiny from human rights organizations, socially conscious investors, and consumers, especially in the context of multinational companies (mncs). the united nations has also demonstrated its commitment to addressing these concerns, exemplified by the appointment of a united nations special representative for business and human rights in 2005. however, the response from national governments has varied, with some hesitating to articulate clear definitions of csr. this paper explores the evolving landscape of csr, shedding light on the motivations, challenges, and implications for businesses, governments, and society. keywords: corporate social responsibility (csr), multinational companies (mncs), united nations, human rights, environmental impact 1.0 introduction over the last three decades, there has been a significant growth in the investment in corporate social responsibility (csr) both at national and international levels. this is because of the negative effect of corporate operations on the health, culture, economic and social life of the communities within which they operate. as a result, there have been a serious public responses, particularly from the human rights agencies, social investors and customers demanding organizations especially multinational companies (mncs) to control and prevent the negative effects of their activities on the environment (banerjee, 2008). most recently, the concern of the united nation (un) through the appointment in 2005 of a united nation’s special representative for business and human rights, have outstripped the willingness of some national government to confront and more clearly articulate their own understanding of what csr entails (nolan, 2007). csr is a concept with similar processes with corporate responsibility, corporate sustainable development, corporate citizenship, and corporate sustainability. anderson (1989) sees csr as operating a business on reliable, sustainable, and desirable basis that respect ethical values, people, communities, and the environment. while jones and george (2003) see the term as a manager’s duty or obligation to make decisions that nurture, protect, enhance, and promote the welfare and well-being of stakeholders and society as a whole. in the words of european union (eu, 2001), csr is where a corporation integrates social and environmental concerns in their business operations and in their interaction with their stakeholders on voluntary basis, as they are aware that, responsible behavior mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 2 | p a g e leads to sustainable business success. in summary, csr entails some level of responsibility that is not liability for social and environmental issues. mcwilliams and siegel (2001) add that, csr is more than just following the law. while business organizations around the world are increasingly integrating csr into all aspect of their business, critics questioned the legitimacy and value of csr (tsoutsoura, 2004). some of them argue that corporations are inefficient and inappropriate agents of social change and therefore, firms have the sole social responsibility of maximizing the value of shareholders (friedman, 1970; and gelb and stawser, 2001). in another view, csr covers many issues that are traditionally addressed by government, thus, firm’s resources are poorly suited for addressing social and environmental problems (tsoutsoura, 2004). however, in response to these, freeman (1984) argues that, corporate entities have responsibilities to constituent groups that affect and are affected by the activities of the corporations. in addition, preston, (1978); waddock and graves (1997); and mcwilliams and siegel (2001) established a significant positive relationship between csr and financial performance. that is, firms that are involved in csr preformed as well as or better than their counterparts that do not engage in csr (pava and krausz, 1996). similarly, the proponents of csr assert with respect to the view that social and environmental issues are the responsibility of government; that, in view of shifting economic power, corporations should have an increasing role and responsibility for addressing social and environmental problems (tsoutsoura, 2004). in essence, the benefits of engaging in csr by companies includes reputation enhancement, recruiting and retaining high quality workers, charging a premium price and competitive advantage (baron, 2001; bagnoli and watts, 2003). however, one of the leading arguments for csr recently is the internationalization of business operations, that is, the increasing dominance of multinational corporations (mncs) in the developing countries. a pioneer in promoting csr in a development context was united kingdom’s department for international development (dfid) by the establishment of socially responsible business unit in 1997 (jenkins, 2005). other efforts in support of csr in this respect includes: the establishment of codes of conduct for transnational companies by un, the changing view of the development agencies on the objective of development, the creation of united nation development programme (undp); and, the decline in confidence in the role of the government as an agent for development. these together resulted in the creation of un millennium development goals (mdgs) with the goals of eradicating poverty and hunger, achieving universal primary education, reducing mortality and improving health and environmental sustainability (jenkins, 2005). therefore, in view of these and the increasing flows of capital to developing countries by mncs, the development agencies see csr as a tool for achieving the developmental goals. parahalad cited in jenkins (2005) states that mncs could radically improve the lives of people and bring a more stable and sustainable world. although, csr practice comprises of all firms, social and environmental challenges are to a large extent associated with manufacturing firms because of the significant impact of their activities on the modern globalized economic environment. however, in the wake of growing csr concerns by corporate entities both national and multinationals, nigeria and its environs is experiencing increasing social, economic, and environmental difficulties. this is despite of the several manufacturing companies in almost all parts of the country, claiming mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 3 | p a g e investment in csr. nigeria according to un has an estimated population of 155 million as at 2009, with average annual population growth rate of 2.1%, and surface area of 923768 square kilometers (data.un.org). this population density and the abundance of natural resources make nigeria to be an attractive market for many businesses as well as their sources of raw material. ajadi (2006) identified specific drivers of csr in nigeria which include the failure of the government to develop the country, and the history of conflict and waste in the extractive industry in the nigerdelta region. he therefore, suggests that csr activities in nigeria should be aimed at addressing the peculiarity of the social economic development challenges of the country (poverty alleviation, health care provision, infrastructural development, structure and education). prior studies on csr in nigeria focused on the multinational oil and gas companies and other multinationals. this is due to the major impact of oil and gas operations on the environment and the companies are making huge profits from their operations in nigeria. in the same nigerian economy, business organizations are facing infrastructural challenges which include incessant power outage, bad roads, and insecurity of investment and property (osemene, 2012), which make business activities unstable. in his analysis, he argues that manufacturing sector is not sound due to inadequate infrastructure among other factors. moreover, sequel to the social and economic difficulties in nigeria, and in light of the benefits that manufacturing companies are driving from the country, society’s expectations and ethical values are highly expected from the nigerian manufacturing sector. with the re-emergence of csr in the present globalized business environment, particularly in the context of tans-nationalization of business operations and the support of un as well as other social and human rights activists to improve the quality of lives of local communities, through the mechanisms of csr, manufacturing firms in nigeria are claiming csr in their policies and reporting investments in csr activities across different areas in the country. however, firms’ activities particularly those with financial implications have market consequences. hence, the need for understanding how the market response to csr of manufacturing companies in nigeria. 1.1 aim and objectives of the study the main aim of this research is to assess the impact of corporate social responsibility on the market values of listed manufacturing firms in nigeria. while the specific objectives of the research are: i. to examine the impact of corporate social responsibility in society on the market values of listed manufacturing firms in nigeria. ii. to investigate the effect of environmental sustainability activities on the market values of listed manufacturing firms in nigeria. iii. to assess the impact of csr with regard employees on the market values of listed manufacturing firms in nigeria. iv. to examine the effect of csr value maximization on the market values of listed manufacturing firms in nigeria. v. to assess the impact of regulatory compliance on the market values of listed manufacturing firms in nigeria. 1.2 research hypotheses in line with the research objectives, the following hypotheses are formulated in null form; mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 4 | p a g e h01: corporate social responsibility on society has no significant impact on the market values of listed manufacturing firms in nigeria. h02: corporate social responsibility on environmental sustainability has no significant impact on the market values of listed manufacturing firms in nigeria. h03: corporate social responsibility on employees has no significant impact on the market values of listed manufacturing firms in nigeria. h04: corporate social responsibility on value maximization has no significant impact on the market values of listed manufacturing firms in nigeria. h05: compliance with regulatory requirements has no significant impact on the market values of listed manufacturing firms in nigeria. 1.3 scope and significance of the research the increasing concerns about ethical business issues and the demand for socially responsible businesses and how their operations maximizes value in nigeria make this study a necessity. the study is expected to benefit policy makers (government), human rights agencies, the general public, managers, shareholders and researchers. however, the study is restricted to listed manufacturing companies that are involved in the production of chemicals and similar products. the study covers the period of six years (2008-2013). 2.0 literature review 2.1 conceptual analysis although csr defies definition, scholars defined the concept in relation to their understanding and the nature of the social and environmental issues involved. jones (1980) defined csr as the notion that corporations have an obligation to constituent groups in society other than stockholders and beyond the law or union contract, indicating that a stake may go beyond ownership. according to frederick, post and davis (1992) csr is a principle stating that corporations should be accountable for the effect of any of their actions on their community and environment. in view of reder (1994), csr is an allencompassing notion, and refers to both the way a company conducts its internal operations, including the way it treats its workforce, and its impact on the world around it. while hopkins (1998) see the concept as concerned with treating the stakeholders of the firm ethically or in a socially responsible manner. he further explains that stakeholders exist both within a firm and outside and thus socially responsible behavior will increase the human development of stakeholders within and outside the firm. in all of these definitions, csr reflects stakeholders’, social and environmental dimensions. woodward-clyde (1999) defined csr as a contract between society and business wherein a community grants a company a license to operate and in return the matter meets certain obligations and behaves in an acceptable manner. in the same perspective kilcullen and kooistra (1999) defined the concept as the degree of moral obligations that may be ascribed to corporations beyond simple obedience to the laws of the state. in a broader perspective, the world business council for sustainable development (1999) defined csr as the commitment of business to contribute to sustainable economic development, working with employees, their families, and the local communities and society at large to improve their quality of life. while in the words of business for social responsibility (2000) csr means operating a business in a manner that meets or exceeds the ethical, legal, commercial and public expectations that society mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 5 | p a g e has of business. it further states that, social responsibility is a guiding principle for every decision made and in every area of business. and, therefore, csr is achieving commercial success in ways that honour ethical value and respect people, communities and the natural environment. csr according to uk government (2001) refers to the private sector’s wider commercial interests and the requirement to manage its impact on society and the environment in the widest sense. while csr to the european commission (2001), is whereby firms integrate social and environmental concerns in their business operations, and in their interaction with their stakeholders on a voluntary basis. from the same perspective, mcwilliams and siegel (2001) defined csr as actions that appear to further some social good, beyond the interests of the firm and that which is required by law. these definitions reflects stakeholders’ dimension and see csr as voluntary activities. on the contrary, marsden (2001) argues that csr is about the core behaviour of firms and the responsibility for their total impact on the societies in which they operate. he further emphasized that csr is not an optional add-on nor is it an act of philanthropy. and that a socially responsible business is one that runs a profitable business that takes account of the positive and negative environmental, social and economic effects it has on society. lea (2002) sees the concept as voluntary act whereby firms go beyond the legal obligations to manage the impact they have on the environment and society. according to him, the concept covers firm’s employees, suppliers, customers and the community, and the extent to which firm protect the environment. however, the global corporate social responsibility policy project (2003) sees the concept as global corporate social responsibility and defined it as business practices based on ethical values and respect for workers, communities and the environment. van marrewijk (2003) refers corporate sustainability and csr to company activities that include social and environmental concerns in business operations and interactions with stakeholders on voluntary basis. in all these definitions of csr, there are five definitions that are identified which include; environmental dimension, social dimension, economic dimension, stakeholders dimension and voluntariness dimension. however, looking at the political agenda and the initiative of different international organizations, like un global compact and european commission, csr assumed a new dimension. the new dimension is based on the challenge brought about by globalization and internationalization of business operations (aaronson and reeves, 2002b). a review of literature by laura et al (2008) shows that csr public policies and some social and environmental challenges are borne by the transnationalization of business operations in a global economy. based on this, a new concept of csr emerged, that is, csr is the outcome of global business operations, from which corporations will have to take responsibility of their operations on society (zadek et al., 2001). in this regard, csr covers all social and environmental challenges of the transnationalization of business operations, which include welfare state transformation and social governance (laura et al., 2008). in sum, csr in all dimensions entails some levels of responsibilities by corporate organizations that improve social, economic and environmental conditions of the communities within which corporation operate. csr according to reputex (2003) cited in finch (2005) has four major components that together make organization to be socially responsible and also sustainable in the long-run; these are: environmental impact, social impact, workplace practice, and corporate governance. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 6 | p a g e however, zerk (2006) and triple bottom line quoted in norman and macdonald (2003) argue in favour of this and summarized the components of csr with respect to communities as follows: economic, social, and environmental. therefore, for the purpose of this research, the main focus area should be corporate csr activities in the communities in the context of economic, social and environmental contributions. prior researchers have argued and documented a substantial literature on the benefits of csr engagement, which together contribute to better financial performance and the long-term survival of a firm (demacarthy, 2009). according to orlitzky, schimdt and rynes (2003) csr is an organizational resources from which both internal and external benefits can be derived. the internal benefits of csr to corporate organization are that, investments in csr assist in developing new competences, resources, and capabilities that would be reflected in organization’s culture, technology, structure, and human resources (russo & fouts, 1997). in addition, csr assists organization to develop managerial competencies even if the environment is dynamic or complex, because defensive activities necessitate significant employee involvement, firm-wide coordination, and a forward-thinking managerial style (shrivastava, 1995). however, csr in this regard assists management in developing proper process, skills, and information system capable of strengthen the firm readiness to address external changes and crises (russo & fouts, 1997). similarly, under internal benefits perspective of csr, internal competences generated through csr process should lead to efficient utilization of organizational resources (majumdar & marcus, 2001). these internal benefits of csr according to orlitzky et al. (2003) develop internal capabilities and organizational efficiency irrespective of whether csr activities and practices are disclosed to outside stakeholders. on the other hand, a major benefit of csr from external perspective is good organizational reputation. under this view, communication of csr performance levels by firms to external constituents assist in building a positive image with customers, investors, bankers and suppliers (fombrun & shanley, 1990). they further state that, disclosure of high levels of csr involvement by organization is an informational signal from which stakeholders assess organization’s reputation. organization may also use their csr reputation to enhance their relationships with bankers and investors; therefore, csr facilitates access to capital (greening & turban, 2000). moreover, firm’s csr reputation is a mechanism for improving employees’ goodwill, which will lead to an increase financial performance (orlitzky et al., 2003). csr is also considered beneficial according to heal (2004) in terms of conflicts resolution between corporation and society; since most of the conflict between firms and society arise from either discrepancy between private and social costs and benefits, or different perception of what is fair. it is from this perspective that heal (2004) asserts that csr is mechanism through which conflicts between business organization and society can be resolved. by extension, csr is also beneficial in resolving environmental conflicts, that is, through careful response to environmental issues such as greenhouse emission and other environmental pollution (heal, 2004). capital market performance is another benefit of csr involvement, the recent growth of socially responsible investing which is directed to socially responsible firms affect the market position of those firms positively (heal, 2004). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 7 | p a g e sprinkle and maines (2010) see the benefits of csr performance in terms of increased cash inflows to firms or reduced cash outflows. they further lament that, organizations that involved in csr benefits from tax deductions garnered by cash and product donations, similarly, tax credits are provided to socially responsible firms by local, state and federal agencies. these tax credit incentives according to them come in terms of sale-tax exemptions and property-tax abatements. another critical benefit that firms drive from csr engagement is free advertising as a result of csr, that is, organizations that do involve in csr performance receive coverage on local, national and international radio and television, and be the subject of articles in newspapers, trade journals, and magazines (sprinkle & maines, 2010). this should save firms from investing a huge amount of money on advertising and promotional activities. 2.2 review of csr theories agency view of business entity and its responsibility to society was founded by the 1976 nobel memorial prize recipient for economic science ‘friedman’. under this perspective, managers after meeting the financial needs of the firm, they then need to be socially responsible (finch, 2005). according to him, this can be realized through firm’s governance, workplace practices and environmental and social impact and conforming to society’s expectations and ethical values. this idea of using shareholders’ fund to engage in csr was criticized (gelb and stawser, 2001). friedman (1970), states that the business entity is responsible only to its shareholders (owners), and its social responsibility is to maximize the value of the owners. he further stressed that engaging in csr is a sign of an agency problem or a conflict of interest between the agents (managers) and the principal (shareholders). based on this, he concludes that managers use csr as a means of promoting their own social, political or career agenda at the expense of shareholders (mcwilliams and siegel, 2001). however, the emergence of corporate social performance (csp) view in the early 1980s accounted for the shift from the agency view framework. corporate social performance view came to light from the researches by preston (1978) and carroll (1979) whose study documented a csp framework. using the csp framework waddock and graves (1997) tested the csp model and found a positive association between financial performance and csp. this has addressed the silent issue in agency view, where the contention remains that firm’s resources are utilized in csr without any benefit from such action. in another empirical work of pava and krausz (1996) which disproved the notion in agency view that, csr would lead to reduced levels of financial performance, they found opposite and conclude that, socially responsible firms performed as well or better than their counterparts that do not engaged in csr. one of the strength of csp view is the philosophy of social responsiveness, social issues and economic responsibilities (finch, 2005). on the other hand, resource-based view is on similar framework with csp view with the addition that, csp not only increases financial performance but it also adds a competitive advantage to the organizations (finch, 2005). that is, committing resources to csr could improve financial position and the competitive advantage of firm. supply and demand view is credited to mcwilliams and siegel (2001). the proposed a supply and demand framework which entails that, there is a level of csr investment that maximizes profit, while satisfying stakeholder demand is seen as important to maximize profits. this supply and demand mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 8 | p a g e theory of csr places the emphasis on the stakeholders as the primary focus of all csr activities (finch, 2005). stakeholder according to freeman (1984:46) is, “…any group or individual who can affect or is affected by the achievements of organization objectives”. stakeholder theory is built on the notion that firm is not only responsible to shareholders, but other constituents including the society who affect or are affected by the operations of the firm (post and preston, 2002). freeman (1984) further laments that adequate attention to stakeholders interest is critical to firm success, and therefore, management must pursue actions that are optimal for a general class of stakeholders, rather than serving to maximize shareholders interest alone (gelb and stawser, 2001). therefore, recently corporations have changed their attitudes significantly by rejecting agency view and adoptingstakeholders view by integrating csr concept in their corporate strategies (mc williams and siegel, 2001). in this direction, the proponents of stakeholder view assert that csr will lead to the improved financial performance, competative advantage, as well as long-term success (pava and krausz, 1996; russio and fouts, 1997). stakeholders in the context of csr are classified into two; that is, primary and secondary stakeholders (clackson, 1995). wood and jones (1995) see primary stakeholders as those groups that the corporation depends on for its survival. primary stakeholders therefore include the stakeholders, investors, employees, customers, government and the local communities. secondary stakeholders on the other hand, are those constituents that do not engage in any form of transactions with the firm but influence or affect the firm’s operations. this form of stakeholder refers to the natural environment and could be extended to future generation (jensen, 2002, and capron, 2003). considering the stakeholders as an integral part of a business is on the premise of three major roles they play within the business environment (wood & jones, 1995a). stakeholders are the basis of measuring what comprise desirable and undesirable firm’s performance. secondly, they define corporate norms and social behaviour and lastly they evaluate the outcomes of firm’s behaviour in respect of meeting their expectations. therefore, agrawal and maneet (2011) opine that corporations must seek to meet the demands of the stakeholder’s particularly social and environmental issues. it is on this ground that frynas (2005) and ellerman (2001) state that stakeholders should be allowed to have an active role in the firms and communities relationships in projects implementation. for instance, in nigeria there is stakeholders consultation in most of the community development project carried out by multinational oil companies (rowlands, 2003), however, other sectors of the economy are not seem to be taking csr so important to this extent. in this research, stakeholder’s theory is preferred. while stakeholder’s theory remains the logical framework for csr, recently globalization of business operations led to the addition of global economy view to the stakeholders csr framework. the view is on the notion that csr is the consequences of transnationalization of business activities in the globalized economic sense. as a result of this, zadek et al., (2001) opine that csr can best be understaood as a consequence of global business operations, due to which firms will have to take greater account of their impacts on society. this is influence by some factors such as the changing role of government. crane and matten (2004) state that, in the traditional context, government was the dominant and the regulators while the companies are dependent. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 9 | p a g e however, globalization has changed this due to the shift in economic power, that is, the government now has a dependent role while the companies have the dominant role (crane and matten, 2004). the view is supported by the fact that globalization brought about a new economic relationship which span beyond national boundaries. as such, csr is seen as an important tool for creating and integrating global challenges into corporate strategies and governance (zadek, 2001 and midttun, 2004). following global economy view, this research subscribe to global economy view beside stakeholders view. 3.0 research methodology there are two major ways of assessing market reaction to business activities, these are; individual investor’s reaction and aggregate stock market reaction. this study employs the aggregate stock market reaction. this method relates share prices to specific aspect of a firm to draw conclusion about the phenomenon of interest. however, correlation research design is adopted to assess the impact of csr activities on the market values of the listed manufacturing firms in nigeria. the study used secondary data from the financial statements of the sampled firms for the period of six years (2008-2013). the population of this study comprises of all the 48 firms that are into manufacturing of chemicals and other related items listed on the floor of the nigerian stock exchange (nse) market as at 31st december, 2013. however, 19 firms succeeded as the sample size of the study based on two criteria; all the firms that were not in the nse listing for all the period (2008 through 2013) covered by the study were filtered out; and those with difficulties in accessing their data are also dropped. 3.1 technique of data analysis and models specification the study employed ordinary least squares (ols) multiple regression technique of data analysis, after testing the effect of the problems of heteroskedasticity. this is because the traditional ols in the presence of heteroskedasticity provide spurious regression problem that can lead to statistical bias. thus, ols technique is considered in this paper because it is very powerful in statistical estimation, and examining the impact of one variable on another. the analysis is conducted using statistics/data analysis software (stata 11.0). variables measurement and model specification corporate social responsibility is divided into its five main areas (society activities, environmental sustainability activities, employees’ relations, owners’ value maximization and regulatory compliances); while on the other hand, market reaction is proxy by the market values of ordinary shares. the measurements of the variables used in this study are presented in table 1 below; table 1: variables measurements variables measurements market values measured by the share prices 90 days after the end of accounting period society csr measured by total expenditures on the society in the areas of health, education and other things at the end of accounting period, as reported in the financial statements. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 10 | p a g e environmental sustainability measured by total expenditures on the environment in the areas of pollution (air, water and land) and similar environmental problems at the end of accounting period, as reported in the financial statements. employee csr measured by total expenditures on the work force at the end of accounting period, as reported in the financial statements. owners’ wealth maximization measured by returns on equity, net income divided by the total equity. regulatory compliance measured by dichotomous variable, 0 if a firm was reported violating rules and regulations during an accounting period, and 1 for otherwise. industry variable measured by dichotomous variable, 1 if a firm is among the long reputable firms in the nigerian capital market, and 0 for otherwise. the model of the study is mathematically expressed as follows; mktvalit = γ0 + β1soctyit + β2envronit + β3employit + β4ownersit + β5rcomplit + β6indtryit + µit.............................................................................................i where mktvalit = market values per share of firm i in year t soctyit = expenditures on society activities of firm i in year t envronit = expenditures on environmental sustainability of firm i in year t employit = expenditures on employees of firm i in year t ownersit = owners’ value maximization of firm i in year t rcomplit = regulatory compliances of firm i in year t indtryit = industry type of firm i in year t, as control variable intercept = γ0 estimators = β1, β2, β3, β4, β5 & β6 residual = µit all the variables (society, environment and employees) are scaled by assets net book value to address the problem of size differences. 4.0 results and discussions this section covers the analysis and interpretation of the data collected for the study; the section begins with the descriptive statistics and then inferential statistics of the data. 4.1 descriptive statistics this section presents the description of the data collected for the study; the summary of the descriptive statistics of the data collected is presented in table 2 as follows; mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 11 | p a g e table 2: descriptive statistics variables mean sd min max n mktval 63.1259 202.4835 1.5600 1022.00 144 lnmktval 2.1828 1.5746 0.4447 6.9295 144 socty 0.0384 0.0713 0.0017 0.6181 144 envron 0.0214 0.0747 0.0000 0.5576 144 employ 0.3722 0.1149 0.1042 0.6104 144 owners 0.0113 0.0572 -0.1599 0.2215 144 rcompl 0.9737 0.1608 0.0000 1.0000 144 indtry 0.5439 0.5003 0.0000 1.0000 144 source: stata output (appendix 1) table 2 shows that our measure of capital market response to social responsibility activities, market values (mktval) has an average value of n63.12 with standard deviation of n202.48, and minimum value of n1.56 and n1022.00 as the maximum value. the standard deviation of 202.48 suggested that the data deviate from the mean value from both sides by n202.48, implying that there is a wide dispersion of the data from the mean because the standard deviation is higher than the mean. although the sample firms are from different sectors, this could leads to the problem of heterogeneity in the analysis. however, the data is transformed using natural logarithm, which brought the mean value to2.1828 with standard deviation of 1.5746, and the minimum and maximum values of 0.4447 and 6.9295 respectively. the table also shows that the average value of society (socty) expenditure is 0.0384 with standard deviation of 0.0713, and minimum and maximum values of 0.0017 and 0.6181 respectively. that is, on average the sample manufacturing firms spent 3.84% of their net asset on the society during the period, while the minimum and maximum values are 0.17% and 61.81% respectively. the standard deviation of 0.0713 suggested that the data deviate from both sides of the mean value by 0.0713, implying that there is a wide dispersion of the data from the mean because the standard deviation is higher than the mean. the table on the other hand shows that the average value of environmental (envron) expenditure is 0.0214 with standard deviation of 0.0747, and minimum and maximum values of 0.0000 and 0.5576 respectively. that is, on average the sample manufacturing firms spent 2.14% of their net asset on the environmental sustainability during the period, while the minimum and maximum values are 0% and 55.76% respectively. the standard deviation of 0.0747 suggested that the data deviate from both sides of the mean value by 0.0747, implying that there is a wide dispersion of the data from the mean because the standard deviation is higher than the mean value. the descriptive statistics from table 2 indicates that the average value of employees (employ) expenditure is 0.3722 with standard deviation of 0.1149, and minimum and maximum values of 0.1042 and 0.6104 respectively. that is, on average the sample manufacturing firms spent 37.22% of their net asset on their employees during the period, while the minimum and maximum values are 10.42% and 61.04% respectively. the standard deviation of 0.1149 suggested that the data deviate from both sides of the mean value by 11.49%, implying that there is no wide dispersion of the data from the mean value. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 12 | p a g e similarly, the table shows that the average value to the shareholders (owners) is 0.0113 with standard deviation of 0.0572, and minimum and maximum values of -0.1599 and 0.2215 respectively. that is, on average the sample manufacturing firms provide a return on equity of 1.13% during the period, while the minimum and maximum returns on equities are -15.99% and 22.15% respectively. the standard deviation of 0.0572 suggested that the data deviate from both sides of the mean value by 0.0572, implying that there is a wide dispersion of the data from the mean because the standard deviation is higher than the mean value. similarly, table 2 shows that on average 97.37% of the sample manufacturing firms during the period comply with relevant regulations (rcompl), from the mean value of 0.9737 with standard deviation of 0.1608, and minimum and maximum values of 0.0000 and 1.0000 respectively. the standard deviation of 0.1608 suggested that the data deviate from both sides of the mean value by 16.08%, implying that there is no wide dispersion of the data from the mean value. moreover, the table shows that the industry variable (indtry) has an average value of 0.5439 with standard deviation of 0.5003, and minimum and maximum values of 0.0000 and 1.0000 respectively. that is, on average 54.39% of the sample manufacturing firms belong to the most active sectors of the economy. the standard deviation of 0.5003 suggested that the data deviate from both sides of the mean value by 50.003%, implying that there is a wide dispersion of the data from the mean value. therefore, the descriptive statistics of the data collected for the variables of the study shows the nature and the extent of the dispersion of the data, which to a large extent suggested that the data did not follow the normal curve. therefore, the test of data normality is conducted and the results indicate that only the data from the employees and industry variables follow the normal curve (see appendix 2). because the p-values are not significant at all levels of significance, suggesting that the null hypothesis (that, the data is normally distributed) is not rejected. however, a further data reliability test is applied to avoid those factors that could bias our results. hadri langrange multiplier (lm) test for unit root is applied to ascertain whether the data of the variables is stationary or not, the results of the tests is presented in table 3 table 3: unit root test variables no. of panels no. of periods z-statistic p-values mktval 19 6 0.2297 0.4092 socty 19 6 1.7668 0.0386 envron 19 6 0.1101 0.4562 employ 19 6 0.6115 0.2704 owners 19 6 0.3029 0.3810 rcompl 19 6 -1.4457 0.9259 indtry 19 6 -1.1919 0.8834 source: stata output (appendix 3) hadri lm test for panel data employs the null hypothesis that all the panels are (trend) stationery. the results from table 3 show that only socty variable has unit root (that is, non-stationery) from the pvalue of 0.0386. thus, the null hypothesis that the data is stationery is rejected. on the other hand mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 13 | p a g e table 3 indicates all the remaining variables are stationery because the p-values are not statistically significant at all levels of significance. having analyzed the descriptive statistics and normality of the data, the inferential statistics of the data collected from which the hypotheses of the study are tested are presented and interpreted in the following section. 4.2 correlation results in this section, the summary of the pearson correlation coefficients of the variables of the study are presented in table 4 as follows table 4: correlation matrix variables mktval socty envron employ owners rcompl indtry mktval 1.0000 socty 0.5819 (0.0000) 1.0000 envron 0.9300 (0.0000) 0.3841 (0.0000) 1.0000 employ 0.0181 (0.8486) -0.2029 (0.0304) 0.0714 (0.4502) 1.0000 owners 0.7622 (0.0000) 0.0068 (0.9427) 0.8123 (0.0000) 0.1999 (0.0330) 1.0000 rcompl -0.1891 (0.0440) -0.2167 (0.0206) -0.1673 (0.0752) 0.2336 (0.0124) -0.0820 (0.3859) 1.0000 indtry -0.0375 (0.6923) -0.2318 (0.0131) -0.0476 (0.6153) -0.1146 (0.2271) 0.1262 (0.1809) 0.0625 (0.5089) 1.0000 p-values in parentheses source: stata output (appendix 4) the results from table 4 indicate a significant positive association between market values (mktval) and society responsibility (socty) from the correlation coefficient of 0.5819 which is statistically significant at 1% level of significance (pvalue of 0.0000). this result implies that market significantly responded to csr activities of the sample manufacturing firms during the period of the study. that is, csr in terms of society is relevant to the nigerian capital market as indicated by the significant positive relationship in this study. similarly, the results from the table indicate a strong significant positive association between market values (mktval) and environmental sustainability (envron) from the correlation coefficient of 0.9300 which is statistically significant at 1% level of significance (p-value of 0.0000). this result also implies that market significantly responded to csr activities of the sample manufacturing firms during the period of the study. that is, csr in terms of environmental responsibility is relevant to the nigerian capital market as indicated by the significant positive relationship in this study. table 4 indicates a positive association between market values (mktval) and employees’ expenditures (employ) from the correlation coefficient of 0.0181 which is not statistically significant at all levels of significance (p-value of 0.8486). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 14 | p a g e this result implies that market does not significantly respond to csr activities of the sample manufacturing firms during the period of the study, in terms of employees’ responsibility. that is, csr in terms of employee is not relevant to the nigerian capital market as indicated by the insignificant relationship in this study. however, the results from the table indicate a strong significant positive association between market values (mktval) and shareholders’ value (owners) from the correlation coefficient of 0.7622 which is statistically significant at 1% level of significance (p-value of 0.0000). this implies that market significantly responded to csr activities of the sample manufacturing firms during the period of the study, in terms of owners’ wealth maximization. that is, csr in terms of generating value to owners of the business is relevant to the nigerian capital market as indicated by the significant positive relationship in this study. on the contrary, the results from the table indicate a significant negative association between market values (mktval) and regulatory compliances (rcompl) from the correlation coefficient of -0.1891 which is statistically significant at 5% level of significance (p-value of 0.0440). this implies that investors restrained when there is high regulation and this could affect market values negatively. lastly, the result shows a lack of significant association between market values (mktval) and the type of industry (indtry) from the correlation coefficient of -0.0375 which is not statistically significant at all levels of significance (p-value of 0.6923). this implies that the market does not consider industry in the valuation of firms. following the analysis of the relationships among the variables of the study, the regression results from which the hypotheses of the study are tested are presented and analyzed in the following section. 4.3 regression results of the model this section presents and analyzes the regression results of the model as presented in table 5 below; table 5: summary of ols regression results of the model variables statistics p-values r2 0.9581 adjusted r2 0.9558 f-statistic 408.06 0.0000 hettest: chi2 2.66 0.1027 mean vif 2.52 random effect test: chibar2 0.62 0.2157 source: stata output (appendix 5, 6, 7, & 9) this study adopts panel data which does not usually meet all the classical assumptions of ols, as such the study subjected the model to some robustness tests. the results in table 5 show an absence of heteroskedasticity in the panel as indicated by the breuch pagan/cook-weisberg test for heteroskedasticity chi2 of 2.66 with pvalue of 0.1027. that is, the null hypothesis that the variance of the residuals is constant (homocedastic) is not rejected. homocedasticity is an ols assumption that usually leads to best linear unbiased estimators (blue). moreover, the table indicates the absence of the perfect multicolinearity among the explanatory variables, as shown by the mean variance inflation factor (vif) of 2.52. the decision criterion for the vif is that a value of 10 and above implies the presence of perfect collinearity. on the other hand, the table shows from the result of random effect test, breusch and pagan lagrangian multiplier test for random effects, that there is no statistical significant variance among the units in the panel (chibar2 of 0.62 with p-value of mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 15 | p a g e 0.2157), implying that ols technique is the most appropriate for the study. table 5 indicate that the explanatory variables of the study explained 95.58% of the total variations in the dependent variable (market values) of the sample manufacturing firms during the period of the study, from the adjusted coefficient of determinations (adjusted r2 of 0.9558). similarly, the table shows that the model is fit from the f-statistic of 408.06 which is significant at 1% level of significance (p-value of 0.0000). following the fitness of the model, test of hypotheses formulated in this study is conducted in the following section. 4.4 hypotheses testing the study tests the hypotheses formulated for the study, table 4.7 presents the coefficients of the variables of the study from which the hypotheses are tested. table 6: ols estimators variables coefficients t-values p-values socty 0.5879 15.24 0.000 envron 0.6692 10.63 0.000 employ -0.0057 -0.29 0.771 owners 0.3964 8.63 0.000 rcompl 0.0044 0.39 0.695 indtry 0.0068 1.46 0.146 constant 0.0049 0.55 0.584 source: stata output (appendix 5) the results from table 6 show that csr on society (socty) has a significant statistical positive impact on the market values of listed manufacturing firms in nigeria, from the coefficient of 0.5879 with tvalue of 15.24 which is statistically significant at 1% level (p-value of 0.000). this suggests that, a n1 increase in csr on society, market value increases by 58.79k, this implies that csr on society is valued by the market. based on this, the study rejects the null hypothesis one (h01) which states that corporate social responsibility on society has no significant impact on the market values of listed manufacturing firms in nigeria. the study therefore infers that market response positively to the csr on society in nigeria. table 6 also shows that csr on environmental sustainability (envron) has a significant statistical positive impact on the market values of listed manufacturing firms in nigeria, from the coefficient of 0.6692 with t-value of 10.63 which is statistically significant at 1% level (p-value of 0.000). this suggests that, a n1 increase in csr on environmental sustainability, market value increases by 66.92k, this implies that csr on environmental sustainability is value relevant to the market. based on this, the study rejects the null hypothesis two (h02) which states that corporate social responsibility on environmental sustainability has no significant impact on the market values of listed manufacturing firms in nigeria. the study infers that market response positively to the csr on environmental sustainability in nigeria during the period covered by the study. moreover, table 6 indicates that csr on employees (employ) has a negative impact on the market values of listed manufacturing firms in nigeria, from the coefficient of -0.0057 with t-value of -0.29 which is not statistically significant at all levels of significance (p-value of 0.771). this suggests that, a n1 increase in csr on employees, market value decreases by 00.57k, but is not statistically significant. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 16 | p a g e based on this, the study failed to reject the null hypothesis three (h03) which states that corporate social responsibility on employees has no significant impact on the market values of listed manufacturing firms in nigeria. the study therefore infers that market did not significantly response to the csr on the employees in nigeria during the period under review. similarly, the table shows that csr on value maximization (owners) has a significant statistical positive impact on the market values of listed manufacturing firms in nigeria, from the coefficient of 0.3964 with t-value of 8.63 which is statistically significant at 1% level (p-value of 0.000). this suggests that, a n1 increase in csr on owners’ value maximization, market value increases by 39.64k, this implies that csr on owners’ value maximization is value relevant to the market. based on this, the study rejects the null hypothesis four (h04) which states that corporate social responsibility on owners’ value maximization has no significant impact on the market values of listed manufacturing firms in nigeria. the study infers that market response positively to the csr on owners’ value maximization in nigeria during the period covered by the study. table 6 also indicates that csr in terms of regulatory compliances (rcompl) has a positive impact on the market values of listed manufacturing firms in nigeria, from the coefficient of 0.0044 with tvalue of 0.39 which is not statistically significant at all levels of significance (p-value of 0.695). this implies that market did not significantly response to regulatory compliances. based on this, the study failed to reject the null hypothesis five (h05) which states that compliance with regulations has no significant impact on the market values of listed manufacturing firms in nigeria. the study therefore infers that market did not significantly response to the csr in terms of regulatory compliances in nigeria during the period under review. similarly, the table shows that industry has a positive impact on the market values of listed manufacturing firms in nigeria, from the coefficient of 0.0068 with tvalue of 1.46 which is not statistically significant at all levels of significance (p-value of 0.146). these findings implied that there are social investors in the nigerian capital market who value social responsibility activities. the implication here is that, if manufacturing companies would continue to invest in social responsibility especially in the areas of society and environmental sustainability and wealth maximization, their market values could improved significantly. 5.0 conclusion and recommendation this paper examined the how market response to the corporate social responsibility activities of listed manufacturing firms in nigeria. from the results, the study concludes that corporate social responsibility in nigeria is relevant and informative to investors. especially, the study concludes that corporate social responsibility on society; environmental sustainability and owners’ wealth maximization have significantly impacted on the market values of listed manufacturing firms at 99% confidence level during the period covered by the study. the study however did not find evidence that corporate social responsibility on employees and regulatory compliances have any significant relationship with market values during the period under review. the paper recommends that manufacturing companies in nigeria should double their efforts towards corporate social responsibility in nigeria. this could send a positive message to the market and enhance their value in return; it will also help create conducive atmosphere for conducting business. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 17 | p a g e references anderson, j., w., 1989, corporate social responsibility, greenwood press, connecticut. bagnoli, m. and s.g. watts, 2003, “selling to socially responsible consumers: competition and the private provision of public goods,” journal of economics and management strategy, 12(3), 419–445. baron, d.p., 2001, “private politics, corporate social responsibility, and integratedstrategy,”journal of economics and management strategy, 10(1), 7–45. clarkson, m. b. e. 1995. a stakeholder framework for analyzing and evaluating corporate social performance. academy of management review 20: 92–117. carroll, a. b. 1979. a three-dimensional conceptual model of corporate social performance academy of management review 4: 497–505. de macarty, p. 2009. financial returns of corporate social responsibility, and the mora freedom and responsibility of business leaders, business and society review, fall, 2009, vol. 114, no. 3 (forthcoming). frynas j.g., 2005, “corporate social responsibility and stakeholder analysis”, in globa strategic management, mellahi k., frynas j. g., finlay p., chapter 4. finch, n. 2005. the emergence of csr and sustainability indices, macquarie graduate school of management fombrun, c. & shanley, m. 1990, “what’s in a name? reputation building and corporate strategy”, academy of management journal, vol. 33, no.2, pp. 233-258. freeman, r. 1984. strategic management: a stakeholder perspective. boston: pitman. friedman, m. 1970. the social responsibility of business is to increase its profits. new york times magazine, sept. 13: 122-126. frederick w, post j, davis ke. 1992. business and society. corporate strategy, public policy, ethics, 7th edn. mcgraw-hill: london. gelb d. s., & strawser j. a., 2001, corporate social responsibility and financial disclosures: an alternative explanation for increased disclosure, journal of business ethics, issue 33, volume, 1, pp. 1-13. graves, s. and s.a. waddock, 1994, “institutional owners and corporate socia performance,” academy of management journal, 37(4), 1034–1046. greening, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 18 | p a g e greening, d. and w. turban. 2000. corporate social performance as a competitive advantage in attracting a quality workforce. business & society, 39(3): 254-280. hopkins, m., 2007. corporate social responsibility and international development: is business the solution? earthscan, united kingdom. hopkins m. 1998. the planetary bargain: corporate social responsibility comes of age. macmillan: london. heal, g. (20040 corporate social responsibility. an economic and financial framework, columbia business school jenkins h. 2004. corporate social responsibility and the mining industry: conflicts and constructs. corporate social responsibility and environmental management 11: 23 34. jenkins, h., 2006. small business champions for corporate social responsibility. journal of business ethics 67: 241-251. springer jones t. m. 1980. corporate social responsibility revisited, redefined. california management review 22(2): 59–67. lea r. 2002. corporate social responsibility, institute of directors iod) member opinion survey. iod: london. http://www.epolitix.com/data/companies/images/companies/instituteofirectors/csr_report.pdf mcwilliams, a. and d. siegel. 2001. corporate social responsibility: a theory of the firm perspective. academy of management review, 26(1): 117-127. marsden c. 2001. the role of public authorities in corporate social responsibility. http://www.alter.be/socialresponsibility/ people/marchri/en/displayperson matten d, crane a. 2005. corporate citizenship: toward an extended theoretical conceptualization. the academy of management review 30(1): 166–179. nolan, j. 2007. corporate social responsibility in australia: rhetoric or reality? ajhr 12 (2) osemene, o. f. 2012. corporate social responsibility practices in mobil telecommunications industry in nigeria. european journal orlitzky, m., f. schmidt and s. rynes. 2003. corporate social and financial performance: a metaanalysis. organization studies, 24: 403-441. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 19 | p a g e pava, m.l. & krausz, j. 1996, “the association between corporate social-responsibility and financial performance: the paradox of social cost”, journal of business ethics, vol.15, no.3, pp. 321-357. post j.e., preston, l. e., and sachs s. 2002. redefining the corporation: stakeholder management and organizational wealth. stanford university press: stanford, ca. preston l.e., 1978, “analyzing corporate social performance: methods and results”, in journal of contemporary business, 7, 135-150. reputex, 2003, reputex social responsibility ratings, reputation measurement pty ltd, melbourne. russo, m. and p. fouts. 1997. a resource-based perspective on corporate environmental performance and profitability. academy of management journal, 40: 534-559. tsoutoura, m 2004, corporate social responsibility and financial performance, university of california at berkeley, march. world business council for sustainable development (wbcsd) (jan. 2000), “corporate social responsibility: making good business sense”, geneva. waddock, s. a. and s. graves, 1997, “the corporate social performance–financia performance link,” strategic management journal, 18, 303–317. wood, d. and r. jones. 1995. stakeholder mismatching: a theoretical problem in empirical research on corporate social performance. international journal of organizational analysis, 3: 229-267. zerk, j. a., 2006. multinationals and corporate social responsibility – limitations and opportunities in international law. uk: university press cambridge. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 46 | p a g e striking a balance: capital, risk, and efficiency in the evolution of cameroonian banking 1samuel emmanuel mbong, 2felicity amina tchinda 1,2department of monetary economics and banking, faculty of economics and management, university of ngaoundéré, cameroon. doi: https://doi.org/10.5281/zenodo.10619106 abstract: cameroon, a member of the community of central african states (cemac), underwent transformative financial reforms during the 1990s in response to the economic and banking crisis of the late 1980s and the structural adjustment program (sap) initiated under the influence of the international monetary fund (imf). these reforms, positioned as a strategic component of the sap, aimed to cultivate more efficient, resilient, and extensive financial systems. advocates of these measures envisioned substantial economic benefits, envisioning enhanced bank efficiency and effectiveness for a more proficient mobilization and allocation of resources across diverse economic activities. this study delves into the multifaceted reforms executed in cameroon, emphasizing their focal points on governance, risk management, and banking efficiency. the key components included financial deregulation, restructuring of banks, and bolstering capitalization to fortify banking soundness. the primary goal was to foster an environment conducive to improved economic performance and resource allocation. over the ensuing decades, these initiatives induced profound structural and institutional shifts within cameroon's banking sector, reshaping the governance landscape for banks operating in the country. the analysis traverses the evolution of the banking industry in cameroon, meticulously examining the impacts of the implemented reforms. it scrutinizes the alterations in governance structures, risk management practices, and overall efficiency within the banking sector. the study unfolds the dynamics of financial deregulation, the restructuring of banks, and enhanced capitalization as integral components influencing the soundness and efficacy of banking operations in cameroon. as the financial landscape of cameroon evolved, this study underscores the intricate interplay of governance, risk management, and efficiency in shaping the trajectory of the banking industry. by elucidating the transformative journey propelled by these reforms, the study contributes to a nuanced understanding of the economic and institutional shifts that have defined cameroon's banking sector in the wake of the 1990s financial reforms. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 47 | p a g e keywords: financial reforms, banking industry, governance, risk management, economic transformation introduction cameroon is an african country belonging to the community of central african states (cemac). following the economic and banking crisis at the end of the 1980s and as a component of the structural adjustment program (sap) implemented mostly in response to the external pressure of the international monetary fund (imf), this country underwent financial reforms during the 1990s. these reforms were considered as a means to build more efficient, robust and deeper financial systems. indeed, for their proponents, such reforms would bring about significant economic benefits through improved bank efficiency and effectiveness to guarantee a more effective mobilization and efficient allocation of resources among various economic activities. consequently, implemented measures aimed at addressing governance, risk management and more efficiency in banking and were around financial deregulation, banks restructuring and firming up capitalization to improve soundness in banking. as a result, over the last decades, banking industry in cameroon has experienced major structural and institutional transformations that alter governance of banks operating on this country. domestic mergers, acquisitions and increase in foreign capital participation were among major observed structural changes in this country. the last state-owned bank in cameroon was sold in january 2000 and this was the last step in a structural adjustment programmed (sap) recommended by the bretton woods institutions for the country to reach the completion of the highly indebted poor countries initiative (hipc).this initiative was recommended to re-launch the country’s economy after a decade of economic crisis that seriously affected its banks. this crisis also led to liquidation of giants such as cameroon bank, banque meridien, rural development fund and the splitwinding of the bank of credit and commerce of cameroon (bccc), with transfers of its good assets to standard chartered bank of cameroon (scbc). relative to institutional changes going with financial reforms, an attention was given to strengthening the regulatory and supervisory institution. the power to supervise the banking system initially carried out by the cameroonian loans national council (cnc) was transferred to a community institution: the banking commission of central african states (cobac) created in 1992. as a result of this institutional change, observed failure of banks during this period was followed by a raising of the initial capital requirement of commercial banks from cfaf 300 million to cfaf 1 billion and later by an increase of the bank’s minimum capital requirement vis a vis their riskweighted assets, 8 per cent as prescribed by the basle committee of banking in 1995. moreover since the early 1990s, financial liberalization implementation in cameroon, driven by financial deregulation and technological change, has made cameroonian banking markets increasingly mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 48 | p a g e more competitive. as a result, there has been tremendous emphasis on the importance of improved efficiency in the banking sector. but at the same time, this increase in competition could lead to incentives for greater bank risktaking implying potential riskefficiency tradeoffs in cameroonian banking. to address this potential threat to the bank system stability, the banking commission of central african states gave capital adequacy a more preeminent role in the prudential regulatory process. the question then arises of whether or not the level of bank capital has a significant impact on risk-efficiency tradeoffs in cameroonian banking? this question is of real importance in cameroon for at least two reasons: firstly, despite the great number of papers dealing with the issue of whether or not higher capital ratios reduces or increases overall banking risk, this issue remains largely unsolved. moreover, the recent streams of the literature introducing the efficiency of banks into the debate just led to conflicting theoretical hypothesis. for a significant part of researchers convinced by the bad luck hypothesis, increase in risk determined by exogeneous factors negatively affects bank efficiency. conversely, for the proponents of the bad management hypothesis, bank efficiency is determined by internal behavior in banks. therefore, it is the reduction of efficiency caused by bad management that induces increase in bank risk taking. in the third hypothesis (the skimping hypothesis), if this negative relationship between efficiency and bank risk taking donatien and exists in the short term, it turns into a positive one in the long term. as the empirical evidence remains contradictory, this paper will therefore add empirical evidence in the cameroonian context and allow comparisons with what is observed in other countries. furthermore, despite the importance of this topic, with regard to financial instability and systemic bank crises observed in this country during the 90s and recent reported cases of bank distress (imf, 2018), there is a lack of subsequent research to guide bank authorities’ interventions. secondly, despite underwent reforms, if the excess liquidity of banks is a striking feature of the cameroonian banking system at the end of the restructuring process as pointed by avom and eyeffa ekomo (2007), in recent years the question of loan quality and of its implicit risk consequences still occupy a prominent place. in the cameroonian context, the level of non-performing loans first declined from an average of 405 of total credit in 1995 to around 12% at the end of 2006 following the restructuring of the banking sector and the transfer of impaired loans to a loan recovery agency in the late 1990s. but, cameroon’s structurally high ratio of nonperforming loans was later aggravated in the first quarter of 2018 to 15 percent far from observed averages in north america (0.07%), europe and central asia (3.8%) or even sub-saharan africa (11.7%) (imf, 2018). in more recent years and according to cobac statistics, nonperforming loans have increased by 45 billion between 2020 and 2021. this observed increase in bad loans might not rely on the bad luck hypothesis of berger and deyoung (2007) in cameroon. as imf (2018) noted, the cameroonian banking system has proven its resilience to exogeneous shocks even resulting from foreign economic behavior. face to the twin recent oil price mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 49 | p a g e and security shocks, bank reaction was an improvement of prudential ratios. more specifically, after a declining to 9 per cent at the end of 2016, the system wide capital adequacy ratio increased to 10.7% at the end of march 2018 (imf, 2018). indeed, there are variations across banks on meeting the prudential ratios. in 2015 seven banks did not have enough capital to meet capital requirement of the bank commission of central africa states (cobac), and four banks (13% of banks’ total assets) were in distress in 2018 with 3 of them having negative capital. this seems to be in relation with bank ownership. following the restructuring process in the cameroonian banking system, the capital ownership structure was modified in favor of foreign participation. table 1 illustrates the selected banks in cameroon, and the ownerships structure of capital in 2019. this preeminence of foreign capital in banking can potentially expose the country to external shocks, as investors might at any time move their funds to correct imbalances in their domestic economies. but this was not the case in cameroon even during the international financial crisis of subprime. indeed, despite the importance of foreign banks with parents that have been hit, the reaction of commercial banks in cameroon to this external shock was to increase collateral requirements, to widen their spread and refocus their portfolios on blue chip companies and high network clients, making access to credit even more difficult for smes. source: cobac. overall, faced with exogeneous shocks, the reaction of banking authorities is, in many cases, to increase capital adequacy ratios to cope with bank risk taking. this shows their adhesion is not only to the idea table 1. ownership structure of capital in selected cameroonian banks (2019). banks government foreign capital domestic capital others bicec 17,50 70 7.5 5 sgbc 25,60 58,06 16,32 afriland 74 4 22 cbc 98,09 1,91 bgfi bank 20 70,69 9,31 ecobank 79,80 9,35 10,85 ubc 54 37 9 uba 17.5 70 7.5 5 scbc 100 scb 2.49 97.51 citibank 99,98% 0,02% mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 50 | p a g e of a negative relationship between bank capital and risk-taking behavior of banks in accordance with traditional theoretical banking models, but also to the idea that such an action can help reaching at the same time more efficiency as required by the reforms. furthermore, by arguing that non-performing loans are not linked to external shocks, imf (2018) implicitly suggests a determining role of the dynamics observed at the very level of cameroonian commercial banks as described by the bad management hypothesis. the following hypotheses can therefore be formulated; h1: increase in bank capital reduces commercial banks’ risk taking in cameroonian banking system h2: there are tradeoffs between bank efficiency and bank risk taking in cameroonian banking system h3: inefficient banks run with higher level of capital in cameroonian banking system. theoretical arguments for a great number of researchers, risk-taking behavior and cost efficiency are adversely related in banking. at least, two alternative theoretical arguments allow the rationality of such a position to be established. firstly, the berger and deyoung (1997)’s bad luck hypothesis in which, an external event increasing the amount of problem loans may result in efforts to service these loans. this implies higher incurred costs. according to this argumentation, such exogenously determined increase in risk therefore impacts negatively the observed cost efficiency of banks: hence the idea of efficiencyrisks tradeoffs in banking. thereby, the causality runs from increase in bank risk due to external shocks to cost efficiency decrease. secondly, the bad management hypothesis in this alternative argument is an increase in the amount of problem loans caused by unwished internal bank behaviors. in such a case, the lower cost efficiency is a signal of poorly performing management, which has also poor control over its loan portfolio. moreover, decrease in efficiency can motivate the bank to boost its risk in order to offset the lost levels of efficiency (nguyen and nghiem, 2015). bank risk taking and efficiency relationships are therefore negative. finally, as noted by tan and floros (2013), a part from credit, poor managerial practice can tarnish banks’ reputation and cause market problems. therefore, and unlike the bad luck hypothesis, in the bad management hypothesis, internal lower cost efficiency leads to an increase in problem loans. unlike the arguments developed so far, let us now differentiate short term from long term consequences. monitoring of loans has an impact on both the amount of non-performing loans and cost efficiency, and this would imply possible intertemporal tradeoff between the quality of loans and the cost efficiency of the bank. in fact, bank may skimp on the resources devoted to underwriting and monitoring loans, reducing operating cost and increasing cost efficiency in the short run. but such a behavior may have an impact on the riskiness of the portfolio in the long run because non-performing loans increase as poorly monitored borrowers fall behind in loan repayment. hencloans monitoring appear to be more efficient in the short term (bashir and hassan, 2017; kolia and papadopoulos (2020). but in the long term, they take on higher risk as this management behavior affects the quality of future mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 51 | p a g e loans. this theoretical position called skimping hypothesis in the literature implies a positive relationship between the considered variables and consequently a rejection of the idea of tradeoffs between efficiency and bank risk taking in banking. source: authors. the mediating effect of risk taking in the capitalefficiency relationship seminal researches to test the alternatives theoretical predictions in any us (berger and deyoung, 1997; kwan and eisenbeis, 1997) or european countries (williams, 2004; altunbas et al., 2007; fiordelisi et al., 2011) yield contradicting results most explained by the differences in econometric methods. an alternative explanation in this paper is that the rationality of capital, risk and efficiency relationships builds both on the long-lasting bank capitalbank risk controversy in the banking literature, and in the more recent idea of bank risk-efficiency tradeoffs. two dominant and opposed hypotheses characterize the capital-risk relationships in the banking literature. for the proponents of negative relationship or proponents of moral hazard hypothesis (lee and hsieh, 2013), banks may have the incentives to increase their portfolio risk and leverage due to moral hazard because financial contracts are incomplete. in fact, bank managers usually exploit the rights of depositors that they primarily favor their interest in managerial compensation and support the benefit of shareholders for their wealth maximization. on the contrary, proponents of the regulatory approach suggest that banks are required to increase their capital in increased risk taking. regulators therefore suggest the positive bank capitalrisk relationship to reduce the problem of bankruptcy owing to higher risk and lower capital. hence, linking these two strands of the banking literature might help to establish the mediating effect of risk in the capital efficiency relationships, connecting definitively the three variables. we clearly distinguish the case tradeoffs hold from the case tradeoffs is rejected. table 2. theoretical bank capital, risk taking and efficiency interlinks. risk-capital negative relationship positive relationship no relationship risk-efficiency (hazard moral hypothesis) (regulatory theory) trade offs bad management hypothesis bad luck hypothesis lower efficiency higher efficiency no effect no trade offs skimping hypothesis higher efficiency lower efficiency no effect no relationship no effect no effect no effect mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 52 | p a g e if the tradeoffs hold and bank capital and risk are related negatively, an increase in capital requirements will result in a deterioration of bank risk taking behavior. the higher level of bank risk will in turn decrease bank cost efficiency. let us now suppose in the same case, a positive capital-risk relationship. an increase in capital requirements in this case improves the bank risk-taking behavior (decrease of risk) and hence, leads to higher bank cost efficiency in the long term. let us now suppose that the bank efficiency-bank risk tradeoffs do not hold. if bank capital and risk are related negatively, an increase in capital requirements improves bank risk behavior. the lowering of risk deteriorates in this case bank cost efficiency. on the contrary, if there is a positive capital-risk relationship, changes in capital requirements affect in the same direction bank risk. therefore, increase in capital requirements results in higher bank cost efficiency. table 2 summarizes the theoretical relationships between the three variables in the banking literature. empirical review bank capital and risk taking empirical evidence on the relationship between capital requirement and risk taking is far from being conclusive. in the case of usa, calem and rob (1999) quantified the effect of capital-based regulation and find that an increased capital requirement, whether flat or risk based, tends to induce more risk taking by ex-ante well capitalized banks that comply with the new standard. in fact, undercapitalized banks took higher risk because the cost of bankruptcy is shifted to deposit insurance. but well capitalized banks also took higher risk because it is more profitable and there is low probability of bankruptcy. koehn and santomero (1980) and kahane (1977) concluded that risk-based capital boosts risk-taking. shrieves and dahl (1992) and jokipii and milne (2011) confirm the positive relationship between capital and risk changes while studying the usa banking data. blum (1999) advocates that capital adequacy requirements increase the riskiness of banks. matajesak et al (2009) favor a positive association between risk-taking and capital ratio in the case of us and 15 european countries. this is also the conclusion of ugwuanyi (2015), who examined the relationship between risk and capital in the post-crisis setting. in contrast, jacques and nigro (1997) and aggarwal and jacques (1998) applied a similar methodology and concluded on an inverse relationship between risk and capital. lee and hsieh (2013) examined the effect of capital ratio on risk-taking of asian commercial banks covering 1994 and 2008. they documented an inverse relationship between risk and capital ratio in support of the moral hazard hypothesis. tan and floros (2013) found an inverse relationship between capital and risk. recent empirical contributions also favor the negative relationship between risk-taking and bank capital (ding and sickles, 2018; jiang et al., 2020). bank efficiency and bank risk if the aforementioned empirical contributions were mainly interested in the relation between risk and capital, for hughes and mester (1998), the stress should also be on the analysis of the tradeoff between mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.tandfonline.com/doi/full/10.1080/23311975.2021.1947557 https://www.tandfonline.com/doi/full/10.1080/23311975.2021.1947557 https://www.tandfonline.com/doi/full/10.1080/23311975.2021.1947557 https://www.tandfonline.com/doi/full/10.1080/23311975.2021.1947557 https://www.tandfonline.com/doi/full/10.1080/23311975.2021.1947557 american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 53 | p a g e risk and efficiency. the result of their empirical test shows a negative relationship between the two variables. more generally, empirical test of the efficiency-risk trade off yields conflicting results in the banking literature. for instance, in examining the same link in a large sample of european banks between 1992 and 2000, altunbas et al. (2007) noted that inefficient european banks seem to undertake less risk. william (2004), le (2018) and tan and floros (2013), in their empirical contributions, confirm this result and suggest that efficiency and risk are adversely related. deelchand and padgett (2009) using a sample of 263 japanese cooperative banks over the period 2003 through 2006, confirm the belief that risk, capital and efficiency are simultaneously determined, but suggest a positive relationship between efficiency and risk in banking as argued in the hazard moral hypothesis. in fact, the results of their research show that inefficient japanese cooperative banks take more risk, contrasting with evidence in europe. this result is also in line with that of kwan and eisenbeis (1997) in the case of us commercial banks. for bashir and hassan (2017) or nguyen and nghiem (2015) the relation is also positive. they argue that banks not spending resources on risk monitoring seem to be more efficient in the short term, but, they take higher risks in medium and long term. bank capital and bank efficiency the empirical evidence on bank efficiency and bank capital also remains mixed even in recent contributions of literature. berger and di patti (2006), in their study of the relationships between capital ratio and profit efficiency in us banking industry over the period 1990-1995, find that higher capital has negative effect on efficiency. also interested by profit efficiency, fiordelisi et al. (2011), using granger tests of causality in a gmm dynamic panel framework, examine the reverse causality between the two variables. their findings emphasize that the less efficient banks tend to take more risk and better capitalized banks perform better in terms of efficiency. however, barth et al. (2013), in their study of whether or not bank supervision, regulation and monitoring enhances or impedes bank operating efficiency in a sample of 72 countries over the period 1992-2007, find that a more stringent capital requirement is marginally and positively associated with bank efficiency. this was also the result of haque and brown (2017)’s study while triki et al. (2017) find this true only for large banks. pasouiras (2008) also states that capital stringency improves efficiency but their result was not robust over all specifications. sufian (2016), in the case of malaysian banks for the period 199-2008 or banker et al. (2010) in the case of korean banking institutions, suggest that efficiency is positively related to capital. pasouira et al. (2009) discuss the impact of capital stringency not only on cost efficiency, but also on profit efficiency. as a result, capital stringency increases cost efficiency and decreases profit efficiency. onio (2017) seems to confirm berger and di patti (2006)’s findings of a negative association between capital and financial performance in the case of european banks. bashir and hassan (2017) state that an increase in capital increases agency costs and the free cash at the disposal of managers, leading to a decrease of efficiency. more recently, djalilov and piesse mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 54 | p a g e (2019), in their study of the impact of bank regulation on bank efficiency, consider 04 regulations: activity restrictions, capital requirements, market discipline and supervisory power. the paper finds bank activity restrictions to be the only regulation improving banking efficiency, using a sample of 21 transition countries for the period 2002-2014. finally, miah and sharmeen (2015) using a sample of banks from year 2001 to 2011 in the case of bangladesh concluded that, capital, risk and efficiency are interrelated. one explanation of such a situation is that, the tree variables could depend on other factors such as moral hazard, asymmetric information, ownership structure and agency problems. materials and methods research design and sample size at the end of 2020, 15 commercial banks operated in cameroun. as the bank population is not large enough, the authors are constraint to test their hypotheses using a small sample. small samples are generally associated with low statistical power and increased margin of errors that can render the study meaningless. furthermore, there is also a possibility of vibration effects with small samples. vibration effects refer to a situation of change of results as a consequence of even minor analytical manipulation. in the case of cameroonian commercial banks, the authors expect a very low sampling variability as commercial banks share the same regulatory environment imposed by the banking commission of central african table 3. sample representativeness. banks capital assets deposits loans bicec 49.1 726,5 602,7 320,9 sgbc 12,5 1055,4 830,2 621,1 afriland 20 1260,1 997,6 603,7 cbc 12 458,1 336,6 311 bgfi bank 20 376,5 250 273,5 ecobank 10 466 369,2 191,7 ubc 20 118,1 57,8 2,8 uba 10 480,6 376,3 136,9 scbc 10 224,3 168,8 93,1 scb 10,5 624 509,5 324,1 sample 174,1 4733,6 4498,7 2878,7 all banks 260,9 7010,7 5398,8 3443,7 percentage 66,84 67,51 83,32 83,59 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 55 | p a g e states (cobac). a major challenge raised notably by van de schoot and miocević (2020) remains however to increase information in data by using reliable measures and a smart sampling approach. in this study, they use a non-probabilistic sampling approach. they therefore excluded five banks because of unavailability of information and data on key variables included in the model. their panel is therefore constituted of 10 banks with yearly data in millions of fcfa from 2014 to 2020 on all the variables included in their econometric model. the authors therefore have enough observations to obtain reliable results when estimating their econometric model. cobac database is used to obtain banks’ balance sheets data and income statements. the financial statements published on the website of each bank are also used to have reliable data on included variables. in this case, data are first converted in fcfa when needed, and then presented in millions of fcfa. in 2020, four of the banks considered in the sample (afriland first bank, sgbc, bicec and scb) remain the most important banks in the cameroonian banking system in terms of activity. these four institutions account for 52% of the banking system's consolidated balance sheet, 54.3% of total loans and 54.5% of total customer deposits. as shown in table 3, taken together, the sample banks represent 83.3% of deposits 83.59% of loans and almost 68% of assets of the whole banking industry. measurement of variables the measure of endogenous variables was discussed briefly (bank risk, capital and efficiency) and included control variables. bank risk measure there is until now no consensus on how to measure bank risk in the literature. if some recent papers are based on insolvency risk (moyo, 2018), (barra and zotti, 2018), others still rely on more traditional measures. insolvency risk is measured by distance to default indicator as follows where and standard deviation of roa. concerning more traditional approaches, the most widely used indicator is portfolio risk. bank risk measure is hereby given by the ratio of riskweighted assets to total assets (jacques and nigro, 1997; rime, 2001; aggarwal and jacques, 2001). the standardized approach to calculating risk-weighted assets consists in multiplying the amount of an asset by the standardized risk weight associated with that type of asset. a high proportion of rwa indicates a higher share of riskier assets. however, a limit generally reported of the risk weighting methodology is that it can be manipulated. liquidity risk is generally measured by the loans to deposits ratio (ldep). banks with higher loans to deposits are usually viewed as riskier due to potential shortage of liquidity. in the cameroonian case, bank excess liquidity observed in recent years does not comply with the use of such indicator. moreover this over-liquidity goes with credit rationing accentuated by the risk aversion of bankers, suggesting that bank risk indicator based on credit risk might be more appropriate in cameroonian banking. this last option includes among others, as in abedifar et al. (2013), tan and floros (2013) or bitar et al. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 56 | p a g e (2018), the possibility to use loan loss reserves as a fraction to total assets as a proxy of credit quality. higher values of this ratio can be a sign of a precautionary reserve policy in the bank or an anticipation high non performing revenues (anginer and demirguc-kunt, 2014). the problem with this ratio in the cameroonian case is that its variations between banks may be related to different banking policies regarding non-performing loans, reserves and write-offs. following bashir and hassan (2017) and kabir and worthington (2017), non-performing loan ratio was used in this paper that is, the non-performing loans as a fraction of total loans as a risk indicator. the advantage of this ratio in cameroonian banking is that it might contain information on risk differences between banks not caught notably by rwa. non-performing loans are measured by loans past due 90 days or more and non-accrual loans and reflect the ex-post outcome of lending decisions. as noted by ding and sickles (2018), higher values of the npl ratio indicate that banks ex-ante took higher lending risk and, as a result, have accumulated ex-post higher bad loans. the measure of capital capital ratio is generally measured in three ways. tier1 risk based ratio based (proportion of total capital to risk-weighted assets), total risk-based ratio (proportionoftier1 and tier2 capital of risk weighted assets) and tier 1 leverage ratio (ratio of tier1 capital on total assets). following nguyen and nghiem (2015) and zheng et al. (2017), the authors calculated capital as the ratio of core capital to total assets (capital adequacy ratio). efficiency scores the authors further computed individual bank efficiency (eff) as the distance of a firm’s observed operating costs to the minimum or ‘best-practice’ efficient cost frontier. efficiency scores are derived using the stochastic frontier approach. based on aigner et al. (1977), the cost function of a firm is as follows: ) (1) where cti represents the bank i total operational costs, yi the vector of quantity of bank output variables and pj the vector of prices of bank input variables. hereby denotes the compound random error. this error is divided into endogenous ( and exogeneous factors ( that influence bank production costs. endogenous factors or inefficiency factors are therefore related to an increase of bank production cost because of an error of management that causes inefficiency. exogeneous factors represent an increase or a decrease of bank cost due to random factors (mistakes on data’s, on measurement of unexpected or uncontrolled factors). are supposed separable. taking the logarithmic form of the relation (2), we then have: ) + + (2) one remaining problem to solve to estimate this relation is that of the functional form of the production function. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 57 | p a g e to measure cost efficiency in cameroonian banking, the authors specify a cost frontier model with two outputs and three inputs. in fact, they suppose that, in this country, bank’s production function uses labor and physical capital to attract deposits. the collected deposits are used to fund loans and other earning assets. inputs and outputs are therefore specified using the intermediation model presented by sealey and lindley (1977). the translog specification of the used cost frontier model (relation 3) is as follows: in this relation, i stands for banks and ctit is the total cost of bank i at the year t where t represents years. as j is an index for labor (lab), physical capital (cap) or financial capital (fin), plabit denotes labor price in bank at the year t, pcapit the price of physical capital of bank at year t and pfinit the remuneration of financial capital of bank i at time t. the authors further noted yit the output of bank i at the year t, v the random error term that incorporates measurements errors and luck and u a firm effect representing the bank inefficiency level, that is the distance of an individual to the efficient cost frontier. indeed, cost efficiency measures the distance of a bank relative to the cost of the best practice bank when both banks produce the same output under the same conditions. the cost efficiency scores are therefore computed as: among sample banks. table 4 recapitulates variables included in the cost function and their measure. table 5 presents the cost frontier estimated efficiency scores in the cameroonian banking. the level of estimated efficiency scores varies all along the study period and between banks. the highest level is attained in 2017. concerning bank analysis, commercial bank cameroon (cbc) with more than 98% state participation in the capital, that was not regulatory compliant in 2009 and goes into a restructuring process and a temporarily management until 2018 is also the less efficient bank of the studied sample. control variables for the explanatory variables the authors used a broad range of bank-specific and country specific variables that are believed to be important in explaining performance and risk. these include loans growth (loang) as rapid loan growth may increase risk and impact adversely on capital and bank efficiency. bank size, through economies of scale, may influence the relationship between capital, risk and efficiency so we control for the assets size of banks (size). big banks, typically hold less capital than smaller banks; they may also be more diversified and gain from other size advantages so it is important to control for this factor. table 6 provides a synthetized description of the variables includes in the system of equation to be estimated. modelling framework (3) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 58 | p a g e the modelling framework adopted to test the hypotheses in this study is based on the various approaches suggested by the strand of the literature aiming to criticize the earlier causality approach proposed by berger and deyoung (1997) in their seminal contribution and implemented by several researchers. as a response to causality approach and taken all together, a significant part of proposed approaches in this empirical literature implicitly suggest that, as bank capital risk and efficiency are determined simultaneously, examining the investigated relationships should best be evaluated in an appropriate system of simultaneous equations, further estimated by efficient estimators (tan and floros, 2013), altunbas et al. (2007), moudud-ul-huq (2019), moudud-ul-huq (2020). the authors therefore specify a system of equations and estimate these using the three stage least squares panel data estimator technique. this allows for simultaneity between banks’ risk, capital and efficiency while also controlling for important other bank specific factors and endogeneity. the system of equations estimated is as follows: (4) (5) (6) the relations (4), (5), and (6) satisfy the order conditions required for the identification in simultaneous equations system. results and discussion bank risk equation results in this equation, the authors are interested by the sign of the capital variable coefficient. if this coefficient is significant and negative, they will assert that hypothesis h1 is validated. the estimated coefficient of bank capital variable (∆capt) is however significantly positive on 5% level, suggesting that the changes in risk and capital are positively related. the hypothesis h1 is therefore not validated. this result is consistent with abbas et al. (2021), but do not confirm the findings of ding and sickles (2018) or jiang et al. (2020). therefore, faced with more stringent capital requirements in difficult times as noted during the 2007 crisis or covid 19 pandemic, commercial banks in cameroon seem to structure their activities in a way to reduce the regulation burden without a corresponding reduction in the underlying risk. this can explain the high level of non-performing loans observed in this country in recent years despite measures taken by cobac. the authors are also interested by the sign and of the coefficient of the efficiency variable. a negative and significant coefficient would indicate that there is a tradeoff between the efficiency and risk and that this is explained by the bad management hypothesis. the results of the risk equation presented in mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 59 | p a g e table 7 do not support any relationship between the changes in bank’s efficiency and bank risk position in cameroonian commercial banking. the coefficient is not statistically significant, albeit negative. this suggests that changes in bank’s efficiency do not lead to changes in bank risk-taking behavior in cameroonian commercial banks. moving to control variables, the change in the bank risk behavior is positively dependent on the net interest margin of a given year. when facing favorable interest rate environment, commercial banks in cameroon might be tempted to increase the amount of loans provided at the expense of decreased quality of such loans. the results also imply that the change in risk variable is determined by the loan growth (significant at 1% level) and bank size (significant at 5% level). large banks are therefore less averse to risk in cameroon. table 4. cost frontier inputs and output description. variable notation description total cost ct total of interest and non interest cost output total loans y gross loans-reserves for loan loss provisions inputs prices price of physical capital pcap expenditures on premises and fixed assets/premises and fixed assets price of labor plab salaries on full time equivalent employees price of borrowed funds pfin interest expenses paid on deposits/total deposits source: authors. table 5. cost frontier efficiency scores in cameroonian banking (%). year mean med sd min max 2014 0.595 0.634 0.114 0.356 0.754 2015 0.660 0.650 0.145 0.448 0.857 2016 0.746 0.749 0.126 0.514 0.897 2017 0.791 0.810 0.075 0.672 0.881 2018 0.727 0.757 0.149 0.420 0.872 2019 0.718 0.759 0.172 0.351 0.859 2020 0.773 0.759 0.095 0.620 0.937 source: author’s calculations based on frontier 4.1. table 6. variables included in the model. variable description mailto:contact@americaserial.com mailto:contact@americaserial.com advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 60 | p a g e eff estimated efficiency scores risk non-performing loans ratio cap capital adequacy ratio size natural logarithm of total assets nim net interest margin roa return on assets loang loans annual’s growth rate source: authors. bank efficiency equation results table 8 presents the results of the second equation in the authors’ system, where the change in the bank’s cost efficiency is the dependent variable. they are interested in the estimated coefficient of the risk variable (∆riskt) since this estimate is related to the bad luck explanation of the tradeoff’s hypothesis between bank efficiency and bank risk-taking behavior. for h2 to be validated, the estimated coefficient of the bank risk variable should be negative. this is the case in table 8. this coefficient is negative with a value of -0.063 and significant at 10% level. they may infer from this that change in bank’s cost efficiency is negatively affected by any change in bank risk taking behavior in cameroon. table 7. risk equation results. variable coef. se t-stat prob c -1.194*** 0.409 -2.917 0.004 ∆cap 0.256** 0.105 2.441 0.016 ∆effic -0.067 0.183 -0.365 0.715 risk (-1) 0.153*** 0.031 4.852 0.000 size 0.044** 0.018 2.418 0.017 loang 1.001*** 0.085 11.725 0.000 source authors calculations based on eview table 8. efficiency equation results. s 12 software. variable coef se t-stat prob c 0.926*** 0.241 3.839 0.000 ∆cap 0.127** 0.056 2.262 0.025 ∆risk 0.063* 0.037 1.675 0.096 effic (-1) -0.972*** 0.134 -7.220 0.000 size -0.009 0.009 -0.969 0.334 source: authors calculations based on eviews 12 software. mailto:contact@americaserial.com advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 61 | p a g e hypothesis h2 is therefore validated. as imf (2018) suggests that exogeneous shocks are not linked to commercial bank risk taking in cameroon, this might be explained by unskilled management that is losing control over both the cost structure of the bank and the administration of its loan portfolio. from the table, it can be seen that the coefficient of bank capital (∆capt) is significant at 5% level and presents a positive sign with a value of 0.012. this result suggests that commercial banks with higher capital operate more efficiently in cameroon. this finding seems consistent with shrieves and dahl (1992), berger and deyoung (1997) altunbar et al. (2007) or more recently haque and brown (2017), but do not support bashir and hassan (2017). based on the estimate of size variable (sizet) coefficient, we might observe that the changes in the cost efficiency are not related to the size of the bank. this might suggest that behavior of the banks with respect to cost efficiency does not vary with increasing balance sheet size. this result is not consistent with the findings of wheelock and wilson (2012) or hughes and mester (2013). capital equation results let us move to the results of the capital equation presented in table 9. the results show a negative and significant relationship between change in capital and change in bank efficiency. inefficient banks run therefore with higher level of capital in cameroonian banking. h3 is validated. the authors also have a negative one with risk taking meaning that capital regulation is not binding strictly in cameroon. in fact, there is a possibility that banks escape from cobac’s measures. banks with significant amount of non-performing loans are forced to provide more provisions leading to consequent evolution of their capital. similarly, as observed in the risk equation, results of the estimation of the capital equation suggest a negative and significant relation with the size of the bank as generally found in the literature and notably by aggrawal et al. (1998) or rime (2001). the change in the bank capital is however not related to the bank’s return on assets in a given year. this last result is not consistent with altunbas et al. (2007) who found that roa and bank capital are sharply and positively related. it therefore seems that banks in cameroon do no rely on earnings in order to increase their capital. table 9. capital equation results. variable coef se t-stat prob c 0.642 0.504 1.273 0.205 ∆effic -0.551** 0.212 -2.591 0.010 ∆risk -0.525*** 0.047 -11.047 0.000 cap (-1) -0.182*** 0.055 -3.274 0.001 size -0.026 0.022 -1.153 0.251 roa 0.028 0.017 1.629 0.105 source: authors calculations based on eviews 12 software. table 10. capability of the model. equation obs parms rmse r-sq fstat p efficiency 54 5 0.131 0.479 12.59 0.000 risk 54 6 0.116 0.535 11.19 0.000 capital 54 5 0.472 0.513 14.27 0.000 mailto:contact@americaserial.com advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 62 | p a g e source: authors calculations. table 10 presents the capability of our model to link efficiency, capital and risk in cameroonian commercial banks. all x2 are significant at 1% level. this means that at least one instrumental variable (iv) has non zero relationship with endogenous variables (efficiency, risk and capital). conclusion in the aftermath of the financial deregulation aiming to improve bank efficiency in cameroon, to address the potential implicit threat to the banking system stability, the central african states banking commission (cobac) placed a more emphasis on bank governance considerations and notably on a more preeminent role of capital adequacy ratios in the implementation of prudential regulation. however, neither theoretical studies nor empirical papers are until now conclusive on the effect of more stringent capital requirements on bank efficiency and risk behavior. in this paper, the interrelationships between risk-taking, capital regulation and efficiency in cameroonian commercial banks were examined. to reach target, based on theoretical contributions and an analysis of the cameroonian context, three hypotheses are formulated: h1: increase in bank capital reduces commercial banks risk taking in cameroonian banking. h2: there are tradeoffs between bank efficiency and bank risk taking in cameroonian banking. h3: inefficient banks run with higher level of capital in cameroonian banking. these hypotheses are tested on a sample of representative cameroonian commercial banks from 2014 to 2020 in a system of simultaneous equations approach. estimation of the system relies on the use of the two stages panel data estimator technique to account for potential endogeneity and simultaneity and small samples approaches. cost technical inefficiency is derived using the computer program named frontier version 4.1 developed by coelli (1996). the authors also use proxy risk taking by a credit risk measure, capital by the capital adequacy ratio and control for bank-level variables that affect the relationship between the three considered variables. as a result, their empirical analysis shows that bank capital does not lead to bank risk taking behavior in cameroonian banking. in fact, there is a positive and significant relationship between the two variables (h1 is not validated). moreover, there is a trade -off between bank risk and bank efficiency in parms=parameters rmse=root mean square error mailto:contact@americaserial.com advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 63 | p a g e cameroonian banking explained by the bad luck hypothesis (h2 is validated). finally, there is a negative impact of change in efficiency on the yearly change in bank capital meaning that inefficient banks run with higher level of capital in cameroonian banking (h3 is validated). therefore, for a better contribution of bank policy to efficiency improvements, banking authorities in cameroon might create conditions of bankers’ regulation arbitrage mitigation. in this sense measures aiming to ensure that no risk spill over from non-regulated financial institutions to the banking system might be privileged. specially, cobac should look at the link between banks and insurance companies and address step-in risk. furthermore, cobac should also develop policies aiming to scrutinize more deeply what bankers do and examine individual transactions to see whether they might be an attempt to play by the rule. there are some limitations of this paper that need to be improved in future research. first, the analysis period is too short; it should be extended. also the sample is limited. it can be extended to cemac countries. secondly, an analysis at the macro-level might help taking into account many economic environmental variables not considered in this study. finally, future researches might take into consideration bank capital structure as the literature suggests significant relationships with bank efficiency or ba conflict of interests the authors have not declared any conflict of interests. 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(2001). capital requirements and bank behavior: empirical evidence for switzerland, journal of banking and finance 25:789805. sealey cw, lindley jt (1977). inputs outputs and the theory of production and cost at depository financial institutions. the journal of finance 32(4):1251-1266. shrieves re, dahl d (1992). the relationship between risk and capital in commercial banks, journal of banking and finance 16:439-457. sufian t (2016). determinants of efficiency in the malaysian banking sector: evidence from semi parametric data envelopment analysis method. studies in microeconomics 4:151-172. tan y, floros c (2013). risk, capital, and efficiency in chinese banking. journal of international financial markets, institutions, and money 26:378-393. mailto:contact@americaserial.com advanced journal of economics and business research https://americaserial.com/journals/index.php/ajebr, email: contact@americaserial.com 67 | p a g e triki t, kuoki i, dhaou mb, calice p (2017). bank regulation and efficiency what works better for africa? research in international business and finance 39:183-205. ugwuanyi g (2015). regulation of bank capital requirements and bank risk taking behavior: evidence from the nigerian banking industry. international journal of economics and finance 7(8). van de schoot r, miocević m (2020). small sample size solutions: a guide for applied researchers and practitioners. taylor & francis. p 284. wheelock dc, wilson pw (2012). do large banks have lower costs? new estimations of returns to scale for us banks. journal of money credit and banking 44:171-199. williams j (2004). determining management behavior in european banking. journal of banking and finance 28(10):2427-2460. zheng c, moudud-ul-huq s, rahman m, ashraf bn (2017). does the ownership structure matter for banks' capital regulation and risktaking behavior? empirical evidence from a developing country. research in international business and finance 42:404-421. mailto:contact@americaserial.com microsoft word 2 proof american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 29 | p a g e the complex interplay of income inequality and tax policy in taiwan 1dr. yen chong and 2professor yu chong 1associate professor, department of economics, chinese culture university. 2professor, department of economics, chinese culture university. abstract: this study delves into the complex relationship between democracy, taxation, and income redistribution, with a focus on blue-collar workers' political preferences. on the surface, one might expect that individuals with lower incomes would advocate for higher taxes and greater income redistribution, but this hypothesis doesn't align with the reality in many democracies where bluecollar workers often support right-wing parties advocating limited redistribution. existing literature provides diverse and inconclusive findings regarding the impact of democracy on tax policies and inequality. to address these discrepancies, this research employs a simplified case study: taiwan's democratization. taiwan's unique political landscape, defined by its relations with china and the sharp ideological divide between the kmt and dpp parties, makes it an ideal setting to explore the interplay between democratic elections and tax redistribution. unlike many democracies, taiwan's political discourse revolves primarily around the issue of "independence vs. reunification" with china, avoiding complicating factors like religious values and cultural differences. by analyzing taiwan's case, this study aims to disentangle the complex web of factors that influence the relationship between democracy, taxation, and income redistribution. the clear political dichotomy in taiwan provides a controlled environment to investigate the impact of national identity on this relationship, akin to conducting a controlled experiment in a well-defined laboratory. keywords: democracy, taxation, income redistribution, blue-collar workers, taiwan, national identity i introduction since the income of poor voters is less than the mean, then hypothetically they should prefer a tax rate of unity and fully redistribute all income to the mean. however, in many democracies, the real fact is that blue-collar workers tend to support right-wing parties despite these parties wanting to limit income redistribution. although the literature attempting to explain this puzzle is expansive, the results are quite diverse for the sake of heterogeneous effects of democracy on tax and inequality as surveyed by acemoglu et al. (2015). for instance, olson (1993), mcguire and olson (1996), and niskanen (1997) show that, when democracy gives poor people the right to vote, their overall tax bills are lower than those in non-democracies. on the other hand, meltzer and richard (1981) argue that an expansion of democracy should lead to greater tax revenues and redistribution. aidt et al. (2006) and aidt and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 30 | p a g e jensen (2009) also use historical panel data of democratization in europe and find robust positive effects of suffrage on tax revenues as a percentage of gdp. there are good reasons for being skeptical about the earlier literature, since the effect of democracy on taxation identified in these models typically fails to “fully” capture the impact of omitted fixed effects, such as religious values, racial discrimination, and other sub-cultural traits. due to the complicated interactions of these factors with democracy, the association between voting and tax redistribution becomes difficult to interpret and inconclusive. to avoid biases from these unobserved heterogeneities, our research uses a particularly simple case taiwan’s democratization -to filter out interactions that are likely to bias the estimates. the case of taiwan is interesting based on its special political relations with china, the bitter ideological contradiction between the country’s two main political parties the kmt (kuomintang, forming the pan-blue coalition) and the dpp (democratic progressive party, forming the pan-green coalition)-and the parties’ supporters. from the perspective of empirical studies, using this case to investigate the relationship between democratic election and tax redistribution is easy and correct as there are not any public debates on left-right dimension, racial discrimination, religious beliefs, and cultural difference in taiwan. the “only” issue that generally matters in taiwan’s politics is “independence vs. reunification” with china, which concerns contested national identities. this dichotomy gives rise to there being only two major political parties in taiwan, with the pro-independence dpp and the anti-independence kmt. this clear and easy framework thus allows researchers to investigate the impact of national identity on the relation between election and taxation in an “other things being equal” environment, almost like a scientist conducting an experiment in a designated science laboratory. we specifically focus on the voter mobilization strategy of both parties and as how tight is the link between income inequality and voting behavior in taiwan? does the electoral competition between the two parties focus on the economic context in which voters’ preferences toward redistribution can be inferred from their incomes? does the importance of non-economic issues (such as national identity) compete or even dominate that of economic redistribution? if so, then how do voters’ preferences on national identity correlate with their socioeconomic status such as income and education? more importantly, do poor voters place greater weight on noneconomic issue preferences than rich voters, as proposed by some marxian thinkers, e.g., roemer (1998)? since these issues cannot be addressed without resorting to micro-level individual voter behaviors, we thus use taiwan social image survey(tsis, hereafter) data and world values survey (wvs, hereafter) data, which cover income, education, and ideology patterns of more than 3,000 adult respondents across taiwan society. finally, our results show in taiwan that poor voters tend to prefer the ideology of national identity rather than material benefits of redistribution, but rich voters want the opposite. this encourages both parties not only to disregard income inequality as a problem, but also to compete at cutting taxes and to offer other rich-friendly policies to cater to the rich. more importantly, our empirical study shows that this is the case in large part, because the median voters in the spectrum of unification/independence are wealthier than the polarized voters of pan-blue and pan-green (or the mean income of the population). this evidence provides an empirical support to the argument of roemer (1998). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 31 | p a g e the remainder of this paper is organized in the following manner. sections ii and iii discuss taiwan’s politics and taiwanese people’s national identity after democratization. section iv models the linkages among income distribution, national identity, and taxation. section v present data description and empirical findings. section vi concludes the paper. ii taxation and inequality after taiwan’s democratization the death of the kmt political strongman, chiang ching-kuo (蔣經國), was a pivot to divide taiwanese politics into two regime types: autocracy and democracy. figure 1 illustrates his death in 1988 as a watershed for the state capacity to tax in taiwan. before democratization, the chiangs’ authoritarian regime empowered the government with enough capacity to enforce tax rules. during the period of autocracy, the ratio of tax to gdp exhibited a pronounced increasing trend due to a centralized strongman governance. however, as taiwan began intensive democratization in the late 1980s, the politics of the island nation presented two critical trends. a. weak state capacity to collect tax. the development of democratization produces extraordinary pressures from various interest groups 淤 engaging in rent-seeking to ensure advantageous tax treatment, especially regarding capital gains. this in turn pushed government tax revenues to exhibit a downward trend from 1988 onwards. figure 1 shows that the ratio of tax revenues to gdp has been on a significant long-term decline since the 1990s due to a series of tax cuts for rich capitalists and landlords, e.g., implementing an integrated income tax system in 1998 (兩稅合一), reducing the land value increment tax by 50% in 2002 and 2004 (土地增值稅減半徵收), permanently reducing the land value increment tax rate in 2005 (調降土地增值稅率), and reducing the rate of inheritance tax and gift tax from 50% to 10% in 2009 (調降遺贈稅率) and the tax rate of dividend income from 45% to 28% in figure 1: ratio of tax revenues to gdp (%) . 2019 5 7 9 11 13 15 17 19 21 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 32 | p a g e notes: the black straight line indicates the year of chiang’s death. the blue line indicates the ratio of total tax to gdp. the dotted line denotes the long-term trend. source: taiwan statistical data book (2017) published by the national development council. even worse, 70% of the increase in taiwanese wealth has resulted from land appreciation and gains in securities, which are subject to low tax rates as well as various tax credits and exemptions. therefore, the de facto income tax rate for capitalists and landlords is merely 8-10%, which is much lower than the maximum income tax rate (40%) or amt (alternative minimum tax, 20%). therefore, a series of tax cuts has reduced the ratio of tax revenue to gdp from 19% in 1990 to 13% in 2016, which is even lower than the 16% for sub-saharan africa (2013 data), not to mention the 26% for the u.s. (2017), 31% for japan (2015), and 34.3% (2017) for oecd countries. b. worsening income distribution. before democratization, the taiwan government used martial law to regulate strikes by workers and to repress trade unions. after democratization, the policies against poor laborers were mostly relaxed or lifted, and hence one would expect an improvement in income distribution when political power shifts to the poorer segments of society through the channel of election. however, after democratization in the 1980s, income inequality in taiwan conversely began to significantly worsen. figure 2 shows that the ratio of the richest 20%’s income to the poorest 20%’s income rose from 4.9 in 1989 to 6.1 in 2017. although various factors influence the growth in the gap between rich and poor (e.g., globalization), there is no doubt that the government’s low tax rate with little redistribution has an important role. iii several stylized facts and national identity this section presents several stylized facts about taiwan politics as follows. a-1. left/right party cleavage is not apparent. most taiwanese people are under the impression that the kmt has an advantage in promoting economic growth, while the dpp’s advantage is in advocating social welfare. the literature of class politics (e.g., hu and lin, 2010) also shows that the bulk of dpp supporters are blue-collar workers, farmers, and self-employed citizens, while kmt supporters are mainly middle-class and capitalists. this can be seen by a question of the wvs survey,in which the respondents are asked to indicate their income positions. the answers are scaled from 1 (lowest income) to 10 (highest income). the evidence shows that the average income rank of panblue voters (5.3) is significantly higher than that of pan-green voters (4.5). the tsis data also show that the median mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 33 | p a g e figure 2: ratio of the richest 20%’s income to the poorest 20%’s income notes: the black straight line indicates the year of chiang’s death. the blue line indicates the ratio of the richest 20%’s income to the poorest 20%’s income. the dotted line denotes the long-term trend. source: database of the directorate-general of budget, accounting and statistics. in order to better serve its supporters, the dpp should theoretically seek to tax the rich and redistribute society’s wealth. however, as previously argued, the real fact is that both parties coincidentally impose a low tax (especially on capital gains) to benefit the rich and hence shift the tax burden to wage earners. therefore, a welldesigned progressive tax system has never appeared in taiwan. both parties implement almost the same policies toward internal affairs, economic development, religion, and justice, except that the dpp opposes teaching chinese history in favor of taiwan history. this means the traditional left-right dichotomy cannot describe taiwanese elections at all. a-2. non-economic dimension increases in importance in taiwan politics. although taiwan society lacks stable “class identification”, its politics are deeply influenced by “national identification”. since 1996, when taiwan held its first presidential campaign, the issue of taiwan independence has especially become the major focus in electoral politics and has dominated the issue of income redistribution. this makes the controversy of ideology as the major factor delineating political parties on either side of the ‘‘taiwan independence/china unification’’ axis. on the other hand, income redistribution becomes the accessory to national identity. this can be seen by the tsis data that show respondents preferring to “maintain status quo indefinitely” decreased from 66.9% to 44.6% between 2009 and 2015. however, respondents who support moving toward independence or unification increased substantially (see table 1). this evidence implies that the conflict of national identity has become more severe in taiwan. table 1: taiwanese voters’ stances on the independence/unification issue monthly income of pan-blue supporters (nt$35,118) is higher than that of pan supporters green ( nt$30,605). 0 1 2 3 4 5 6 7 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 34 | p a g e voters 2009 2010 2015 maintain status quo, but move toward independence 24.70% 21.00% 38.50% maintain status quo indefinitely 66.90% 69.60% 44.60% maintain status quo, but move toward unification 8.50% 9.40% 16.90% sample size 1,043 1,084 1,088 notes: “maintain status quo, but move toward independence” includes both “independence as soon as possible” and “maintain status quo & move toward independence.” “maintain status quo, but move toward unification” includes both “unification as soon as possible” and “maintain status quo & move toward unification.” data are collected from the tsis dataset in 2009, 2010, and 2015. a-3. both parties divergent in taiwan independence, but convergent in low taxes. although both the kmt and the dpp stand together in cutting taxes for the rich, their positions in the spectrum of taiwan independence are quite different. the kmt is opposed to independence and leans toward reunification, while the dpp advocates or at least pays lip service to independence. this can be seen by the perception of the electorate toward both parties. of pangreen voters, 22 + 36 = 58% tend to support taiwan independence as soon as possibleand slowly moving toward independence, while only 2.6 + 8.9 = 11.5% of pan-blue votersagree with these issues (see table 2). one thing worth mentioning is that most panblue voters and non-partisan voterstypically cling to the status quoindefinitely.the tsis survey also shows that most pan-green voters call for a taiwanese national identity, but only few pan-blue voters support unification with china. hence, the real political debate should be “proindependence vs. antiindependence,” rather than “independence vs. unification with china.” based on this evidence, the rest of the paper assumes that both parties have heterogeneous preferences in “taiwan intendance”, rather than “unification with china.” table 2: taiwanese voters’ stances on the independence/unification issue voters pan-green (1) no partisanship (2) pan-blue (3) independence as soon as possible 22.0% 9.5% 2.6% maintain status quo & move toward independence 36.0% 13.4% 8.9% maintain status quo indefinitely 35.3% 69.8% 70.0% maintain status quo & move toward unification 5.0% 5.3% 13.9% unification as soon as possible 1.7% 2.1% 4.6% observation number 897 1,026 1,292 note: the sample covers3,215 respondents surveyed by the taiwan social image survey in the years 2009, 2010, and 2015. a-4. poor voters are concerned more on national identity, but the rich think otherwise. some researchers find little to no significant effect of economic voting on the taiwanese electorate (e.g., hsieh mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 35 | p a g e et al. 1996). to our mind, these studies generally fail to account for the heterogeneity of the electorate. although conforming to their argument that poor and low-educated voters indeed are concerned more about national identity than economic redistribution, the rich and educated voters seem to be more concerned with taxation and reluctant to redistribute their income to the poor. this can be verified by the evidence provided by table3, which uses tsis data to show that the average years of schooling and average monthly income (12.65 years and nt$35,375) of the respondents who believe that national sovereignty is more important than economic interests are significantly lower than those with the opposite view (13.49 years and nt$40,218). moreover, the education and income levels of respondents who support independence or unification as soon as possible (12.32 years and nt$34,151) are lower than those preferring to maintain the status quo currently or indefinitely (13.32 years and nt$39,126). a-5. table 3: education and income level of taiwanese voters with different thinking on cross-strait negotiations prefer economic interests to prefer national sovereignty to national sovereignty or are economic interests concerned with both average years of schooling 12.65 13.49 average monthly t value = 6.36 income (nt$) 35,375 40,218 t value = 2.37 support independence or maintain the status quo unification as soon as possible currently or indefinitely average years of schooling 12.32 13.32 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 36 | p a g e average monthly t value = 4.93 income (nt$) 34,151 39,126 t value = 2.79 notes: all data are collected from the tsis datasets in 2009, 2010, and 2015.the pooled dataset includes 3,215 observations. some rich people admittedly may be indistinguishable from the poor in their preferences on national identity dimension. however, it is reasonable to expect that a sufficient percentage of them cares more about economic redistribution in spite of their political ideology. in order to protect her economic interests, a rich pangreen (or pan-blue) voter would vote for the kmt (or dpp) if the party proposes a relatively low tax rate with little redistribution. hence, perhaps because of loss aversion, there is asymmetry whereby the rich base 淤 their votes primarily on their economic interests, whereas the dimension of religious values is more salient among the poor. at this point, even though the dpp (or kmt) has large numbers of poor pro-independence (or antiindependence) electorate, as long as the sense of national identification is highly salient among these voters, both parties will have strong incentives to sacrifice the material benefits of their poor supporters in order to win the critical support of the rich voters. this unsurprisingly moves the tax policy outcome away from the poor constituency’s ideal point. as indicated by a dpp scholar (chen, 2010), a political consultant of president tsai, although the dpp self-motivates to represent the disadvantaged classes and attempts to change the electoral mobilization campaign from identity cleavage to class cleavage, this approach has not succeeded owing to a growing sense of national identity, which makes taiwan independence become the main focus of the campaign. in order to win the election, even if the dpp wants to move to the left, it still cannot propose a tax policy with a high redistribution rate, since it needs support from the rich voters, especially the ones with a neutral perception of taiwan independence. at this point, the issue of redistribution at best is only a secondary factor in the voting campaigns of taiwan. a-5.low-income voters with strong national identity tend to be dpp supporters. one thing worth emphasizing is that the low-income voters with strong national identity are mostly dpp supporters, as previously described in subsection iii-a-1. in other words, pan-green with a strong sense of national consciousness are generally poorer than panblue or “secular” voters. at this point, if her ideological identity is stronger than her need for redistribution, then she will vote for the dpp no matter how low the tax rate is that the dpp proposes. this gives the dpp an incentive to cut the tax rate in order to please rich voters, even though it wants to turn to the left rather than right. b. why do the poor not expropriate the rich? one of the reasons that the chiang regimes did not extend suffrage is because they believed that, were the poor to be given the vote, they would soon expropriate the rich industrialists. nevertheless, after democratization, taiwan’s suffrage has not engendered the expropriation of the rich through taxation, but rather has seen it go the other way round. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 37 | p a g e when addressing this issue, the literature mostly focuses on the following two explanations: (1) poor voters expect themselves or their children will someday become rich (e.g., piketty, 1995; benabou and tirole, 2006); (2) the poor believe that there would be adverse effects to expropriating the rich, who have productive talents that would cease to be supplied under high tax rates, and all would consequently suffer (e.g., shayo, 2009). however, the literature is hardly applicable to the case of taiwan based on the following two reasons. first, most of these studies are performed under a one-dimensional spatial model, in which the policy space is about tax redistribution and voters’ preferences are driven primarily by their places in the income spectrum. second, even some research studies, such as poole and rosenthal (1991), roemer (1998), and de la o and rodden (2008), treat a democratic election as a two-dimensional issue over redistribution and religion, in which (1) the proletarian voters want more redistribution; while the capitalists want the opposite; or (2) the religious voters want more police, illegalization of abortion, and the death penalty; while the secular voters want the respective opposites. however, in their models, the left and the right always have divergent tax policies in that the left proposes a higher tax rate than the right one. however, taiwan’s election politics are different in that both the dpp and the kmt unanimously converge to the same low tax rate. due to the fierce conflict over taiwan independence, taiwan’s politics neither involves issues regarding religion nor class consciousness, as stressed by those other authors. in other words, “pro-independence vs. antiindependence” is the only issue that matters in taiwan’s politics. in order to explain both parties (especially the dpp) favoring the rich over the poor and their failures to favor a high tax for redistribution, the researchers should focus on the differences in ideological patterns between rich and poor voters. we hence instead propose national identity as a possible explanation for the non-expropriation of the rich in taiwan’s form of democracy. this approach leads to a two-dimensional platform in which political parties compete in a policy space with two issues: taxation (economic dimension) and national identity (non-economic dimension); and both have the potential to interfere with each other. under taiwan’s unique democratic regime, we believe that this specification may help to explain through which channel can national identity lead to reduced support for redistribution. c. national identity. our viewpoint is quite consistent with the marxist argument formalized by roemer (1998), in which the explanation for the reduced support of the proletarian voters for redistribution is that they do not appreciate their economic self-interest in progressive taxation and redistribution. this unawareness provides politicians an opportunity to mobilize the voters more easily around the issue of group identities, causing the equilibrium amount of redistribution to decrease. in fact, a fairly robust literature has shown that non-economic factors (e.g., religion) are surprisingly powerful and stable predictors of voting behavior, whereas the importance of economic factors(e.g., class conflict) continues to decline. for instance, de la o and rodden (2008) show that political religion may generate a “moral puritanism effect,” which induces an electorate to prefer lower redistribution. scheve and stasavage (2006) also argue that religious individuals may prefer lower levels of income redistribution, because they could derive psychic benefits from the religion that serves as a substitute for the welfare state in buffering individuals against adverse life events. basically, this approach highlights a marxian perspective that preferences on non-economic issues that have a mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 38 | p a g e disproportionate pull on the poorest, least educated voters, whereas rich and educated voters are still more concerned with economic self-interest (frank, 2004). based on this line of argument, we believe that national identity can develop to support the formation of “political religion”, especially for poor voters. this implies that individuals with more religion in national identity would have significantly different preferences than secular individuals on both economic and non-economic dimensions, and these differences may become a powerful predictor of differences in their vote choices. d. sociotropic and pocketbook voting. this subsection focuses on individual variations in the levels of education and income that influence voters to vary in their abilities to clearly attribute the responsibility for pecuniary changes to the government. in general, recognizing the linkage between politics and personal well-being requires higher cognitive ability than identifying the political relevance of national identity. well-informed voters can easily link governmental actions and personal economic conditions, while such attribution is more difficult for the less informed (duch, 2001; gomez and wilson, 2006). on the other hand, national identity is to some extent determined by ethnicity and language, which are manifest to anyone (edwards, 2009). therefore, concerning the ability to recognize the impact of politics on an individual’s material interests, pocketbook voting based on personal material interests is stronger among the informed electorate, while non-economic (sociotropic) voting based on national identity is more likely to occur among the less-informed (de la o and rodden, 2008). in taiwan politics, the above argument is supported by choi (2010),who proposes that it is a wellinformed electorate rather than a less-informed one that can be involved in both sociotropic and pocketbook voting, because these voters can assign responsibility for both personal income and national identity to the government. on the other hand, low-educated individuals are less informed at being able to ascertain how governmental policy affects their personal incomes. they thus can only focus more on a sociotropic issue (taiwanese identification), which more or less connects the subethnic cleavage between benshengren (taiwanese people of local origin) and waishengren (taiwanese people of recent china descent). for this reason, sociotropic voting should be more prevalent among the lessinformed electorate. since this cohort constitutes a significant portion of diehard supporters of the dpp and kmt, both parties hence have strong incentives to mobilize voters by highlighting national identity to expand their social bases. iv. two-dimensional voting model this section establishes a two-dimensional model grounded in the previous stylized facts to investigate the roles of national identity and redistribution in the competition between the kmt and the dpp. a. tax and utility. let the space of voters’ traits be σ = 𝑌 × 𝐴, with generic element (𝑦, 𝑎). here, is the set ofy, which is the pre-tax income of an individual, and a, taken to be real number line, is the set of national identity views a. we use the degree of a voter’s support for independence to measure national identity. the higher a is, the more she supports taiwan independence. a voter’s material benefits can be proxied by after-tax income (1 − 𝑡)𝑦 + 𝑘, where t∈[0,1]is the tax rate, and: 𝑘 = (𝑡 − 𝛽 ), (1) in which 𝑦 is the mean of y, and t is a uniform tax rate on income. equation (1) represents a standard model of redistribution financed by distortionary taxation (bolton and roland, 1997; shayo, 2009), in which income taxation involves quadratic deadweight losses. these losses include a tax-levying cost, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 39 | p a g e government corruption, and resource misallocation driven by income tax (e.g., unproductive use of resources, capital and talent outflow, and rent-seeking by interest groups). the model includes two political parties: the dpp represents voters with traits(𝑦 , 𝑎 ); whereas the kmt represents voters with (𝑦 , 𝑎 ).they respectively propose a policy pair τ(𝑡, 𝑧), in which z is the party’s position toward support for taiwan independence. finally, the utility function of a voter with traits (𝑦, 𝑎) over policies is (𝑡, 𝑧; 𝑦, 𝑎), and 𝑎 > 𝑎. b. utility for different patterns of national identity. assume that both parties are heterogeneous in national identity such that, in a hotelling line representation of taiwan independence, the position of dpp (kmt) is denoted by 𝑧 (𝑧 ), and is located at the rhs (lhs) of the spectrum representing 𝑧 > 𝑧 or “pro-independence vs. antiindependence”. furtherassume that both parties are not downsian in that they wish to maximize the probability of winning the election in order to implement proor antiindependence policies.this involves two conflicting incentives: (1) both parties take different ideological preferences and have divergent incentives to adopt a platform that is truthful to their policy preferences; (2) however, since their preferences cannot be translated into real-world policy without winning the election, they thus have the incentive to move toward the middle so as to increase the chances of winning. these contrasting incentives (policy goals and electoral needs) create an outcome of “partial convergence” in that both parties propose similar policy packages except their most favored policies, i.e., proand anti-independence. c. two-dimensional politico-economic model. the dpp claims that it serves the interests of workers and farmers and always wins more votes from the poor than the kmt. however, in the real governance of taxation, the dpp has never adopted a tax policy that expropriates incomes from the rich and gives to the poor. the following twodimensional model modifies the setup of roemer (1998) and uses a voter’s preference to explain why the dpp would not propose a highest possible tax rate (redistribution) at the cost of losing the votes of the better-off individuals. a voter’s optimization problem contains two issues: taxation and national identity. following roemer (1998), we assume that a voter with an ideological view, a, has a utility function toward the government’s ideological position (𝑧; 𝑎) = − 𝛼⁄2(𝑧 − 𝑎) , in which a higher value of 𝑧 implies a more independence-leaning policy. a positive number 𝛼 ≥ 0 is used to measure the salience of the national identity. finally, assume that the voter is risk neutral with the von neumann–morgenstern utility function, and her utility at tax rate t is the post-tax income and the government’s independence policy, z. therefore, at policy (𝑡, 𝑧), the indirect utility function of a voter with the combination of economic income and political preference (𝑦, 𝑎) becomes: (𝑡, 𝑧; 𝑦, 𝑎) = (1 − 𝑡)𝑦 + (𝑡 − 𝛽 )𝑦 − (𝑧 − 𝑎) . (2) a political party chooses tax rate (t) and ideology position (z) to maximize the probability of winning the election, meaning that it must do its best to satisfy the needs of the electorate. differentiation gives the equilibrium conditions in a tie-in electoral vote: δ𝑡 (𝑧 − 𝑎) = (3) δ𝑧 (1 − 𝛽𝑡) − 𝑦 here, 𝑧 = (𝑧 + )⁄2 represents the average of both parties’ attitudes toward independence, and hence𝑧 > 𝑧 > 𝑧 . equation (3) shows that the relationship between t and z depends on the distributions of a and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 40 | p a g e y. when the deadweight losses associated with the income tax is low, 𝛽 ≤ (𝑦 − 𝑦)⁄𝑡𝑦, a poor voter can benefit from the redistribution of higher tax rates: 𝑦 = (1 − 𝑡) + (𝑡 − 𝛽 )𝑦 = (1 − 𝛽𝑡)𝑦 − 𝑦 > 0.(4) however, the following will show that if she prefers being a citizen of the republic of taiwan much more than being a beneficiary of redistribution, then her preference will encourage the dpp to choose a lower tax rate to appeal to rich voters rather than to enforce a high tax redistribution to represent its poor supporters’ economic interests. d.dpp’s electoral strategy toward poor pan-green supporters. using equation (3), one may compute the precondition that a poor pan-green supporter (𝑎 > 𝑧 )will sacrifice her redistribution benefits and vote for the policy package of dpp, 𝜏 (𝑡 ,𝜏 ): δ𝑡 [𝑦 − (1 − 𝛽𝑡)] ≤ 𝑎 − 𝑧, (5) 𝛼δ𝑧 in which δ𝑡 = 𝑡 − 𝑡 < 0 and δ𝑧 = 𝑧 − 𝑧 > 0 . since she is poor and “green”, we have both 𝑦 − (1 − 𝛽𝑡) ̅ < 0 and (𝑎 − 𝑧) ̅ > 0. however, under a downsian model of political competition, regardless of her economic interests, the dpp may choose low tax redistribution to maximize the probability of winning the election, if the following two conditions hold. (1) the non-economic political dimension becomes more salient in the electoral arena(meaning that the value of α is large enough to ensure equation (5)), such that many poor pan-green voters will vote for the dpp even if the dpp sets a tax rate lower than the kmt. (2)the ideologically median voters concern themselves with economic benefits rather than political identity and hate to split their incomes with others. more importantly, as indicated by roemer (1998), they must be wealthier than pan-green voters, andso a low tax rate not only caters to these median voters, but it also will not drive away poor polarized voters. this certainly encourages the dpp to increase z toward a more ideological pole and, in the meantime, to lower taxes to please rich voters. hence, the more salient the national identification (α) issue is, the more likely that the dpp sets a lower rate than the kmt. as to the variable β, equation (5) shows that if low-income voters do not believe that the government is efficient and honest enough to implement redistribution, then an increase in β will discourage the dpp to propose alower tax rate.regrettably, the wvs data show that the ratio of taiwanese respondents who have “quite a lot confidence” in government has significantly dropped from 60.6% in 1995-1999 to 39.4% in 2010 to 2014, implying that it is increasingly difficult for the political parties to cater to poor voters by tax redistribution. e. dpp’s electoral strategy toward ideologically neutral voters. since ideologically neutral voters are in the median position of the independence spectrum, we have 𝑎 − 𝑧 ≅ 0. if the mean wealth of ideologically neutral voters is greater than that of the entire population, [𝑦 − (1 − 𝛽𝑡)𝑦] > 0, and if this cohort is concerned more about the redistribution issue than the others, then the dpp caneasily win their votes by setting δ𝑡 = 𝑡 − 𝑡 ≤ 0to make the following equation hold true: δ𝑡 [𝑦 − (1 − 𝛽𝑡)] ≤ 𝑎 − 𝑧 ≅ 0 (6) 𝛼δ𝑧 again, this unsurprisingly encourages the dpp to propose a lower taxation than that of the kmt. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 41 | p a g e f. kmt’s electoral strategy and stackelberg equilibria. in the same way, we may expect that the kmt will choose the same low tax strategy as that of the dpp. the basic premise is that the “religious” issue is so salient that both parties can do nothing but to propose a low tax rate. this low tax rate equilibrium can be explained by a stackelberg two-stage game. assume that the dpp is the incumbent and the kmt is the challenger, where the challenger moves first. one may solve the game by backward induction and assume that the kmt sets a tax rate . however, no matter how low 𝑡 is, in order to win the election, the dpp will set 𝑡 ≤ 𝑡 to cater to ideologically neutral voters. likewise, the same is true forwhen the kmt is the incumbent. when operationalized as party alternation, hypothetically, if α → ∞, then the convergence of this iteration may generate a unique electoral equilibrium 𝑡∗ = 𝑡∗ = 0. g. an intuitive explanation. suppose that poor voters are concerned more with national identity than income redistribution; while the rich score the other way around. as long as the kmt (dpp) proposes a more antiindependence (pro-independence) policy than the dpp (kmt), there will be a significant number of poor voters who are so pro-independence (anti-independence) that they will not vote for the kmt (the dpp) even if it proposes a higher redistribution rate than that of the dpp (the kmt). given that they prefer ideological orthodoxy to material interest and hold a belief, “vote for the dpp, even if even if it makes us hungry!「肚子餓扁也要投阿扁」”, the dpp predictably will propose a low tax rate, thereby winning the votes of rich voters who are neutral toward independence, but are concerned about a tax increase or redistribution. from a welfare perspective, the dpp’s low taxation strategy not only can help to win the election, but also can maximize the expected welfare of both poor pro-independence and rich anti-redistribution constituents. however, this also makes the pan-green poor voters, who act against their material interests, become addicted to the opiate of ideological identity. v. data description and empirical setting a. two preconditions. this section uses probit analysis to prove two propositions of previous studies: (1)people with higher income and better education tend to be ideologically neutral voters rather than polarized voters (no matter whether pro-independence or anti-independence). the reverse is also true for poor and loweducated voters.(2)people with higher income and better education tend to be concerned more about economic interest than political identity. the reverse is also true. b. data description. the data are drawn from tsis and wvs that collected the information annually on respondents’ age, education, income, their attitudes toward economic opportunity, and political participation. even more favorably, in the years of 2009, 2010, and 2015, the tsis had special issues on “taiwan independence vs. reunification with china,” which provide pertinent information concerning national identity. across these three years, the tsis dataset comprises1,043observations for 2009,1,084 for 2010, and 1,088 for 2015. totally, we have a pooled dataset of 3,215 observations to perform the empirical study. on the other hand, the wvs dataset includes 2,789observations (707 for 1995, 1,125 for 2006, and 957 for 2010). table a-i in the supplemental materials provides the text of the questions for the key variables. tables a-ii, a-iii, and a-iv list the definitions and descriptive statistics of each variable and how they are constructed based on the respondents’ answers to the survey. we now briefly describe variables used in this study. 1.median: this is a binary variable used to denote whether or not the respondent is a median voter in the spectrum of taiwan independence. with reference to questions asked in tsis, there are two related mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 42 | p a g e to political ideology. the first one is regarding national identity in which the respondents are asked to answer the following “thermometer” question: “there are several views on the relationship between taiwan and china. which one do you prefer?” the response categories include (1) independence as soon as possible; (2) maintain status quo & move toward independence; (3) maintain status quo indefinitely; (4) maintain status quo & move toward unification; and (5) unification as soon as possible. the second one regards the preference for taiwan’s relationship with china: “in cross-strait negotiations, which one do you think is more important, economic interests or national sovereignty?” (1) national sovereignty; (2) both; (3) economic interests. we use a respondent’s answers to these two questions to identify if she is a median voter. if her response for the first question is “maintain status quo”[(2)+(3)+(4)] and also her response for the second question is “both” or “economic interests” [(2)+(3)], then she is identified as a median voter, and the observation of her response will be recorded as 𝑀𝑒𝑑𝑖𝑎𝑛 = 1;otherwise,she is a polarized voter, and 𝑀𝑒𝑑𝑖𝑎𝑛 = 0. hence, the median voters are those who prefer to maintain status quo and meanwhile are concerned about economic interests. 2. income and education: we use the monthly income (20k, 40k, 60k, 80k, 100k)9of a respondent as the proxy for the income status of a respondent. rows (1) and (2) in table 4give the mean incomes of median voters and polarized voters. row (5) also shows that the income of the median cohort is significantly higher than that of the polarized cohort.10the same conclusion also applies to the education level (bachelor, senior high, junior high) (see the average years of schooling in rows (6) to (8)). this preliminary evidence seems to indicate that median voters are wealthier and better educated than the polarized ones. table 4: salience of national identity in taiwan (1) mean income of median voters (𝜇 ) nt$40,534 (2) mean income of polarized voters (𝜇 ) nt$35,552 (3) size of median cohort 1,883 (4) size of polarized cohort 1,332 (5) pr (𝜇 ≥ 𝜇 ) 99.99% (6) average level of median cohort’s education (𝑒 ) 13.57 years (7) average level of polarized cohort’s education (𝑒 ) 12.64 years (8) pr (𝑒 ≥ 𝑒 ) 99.99% note: the figures are computed by using the data of tsis. 3. exogenous controls (x): a set of exogenous variables is used to control for possible heterogeneity across observations. these individual-specific variables comprise gender (female),marital status (divorced, married), employment status(unemployment, retired, housekeeper, student), year dummy (2015y,2010y), partisanship (pan-green, pan-blue), ethnicity (aborigine, waishengren, benshengren), and resident districts (eastern taiwan, southern taiwan, central taiwan). c-1. empirical results: neutral voters are wealthier and better educated. we first prove the proposition that higher income and better education tend to influence a voter to be neutral in political ideology. as our dependent variable (median) is binary, we thus use a probit model to estimate the effects of income and education on median. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 43 | p a g e (𝑀𝑒𝑑𝑖𝑎𝑛 = 1〡𝐸𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛, 𝐼𝑛𝑐𝑜𝑚𝑒, 𝑿) = 𝑃(𝑍 ≤ 𝛽 + 𝛽 𝐸𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛 + 𝛽 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝛀𝑿) = 𝐹(𝛽 + 𝛽 𝐸𝑑𝑢𝑐𝑎𝑡𝑖𝑜𝑛 + 𝛽 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝛀𝑿), in which median is a binary dependent variable, e is an individual’s education level, y is her income, and x is a set of control variables.𝑃(𝑀𝑒𝑑𝑖𝑎𝑛 = 1〡𝐸, 𝑌, 𝑿)istheprobability that she is an ideologically neutral voter, given the values of 𝐸, 𝑌, 𝑿. 𝑍 is a standard normal variable (i.e., z ∼ (0, 𝜎 )), and f is a standard normal cdf. table 5 empirical results of the probit model for median model a model b model c coeff m.e. coeff m.e. coeff m.e. intercept 0.307 0.231 0.466 age 0.008** 0.0033 0.008** 0.0030 -0.010** 0.0038 female 0.213** 0.0851 0.234** 0.0933 0.212** 0.0832 divorced 0.096 0.0382 0.147 0.0587 0.099 0.0390 married 0.021 0.0085 0.069 0.0274 0.029 0.0115 9 these income variables are all binary in that, for instance, 20k denotes that the monthly income of a respondent is between nt$20,000 to nt$39,999; while40k denotes income between nt$40,000 to nt$59,999. the reference group is no income and less than nt$20,000. 10 using the central-limit-theorem test, we find that the probability of 𝜇 >𝜇 is at the significance level of 1%. unemployment -0.143 -0.0572 -0.176 -0.0701 -0.159 0.0625 retired 0.081 0.0323 0.106 0.0422 0.074 0.0289 housekeeper 0.000 0.0001 0.004 0.0017 -0.002 0.0009 student -0.036 -0.0145 -0.070 -0.0279 -0.064 0.0253 bachelor 0.257** 0.1024 0.295** 0.1174 0.193* 0.0757 senior high 0.272** 0.1083 0.298** 0.1186 0.224** 0.0881 junior high -0.043 -0.0171 -0.009 -0.0035 -0.066 0.0260 100k 0.289** 0.1152 0.230* 0.0915 0.263** 0.1031 80k 0.163 0.0652 0.141 0.0564 0.126 0.0493 60k 0.133 0.0530 0.161 0.0640 0.131 0.0513 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 44 | p a g e 40k 0.044 0.0175 0.021 0.0082 0.022 0.0086 20k 0.053 0.0212 0.023 0.0091 0.046 0.0181 2015y -0.026 -0.0105 -0.027 -0.0827 -0.017 0.0066 2010y -0.015 -0.0058 -0.083 -0.0332 -0.046 0.0181 pan-green -0.756** -0.3015 -0.738** 0.2896 pan-blue 0.354** 0.1411 0.326** 0.1279 aborigine -0.246 -0.0981 -0.373 0.1463 waishengren 0.507** 0.2018 0.276** 0.1085 benshengren -0.080 -0.0318 -0.048 0.0188 eastern 0.081 0.0322 -0.066 0.0261 southern -0.092 -0.0365 -0.052 0.0206 central -0.021 -0.0085 -0.057 0.0225 notes: if the respondent is a median voter, then the dep. variable=1; otherwise, the dep. variable=0. m.e. is the marginal probability effect. symbols * and ** represent the p-value is smaller than 10% and 5%, respectively. table 5 presents the result of the effects of education and income on median, while controlling for other exogenous variables. the result evidently shows that the highest variable of personal income (100k) has a significantly positive effect on median. in other words, an individual with a monthly income greater than nt$100,000 tends to have no particular interest in national identity (no matter whether anti-independence or pro-independence). in terms of the magnitude of effect size, the likelihood that she will be an ideologically neutral voter is higher than others by 9.15~11.52%. education also has a significantly positive effect to prevent an individual from taking extreme political positions. a college (and above) or senior high graduate voter is more likely to become a median voter than the others by 7.57~11.74% or 8.81~11.86%. this evidence provides concrete support for our proposition that ideologically neutral voters are wealthier and better educated than polarized voters. as to the estimation of other independent variables, the result shows that an individual’s partisanship is important in determining her political view. a respondent voting for the kmt (dpp) camp is more likely to be a median (polarized) voter. this evidence provides some support to our argument that the dpp has more polarized supporters than the kmt. moreover, a voter whose father is a waishengren tends to take a more median political position than those of other groups. finally, a young or female voter is also more likely to be a median voter. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 45 | p a g e c-2. neutral voters are concerned more about economic interests. we now examine if a neutral voter is concerned more about economic interests. as tsis does not explicitly ask participants to rank the importance of economic interests and national identity, we thus turn to wvs, in which two questions are somehow related to our research interests. the first one can be used to assess a respondent’s attitude on whether or not income distribution should be equal. the answers are scaled from 1(completely agree with the statement “income should be made more equal”) to 10 (completely agree with the statement “we need larger income differences as incentives for individual effort”).we take the taiwanese respondents to construct a variable referred to as income difference, which is used to identify if a respondent would like to sacrifice her material interests to reduce income inequality. the second question is used to identify if a respondent expects the government to improve income distribution. the answers are also scaled from 1(completely agree with the statement “government should take more responsibility to ensure that everyone is provided for”) to 10(completely agree with the statement “people should take more responsibility to provide for themselves”). we also use a respondent’s response to construct a variable referred to as personal responsibility, which is used to identify if she desires government policies to reduce income inequality. the larger the values of income difference and personal responsibility are, the less a respondent agrees with tax redistribution. finally, income difference and personal responsibility, taken together, are used to identify if she is a voter who believes in individualism and does not want to redistribute income. if her responses to the two questions are both higher than 5(income difference>5 and personal responsibility>5), then she is identified as an individualistic voter and the observation is recorded as 𝐼𝑛𝑑𝑖𝑣𝑖𝑑𝑢𝑎𝑙𝑖𝑠𝑡𝑖𝑐 = 1; otherwise,𝑛𝑑𝑖𝑣𝑖𝑑𝑢𝑎𝑙𝑖𝑠𝑡𝑖𝑐 = 0. as this dependent variable is binary, we still use a probit model to estimate the effects of income and education on individualistic. table 6 presents the results of the effects of education and income on individualistic, while controlling for other exogenous variables. the results evidently show that the family income has a significantly positive effect on individualistic. an individual in the richest 10% of families is more likely to become an individualistic voter by 22~23% than one in the poorest 10% of families, implying that rich voters tend to support an anti-redistribution party. as to the impact of education on individualistic, a college and above graduate voter (bachelor) also has no interest in reducing income inequality. in terms of magnitude, the likelihood that she will be an individualistic voter is higher than others by 5.86~6.46%. table 6 empirical results of probit model for individualistic model a model b model c coeff m.e. coeff m.e. coeff m.e. intercept -0.878 -1.006 -1.002 age 0.001 0.0004 0.002 0.0005 0.002 0.0005 female -0.009 -0.0033 -0.014 -0.0046 -0.013 0.0044 divorced 0.002 0.0007 0.002 0.0008 0.004 0.0012 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 46 | p a g e married 0.097 0.0349 0.096 0.0324 0.097 0.0329 unemployment -0.086 -0.0310 -0.081 -0.0274 -0.080 0.0272 retired 0.079 0.0284 0.086 0.0291 0.086 0.0290 housekeeper -0.031 -0.0112 -0.028 -0.0096 -0.029 0.0098 student 0.018 0.0064 0.024 0.0081 0.025 0.0085 bachelor 0.163* 0.0586 0.189* 0.0639 0.191* 0.0646 senior high 0.075 0.0269 0.097 0.0327 0.098 0.0333 junior high 0.089 0.0319 0.101 0.0340 0.101 0.0343 household income 0.063** 0.0226 0.064** 0.0216 0.064** 0.0218 2010y -0.116 -0.0419 -0.136* -0.0461 -0.136* 0.0462 2006y 0.025 0.0090 0.015 0.0050 0.014 0.0048 pan-green -0.033 -0.0119 -0.016 0.0054 pan-blue 0.010 0.0036 -0.001 0.0004 aborigine 0.253 0.0853 0.256 0.0866 waishengren -0.036 -0.0121 -0.034 0.0114 benshengren 0.114 0.0384 0.111 0.0377 eastern -0.052 -0.0176 -0.051 -0.0171 southern 0.034 0.0114 0.032 0.0109 central -0.057 -0.0191 -0.057 0.0194 notes: if the respondent is an individualistic voter, then the dep. variable=1; otherwise, the dep. variable=0. m.e. is the marginal probability effect. symbols * and ** represent the p-value is smaller than 10% and 5%, respectively. the evidence above supports our proposition that wealthier and better educated voters are concerned more about their own economic interest. they tend to exhibit individualism, highlight personal functions, and believe that income inequality is one’s personal responsibility and not the government’s. therefore, the government should not pursue income redistribution as a taxation policy. since they generally prefer the median position in the ideological spectrum of taiwan independence, both the dpp and kmt thus have no choice but to reduce taxes in order to cater to these voters. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 47 | p a g e c-3 testing for endogeneity. an individual’s partisanship is influenced by her preference on national identity (median)or economic benefits (individualistic), meaning that the causality might run from median to partisanship, but not in the other direction. this raises an endogeneity concern, since a reverse causality exists between partisanship and median(or individualistic).to address this issue, we apply a two-stage probit model and use subethnic group ethnicity (aborigine, waishengren, benshengren), resident districts (eastern taiwan, southern taiwan, central taiwan)as instrumental variables. the oir test fails to reject the null hypothesis of no endogeneity. since the two-stage estimation may lead to a loss of precision, we still stick to the estimation results presented in tables5 and 6 to preserve estimation efficiency. vi. conclusion this research uses taiwan’s democratization as the research subject to explore the relationship between democratic election and tax redistribution. we first explain that the policies of the kmt and dpp are convergent in terms of a tax cut for the rich, but divergent in the sense that both propose contrasting national identities. in order to explain this, our empirical study shows that, for some low-income voters, the salience of the national identity issue has surpassed that of the income redistribution issue such that national pride is associated with reduced support for redistribution. at this point, both parties have no choice but to reduce taxes in order to cater to rich voters. therefore, under democracy, although the poor are the majority and they vote sincerely, the equilibrium tax rate is still not the tax most favorable to themselves .our result thus provides some support to the marxian argument that the poor— especially the “religious” poor—do not pay attention to their economic interests when voting, whereas the wealthy tend to ignore the national identification dimension and vote based on their own interests. references acemoglu d, s. naidu, p. restrepo, and j. robinson. 2015. “democracy, redistribution, and inequality.” handbook of income distribution. 2: 1885–966. aidt, t.s., dutta, j., loukoianova, e., 2006. “democracy comes to europe: franchise expansion and fiscal outcomes 1830–1938european economic review 50 (2): 249–283. aidt, t.s., jensen, p.s., 2009. “tax structure, size of government, and the extension of the voting franchise in western europe, 1860–1938.” international tax and public finance 16 (3): 362– 394. benabou, r. and j. tirole. 2006. “belief in a just world and redistributive politics.” quarterly journal of economics 12(2): 699–746. bolton, p., and g. roland. 1997. “the breakup of nations: a political economy analysis.” quarterly journal of economics 112(4): 1057-1090. chen, m.t. 2010. ‘‘five-municipal elections and the dpp transition.’’ annual meeting and symposium of the taiwan political science association, taipei: soochow university. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 48 | p a g e choi, e. 2010. “economic voting in taiwan: the significance of education and lifetime economic experiences.” asian survey 50(5): 990-1010. de la o, a. and j. rodden. 2008. “does religion distract the poor?: income and issue voting around the world.” 41(4-5): 437-476. duch, r.m. 2001. “a developmental model of heterogeneous economic voting in new democracies.” american political science review 95(4): 895-910. edwards, j. 2009. language and identity: an introduction. london: cambridge university press. frank, t. 2004. what’s the matter with kansas? how conservatives won the heart of america. new york: metropolitan books. gomez, b. and j. wilson. 2006. “cognitive heterogeneity and economic voting: a comparative analysis of four democratic electorates.” american journal of political science 50(1):127-145. hsieh, j.f., d. lacy, and e. niou. 1996. “retrospective and prospective voting in a one-partydominant democracy: taiwan’s 1996 presidential election,” public choice 97(3): 383–99. hu, k.w. and t.h. lin. 2010. ‘‘the rejuvenation of class politics: taiwan’s democratic consolidation and class votes, 1992–2004.’’ friday forum report, academia sinica, institute of sociology. meltzer, a.m., and s. richard.1981. “a rational theory of the size of government.” journal of political economy.” 89(5): 914–927. niskanen, w.a. 1997. “autocratic, democratic, and optimal government.” economic inquiry. 35(3): 464–79. olson, m. 1993. “dictatorship, democracy, and development.” american political science review. 87:(3): 567–76. mcguire, m. and m. olson. 1996. “the economics of autocracy and majority rule: the invisible hand and the use of force.” journal of economic literature. 34(1): 72-97. piketty, t. 1995. “social mobility and redistributive politics.” quarterly journal of economy 110: a9551–584). poole, k.t., and h. rosenthal. 1991. “patterns of congressional voting.” american journal of political science 35: 228 – 278. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 4, october-december 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 49 | p a g e roemer, r. 1998. “why the poor do not expropriate the rich: an old argument in new garb.” journal of public economics 70 (3):399–424. scheve, k., and d. stasavage, 2006. “religion and preferences for social insurance. quarterly journal of political science 1(3): 255-286. shayo, m. 2009. “a model of social identity with an application to political economy: nation, class, and redistribution.” american political science review 103(2): 147-174. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 1 | p a g e evaluating monetary policy effectiveness: interest rate pass-through in nigeria dr. adeola oyadeyi obafemi awolowo university, ile-ife, osun state, nigeria. abstract: interest rate pass-through, the transmission of central bank policy rate changes to retail bank lending and deposit rates, is a crucial indicator of the effectiveness of monetary policy. this study examines the interest rate pass-through mechanism in the context of nigeria's monetary policy framework. in december 2006, nigeria adopted a new monetary policy approach, replacing the minimum rediscount rate with the monetary policy rate and introducing an asymmetric corridor around this rate. the primary aim was to target the overnight rate and enhance monetary policy effectiveness. this research explores the relationship between the policy rate and retail bank lending and deposit rates, with a focus on the interbank market. it assesses the extent to which changes in the policy rate influence these rates in the short term. a comprehensive analysis of interest rate pass-through is essential for understanding the efficacy of nigeria's monetary policy in controlling inflation, stimulating economic growth, and maintaining financial stability. our findings contribute to the ongoing discourse on monetary policy in nigeria, shedding light on the interplay between central bank actions and retail banking rates. understanding interest rate passthrough is vital for policymakers and financial institutions seeking to navigate the intricacies of monetary policy and achieve macroeconomic stability. keywords: interest rate pass-through, monetary policy, policy rate, retail bank rates, nigeria, interbank market. 1. introduction interest rate pass-through is a description of how the retail bank lending and deposit rates respond to changes in the policy rate. monetary policy is therefore completely effective if the retail and deposit rates respond and adjust completely to changes in the policy rate within the short term (ahmad, aziz, and rummun, 2013). in december 2006, the central bank of nigeria introduced a new monetary policy framework by replacing the minimum rediscount rate with the monetary policy rate. this policy introduced an asymmetric corridor around the policy rate and there was a shift in policy focus to targeting the overnight rate (mordi and adebiyi, 2014). according to ewerhart, cassol, ejerskov, and valla (2004), there is a close link between the interbank rate and the policy rate. this is because the standing deposit and lending facilities of the central bank provide an alternative source of banking sector liquidity compared to the interbank market. therefore, the interbank rate is expected to move in tandem with the policy rate. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 2 | p a g e several studies in the literature have examined the potential effectiveness of interest rate pass-through. some of these studies have found an incomplete pass-through (binning, bjornland and maih, 2017, 2019; mahmood, 2018; sanusi, 2010), while some have found a complete pass-through (grigoli and mota, 2017; mbowe, 2015), and the rest had mixed results (ahmad, aziz, and rummun, 2013; belke, beckmann and verheyen, 2012). the reasons for an incomplete pass-through according to the literature (that is, the demand elasticity of deposits and loans being less than one) can be linked to alternative sources of financing and investments such as investment in government securities (treasury bills and bonds) of similar maturities or equity financing (bangura, 2011; lerskullawat, 2014). other reasons may include the role of asymmetries, a high cost of changing banks (switching costs), and a highly concentrated banking system (de bondt, 2002, 2005). the monetary authorities in nigeria have been using interest rates as its main policy anchor in line with an inflationtargeting framework, but the few studies to consider the extent and effectiveness of interest rate pass-through in nigeria have focused on shorter periods (sanusi, 2010), or using annual data in computing the pass-through (ogundipe and alege, 2013), or a comparative analysis (fomum, 2011). however, a recent study to consider interest rate pass-through in nigeria focused on the pass-through from the policy to the retail rates using a structural break approach (mordi, adebiyi, and omotosho, 2019). in light of the above, this study extends the literature in four main areas. first, the study examined the effectiveness of the policy rate on the interbank (money market) and retail lending and deposit rates, and the effectiveness of the interbank rate on the retail lending and deposit rates since the adoption of the monetary policy rate as the policy anchor. second, the study considered the role of asymmetries in computing the time taken for a change in a central bank’s interest rate to fully reflect on the interbank, retail deposit, and lending rates. third, the study considered the short and long-run dynamic adjustment of two interbank rates and seven retail rates, extending the number of rates covered in previous studies. finally, the study using monthly data, adopted an up-to-date time frame compared to previous studies (sanusi, 2010; fomum, 2011; ogundipe and alege, 2013) to capture recent events in the economy, such as the 2007 capital market splurge, the 2008 financial crises, the periods of fallen crude oil prices and the periods of recession and post-recession. the aim was to examine the effectiveness of interest rate pass-through in nigeria since the monetary policy rate was introduced. an important reason for observing the effectiveness of interest rate pass-through is because if retail and money market rates are perfectly responsive to the policy rate, the economy may be able to achieve its full potential. however, an incomplete pass-through may lead to failure on the part of the monetary authorities to stabilize shocks within an economy (tai, sek, and har, 2012). therefore, the magnitude and speed of these adjustments will determine whether the monetary authorities’ interest rate policies have been effective or not since an effective pass-through is required for effective economic stabilization and inflation control under an inflation targeting strategy. 2. literature review this paper briefly discussed what previous authors have done regarding the topic. the review starts with liu (2019) whose study examined interest rate pass-through in china and the major determinants of lending rates in china. the study found some evidence of interest rate pass-through in china from mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 3 | p a g e money market rates to lending rates; however, this pass-through was negatively affected by shadow banking activities, commercial banks’ asset quality as well as macroeconomic activities. mueller-spahn (2008) empirically examined interest rate passthrough from the capital and money market to retail bank rates in germany. the study found an incomplete passthrough from the capital and money market rates to retail banking rates in germany. frisancho-mariscal and howells (2011) examined interest rate pass-through and risk in the uk since the period of the global financial crises. the study found that the aftermath of the crises affected deposit rates compared to lending rates, leading to higher interest rate spreads in the uk. ahmad, aziz, and rummun (2013) in a similar study on the uk found an incomplete pass-through from the libor rate to four different retail rates in the short run and a fairly complete pass-through in the long run. brunnermeier and koby (2019) examined the impact of reversal interest rates in europe using a dsge framework. the study found out that quantitative easing raised the reversal interest rates and therefore, quantitative easing measures should only be employed if interest rate cuts have been exhausted. binning, bjornland, and maih (2017) also examined interest rate pass-through using a dsge framework. the study found that there was no short-run pass-through, however, pass-through tended to be incomplete in the long run. similarly, binning, bjornland, and maih (2019) also found the same results in their recent study on interest rate pass-through via a dsge framework. however, gregor, melecký, and melecký (2019) carried out a meta-analysis of the literature on interest rate pass-through. they found a lower pass-through in countries that focused on longterm lending rates, while they showed that pass-throughs are more effective in countries that have a welldeveloped financial market and deeper capital markets. gigineishvili (2011) examined the importance of macroeconomic and financial market conditions on the interest rate pass-through process in low-income, advanced, and emerging countries. the study showed that gdp per capita and inflation were major determinants of interest rate pass-through, while banking competition, credit quality, and overhead costs strengthened the interest rate pass-through in all the examined countries. von borstel, eickmeier, and krippner (2015) examined interest rate pass-through in the euro area during the periods of sovereign debt crises. the study found that unconventional monetary policies were useful in reducing lending rates in europe, while conventional monetary policies were unable to lower banks’ marks up. similarly, darracq-paries, moccero, krylova, and marchini (2014) found out that a well-developed financial market devoid of fragmentations is necessary for an effective passthrough. furthermore, van leuvensteijn, sørensen, bikker, and van rixtel (2008) found more competition in the bank loan market compared to her deposit market and they also found a stronger pass-through in more competitive economies in the euro area. also, de bondt (2002) found interest rate pass-through to be more effective in the long term compared to the short term, with the lending rate adjusting faster to the money market rate compared to the deposit rate in the euro area. while belke, beckmann, and verheyen (2012) examined interest rate pass-through in emu countries with mixed results. and most of the european monetary union countries had an incomplete passthrough. siakoulis, petropoulos, lazaris, and lialiouti (2018) also found a lower pass-through during periods of financial crises, and also found interest rate pass-through to be determined by sovereign risk and the financial system of individual country members. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 4 | p a g e in the emerging world, siklar, dogan, and dinc (2016) empirically examined interest rate pass-through in turkey and the resulting pass-through on output and prices. the study although found an incomplete passthrough on retail rates, also had values larger than the pass-through from policy rate to output and prices, which were generally low on the series. amatyakul, taerat, visudtiko, and wongwachara (2019) examined the passthrough using the new loan rate and minimum loan rate as the policy rate in thailand. the study found a more effective pass-through from the new loan rate compared to the minimum loan rate. furthermore, the results showed that firms with large assets and stronger banking relationships had a stronger pass-through, while banks with relatively liquid balance sheets had a weaker pass-through. finally, the study showed that the agricultural sector loans barely responded to an induced policy rate change; however, loan rates attached to the manufacturing sector changed in line with the induced policy rate change. bogoev and petrevski (2012) under a fixed exchange rate system checked the interest rate pass-through in macedonia. the study found that the monetary authorities may witness a limited impact in the short-run, with a slow speed of adjustment. in the long run, however, interest rate pass-through was found to be almost complete. yilmaz, yergin, and oğrak (2018) examined interest rate pass-through in turkey and found a stronger and higher pass-through on the retail interest rates in all cases. miletic and tasic (2015) focused on corporate and household loans in serbia and they found an incomplete pass-through to corporate and household loans in the long run in serbia. grigoli and mota (2017) found a complete pass-through from the policy rate to the lending and deposit rate in the dominican republic. however, sweiden (2011) found a faster pass-through on deposit rates compared to lending rates in jordan. jiri and martin (2018) for the czech republic found a complete passthrough to sme lending but did not find a passthrough for consumer lending. antao (2009) showed that interest rate pass-through to loans was complete in the long run for portugal, while it had an incomplete pass-through with a considerably higher degree to deposits. finally, the study showed that deposit interest rates adjusted faster to equilibrium compared to the lending rates for portugal. ansari (2013) empirically investigated india’s interest rate pass-through with regulatory requirements. the study found out that there could be a trade-off between regulations and the effectiveness of money transmission and that banks can subsidize loans rather than invest in government securities. hsu (2017) also studied the interest rate pass-through in seven asian economies. the study found the lending rates to be stickier, that is, less responsive to the policy rate compared to the deposit rates. while the study found that the pass-through is stronger in more developed economies. furthermore, mahmood (2018) found an incomplete pass-through for pakistan. the study also found out that interest rates were sticky towards a downward adjustment compared to an upward adjustment. mangwengwende, chinzara, and nel (2011) investigated the link between bank concentration and interest rate pass-through in four sub-saharan african countries. the study evidenced some relationships between the concentration of banks and the pass-through in these four countries. the study also showed that bank concentration influenced the magnitude, rather than the speed of adjustment. the study finally supported the structure conduct performance hypothesis and the efficient structure hypothesis. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 5 | p a g e in sub-saharan africa, mbowe (2015) examined the pass-through in tanzania, with a major focus on the pass-through from the policy rate to lending rates. the study found a complete pass-through to the interbank rate, while it found a weak and incomplete pass-through from the policy rate to the deposit rate. however, aziakpono and wilson (2013) found a considerably higher degree of pass-through in the retail rates in south africa. ogundipe and alege (2013) examined interest rate pass-through on retail rates and the macroeconomy at large in nigeria. the study found out that there was a slow and incomplete pass-through; however, the pass-through was slower and weaker on output and prices compared to retail interest rates. sanusi (2010) on nigeria found interest rate pass-through to be characterized by an incomplete degree of pass-through from the policy rate to the interbank and retail lending and deposit rates, however, with a higher degree from the policy rate to the interbank rate compared to the retail lending and deposit rates. the study also showed a higher pass-through to the interbank rates post-consolidation, but the pass-through to retail rates was weaker pre-consolidation. this outcome of an incomplete interest rate pass-through to the lending and deposit rates was reinforced by similar studies such as okello (2014) in uganda, fomum (2011) on nigeria and cameroon, and mordi, adebiyi, and omotosho (2019) using a structural break approach in nigeria. in summary, the reviewed studies showed that interest rate pass-through in the examined countries has mixed outcomes, with some studies exhibiting an incomplete, complete, or overshooting passthrough. hence, this paper will examine interest rate pass-through from the period of the implementation of the monetary policy rate (mpr) as the policy anchor in nigeria. this is to determine the effectiveness of the policy rate on the money market and retail rates. the rest of the paper is designed as follows. section three discusses the approaches to arrive at the objectives. section four analyses and discusses the results, while the final section concludes the paper with some recommendations. 3. methodology our conceptual framework starts from the monte-klein model for bank profit maximization. this model has been previously used by mbowe (2015) and roseline, nyamongo, and kamau (2011). according to the framework, commercial banks have a direct relationship with the central banks and therefore, maximize profit visa-vis their balance sheet. from the balance sheet, assets and liabilities must be equal. loans and reserves are on the asset side, while deposits and settlements with the central bank are on the liability side of the balance sheet. computing this gives our first equation below. r l d s 1 assume commercial banks grant loans at rate il , pays for its deposits at rate id , incurs cost of deposit and loans at mland these banks perform clearing activities with the central bank, the banks with a negative settlement balance will therefore pay a fine ip equivalent to the policy rate. the profit maximization function now becomes: (d,l) ill id(r l s) ip (s r) ml 2 from the above, two options are being faced by commercial banks, which is the quantity of loans they give and the amount they choose to have as reserves. therefore, differentiating equation 2 with respect to loans and reserves gives: il id m 3 id i p 4 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 6 | p a g e combining equations 3 and 4 gives a linear relationship between the lending and policy rate. il m i p 5 hence, the first stage of interest rate pass-through, known as the monetary approach, will see a passthrough from the policy rate to the money market rate (interbank rate and other money market instruments), while the final stage, simply known as the cost of fund approach, will see a pass-through from the interbank rate to the retail interest rates (lending and deposit rates). re-specifying equation 5 into the pass-through from policy rate to money market rate and from the money market rate to retail rate gives: rit 0 1r pt t 6 rrt 1 2r it t 7 rrt 2 3r pt t 8 where equations 6, 7 and 8 represent the pass-through from the policy rate to the money market rate (interbank rate), the interbank rate to the retail rates (lending and deposit rates) and from the policy rate to the retail rates respectively. rpt represents the policy rate, rit represents the interbank rate and rrt represents the retail interest rate. t is independently and identically distributed with a mean of zero and a constant variance ( 2 ), n's are the mark-ups and n's measures the degree of interest rate pass-through. in essence, interest rate passthrough simply gives an explanation of the influence of the policy rate on the money market and retail interest rates in order to verify if the pass-through process is incomplete (0 n 1), complete ( n 1) or overshooting ( n 1) (lerskullawat, 2014). by implication, the interest rate passthrough measures the degree of responsiveness of the retail and money market rates to the policy rate. for a stationary series at level form, the above equations 6 to 8 will be adopted since the model is in its long run form; however, for series that have a unit root, the below short run model will be adopted to model interest rate pass-through. n m rrit 0 1 prpt k prpt k j rr it j t 9 k 1 j 1 it must be noted that equation 9 is a hybrid version of equations 6 – 8, depending on which passthrough is being examined where m and n are the maximum lags chosen and represents the difference operator. assuming cointegration exists among the observed variables in equation 9, then a dynamic adjustment that shows the speed of adjustment, via a short run disequilibrium to the long run equilibrium is then represented. equation 10 thus depicts the short run and long run version of equation 9. n m rrit 0 1prt 1 prpt k prpt k j rrit j (rrt 1 prt 1) t 10 k 1 j 1 where is the speed of adjustment to the long-run equilibrium level and is the coefficient of the independent variable in the long-run. therefore, the error correction co-integration test will be used to test whether is statistically different from zero, which then implies that cointegration exists between the policy rate and retail rate (or interbank rate if we consider the policy rate and interbank rate). once the error correction term is confirmed, the next step will be to confirm the number of months it will take for the retail rate to adjust to a change in the policy rate. this can be derived through the mean mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 7 | p a g e adjustment lag (mal). while the error correction term will show the speed of adjustment within a month, the mean adjustment lag will show the number of months required to reach long-run equilibrium (mangwengwende, chinzara and nel, 2011). this implies that the mean adjustment lag will show the number of months it takes for the retail rates to fully adjust to a change in the policy rate. thus, the mean adjustment lag is calculated as follows: 1 n mal 11 if the mean adjustment is high, then the adjustment process is slow and otherwise if the mean adjustment is low. the above description of the mean adjustment lag is termed the symmetric mean adjustment lag. however, there are cases when the mean adjustment lag is said to be asymmetric. according to scholnick (1996), if residuals are above their mean, then they will tend to adjust downwards to the mean in the long run, while if the residuals are below the mean, then they will adjust upwards towards the mean. this concept brought about the asymmetric mean adjustment lag, which tells us how fast the retail rates fully adjust to the policy rate either upwards or downwards (scholnick, 1996). consequently, the correction term is divided into two series (positive and negative) and is mathematically represented as follows: ect ec, if ect ect 0 if ect and 12 ect ec if ect ect 0 if ect where is the mean error correction and is equal to zero since it denotes the residual in the cointegration equation. by implication, a residual above the mean implies that the retail rate is above the equilibrium and must move downwards towards equilibrium, and otherwise, in the case of a residual below the equilibrium. therefore, dividing the residual into two separate error correction terms gives the asymmetric mean adjustment lag. n m rrit 0 1prt 1 prpt k prpt k j rrit j 1ect 2ect lt 13 k 1 j 1 and the asymmetric mean adjustment lag will further be represented by: 1 1 mal 14 1 and 1 1 mal 15 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 8 | p a g e 2 equations 14 and 15 display the positive and negative mean adjustment lags, that is, the adjustment of the retail rates (or interbank rate) to the policy rate when these rates are above and below their equilibrium level. if the mean lags are seen to be different, then the adjustment process is also seen to be different. finally, the wald test will be used to test whether equations 14 and 15 are equal. if they are equal to zero, then the test series is said to be symmetric. however, the test series will become asymmetric if the two equations are not equal to zero. that is, retail rates will adjust differently to a change in the policy rate. 4. analysis and presentation of results several techniques were adopted to determine the effectiveness of interest rate pass-through in nigeria. some of these techniques include unit root tests, co-integration tests, error correction technique, autoregressive distributed lag model and symmetric and asymmetric mean adjustment lags. the essence was to ensure that the results generated are robust for relevant policy recommendations. monthly data spanning december 2006 through december 2020 were sourced from central bank of nigeria’s statistical bulletin (2021). the observed data include monetary policy rate, interbank call rate, open buy-back rate, prime lending rate, maximum lending rate, savings deposit rate, one-month deposit rate, three months deposit rate, six months deposit rate and twelve months deposit rates. from the descriptive statistics, the mean and median values showed a good level of consistency, while the skewers statistics showed that the policy rate, savings rate, three months and six months deposit rates were negatively skewed, while the rest were positively skewed. furthermore, the kurtosis showed that interbank call rate, open buy-back rate, one-month deposit rate and prime lending rate were leptokurtic, while the other variables were platykurtic. the jarque-bera statistic showed that the one month, three months, six months and twelve months deposit rates and the maximum lending rate followed a normal series. the essence of examining the data presented in table one is because it depicts interest rates at every segment of the market, such that the money market is duly represented with the interbank call interest rate and open buy-back rate and the retail rate is represented by the deposit and lending rates. table 1: descriptive statistics mpr itbc obbr sdr 1mdr1 3mdr 6mdr 12mdr plr mlr mean 10.92 12.22 11.29 2.96 8.55 9.09 9.04 8.41 16.91 24.50 median 12.00 10.63 10.20 3.24 8.52 9.33 9.63 8.28 16.82 24.54 max 14.00 64.58 51.04 4.30 15.01 14.65 15.84 16.47 19.66 31.56 min 6.00 0.77 0.89 1.40 3.49 4.13 3.50 3.53 14.58 17.17 sd 2.63 8.44 7.50 0.93 2.36 2.21 2.56 2.88 1.02 3.94 skew -0.60 2.51 2.31 -0.36 0.02 -0.09 -0.20 0.15 0.58 0.09 kurt 2.18 13.65 10.79 1.81 3.27 2.81 2.43 2.13 3.63 2.27 j-bera 12.87 837.72 495.83 11.73 0.46 0.41 2.92 5.15 10.59 3.39 pvalue 0.0016 0.0000 0.0000 0.0028 0.7958 0.8142 0.2318 0.0760 0.0050 0.1840 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 9 | p a g e sum 1582.75 1771.63 1636.52 428.90 1240.04 1317.39 1310.74 1219.25 2452.26 3552.63 ssd 995.03 10264.86 8101.89 125.69 801.59 706.26 945.81 1190.77 150.62 2233.39 obs 145.00 145.00 145.00 145.00 145.00 145.00 145.00 145.00 145.00 145.00 source: author’s compilation from eviews note: mpr represents monetary policy rate, itbc represents the interbank call rate, obbr represents the open buy-back rate, sdr represents the savings deposit rate, 1mdr represents the one month deposit rate, 3mdr represents three months deposit rate, 6mdr represents six months deposit rate, 12mdr represents twelve months deposit rate, plr represents prime lending rate, while mlr represents maximum lending rate. table 2 displayed the extent of correlation among the variables. while there are mild correlations between the policy rate, interbank rates (interbank and open buy back rates) and savings rate, there are weak positive correlations between the policy rate and one, three, six and twelve-month deposit rates. however, the maximum lending rate has a mildly strong positive correlation with the policy rate. table 3 confirmed that the policy rate and retail lending and deposit rates had a unit root, while the interbank call rate and open buy-back rate were stationary in their level form. table 2: correlation matrix itbc obbr sdr 1mdr 3mdr 6mdr 12mdr plr mlr mpr 0.4321 0.5607 0.5095 0.0016 0.036 0.1559 0.1443 0.1684 0.7135 source: author’s compilation from eviews, 2020 note: mpr represents monetary policy rate, itbc represents the interbank call rate, obbr represents the open buy-back rate, sdr represents the savings deposit rate, 1mdr represents the one month deposit rate, 3mdr represents three months deposit rate, 6mdr represents six months deposit rate, 12mdr represents twelve months deposit rate, plr represents prime lending rate, while mlr represents maximum lending rate. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 10 | p a g e table 3: unit root test variable augmented dickey-fuller phillip-perron levels difference levels difference status mpr tstats -0.7932 -11.4217 -1.0061 -11.5045 i(1) coeff (0.8177) (0.0000)*** (0.7502) (0.0000)*** itbc tstats -5.3064 -8.9017 i(0) coeff (0.0000)*** (0.0000)*** obbr tstats -3.5066 -7.2297 i(0) coeff (0.0091)*** (0.0000)*** sdr tstats -1.1635 -14.0956 -1.1329 -13.9412 i(1) coeff (0.6892) (0.0000)*** (0.7018) (0.0000)*** 1mdr tstats -2.1948 -5.3466 -2.1339 -13.0838 i(1) coeff (0.2092) (0.0000)*** (0.2319) (0.0000)*** 3mdr tstats -1.8681 -7.0518 -2.1822 -12.486 i(1) coeff (0.3466) (0.0000)*** (0.2137) (0.0000)*** 6mdr tstats -2.0975 -11.772 -2.1968 -11.7704 i(1) coeff (0.2461) (0.0000)*** (0.2084) (0.0000)*** 12mdr tstats -2.2293 -15.9318 -2.7793 -15.9652 i(1) coeff (0.1969) (0.0000)*** (0.0638)* (0.0000)*** plr tstats -3.3835 -2.7922 -9.9880 i(1) coeff (0.0132)** (0.0619)* (0.0000)*** mlr tstats -0.5625 -15.4055 -0.6058 -15.2306 i(1) coeff (0.8740) (0.0000)*** (0.8646) (0.0000)*** source: author’s compilation from eviews note: the adf critical value with intercept are -3.48(1%), -2.88(5%) and -2.58(10%). the phillip-perron critical value with intercept are-3.48(1%), -2.88(5%) and 2.58(10%). ***, ** and * denote significance at 1%, 5% and 10% levels, respectively. 4.1 response from the policy rate to the interbank rate the first aspect of the analysis discusses the pass-through from the policy rate to the inter-bank market (the monetary approach). first, the bound test procedure was carried out to examine the extent of cointegration among the variables. the result from table 4 showed that cointegration exists among the variables, implying that there is a long-run relationship, and the interbank rates adjust to policy rate changes in the long run. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 11 | p a g e table 4: bound test result of pass-through from policy rate to interbank market itbc obbr f-statistic 10.77 10.67 lower(1%) 6.84 6.84 upper(1%) 7.84 7.84 lower(5%) 4.94 4.94 upper(5%) 5.73 5.73 cointegration yes yes source: author’s compilation from eviews in the short run, table 5 showed that the pass-through from the policy rate to the interbank market is incomplete, albeit to a higher degree at 0.88 for the interbank call rate and 0.71 for the open buy-back rate. table 5 further suggests that the interbank call rate adjusts at 62% towards equilibrium in each month, while the open buy-back rate adjusts at 44% towards long-run equilibrium. an incomplete passthrough implies that the interbank market responds less than proportionately to a change in the policy rate. this result is in line with the theoretical expectation which states that interest rate can have an incomplete pass through as a result of factors that cause interest rate stickiness such as the problem of asymmetric information, costs faced by banks (switching costs and adjustment costs), risk-sharing behavior and credit rationing. the result of an incomplete pass-through aligns with previous developing country studies (fomum, 2011; bangura, 2011; lerskullawat, 2014; mordi, adebiyi, and omotosho, 2019) and previous developed country studies (bredin, fitzpatrick and reilly, 2001; and de bondt, 2002, 2005). in the long run, however, the demand elasticity of the pass-through process exceeded one for both the interbank call rate (1.42) and the open buy-back rate (1.62). this implies that interest rate pass-through overshoots. the implication of this is that banks might have been engaged in raising their lending rates at the interbank market to counter the possibilities of a default in loan repayments between banks rather than reducing the supply of loans they create (de bondt, 2005). the results of the asymmetric version of the error correction term (positive and negative error correction term) showed that banks fully adjust to equilibrium in line with monetary policy changes regardless of whether the policy rate is adjusted downward or upward. however, the null hypothesis that the positive and negative correction terms are equal is rejected, implying asymmetry between the positive and negative correction terms based on the wald test for both the interbank call rate and open buy-back rate. finally, the essence of the mean adjustment lag is to know the number of months required for a full adjustment process from the policy rate to the interbank rates (while the error correction term showed the correction speed in each month). therefore, the computed mean adjustment lag for interbank call rate (0.12) and open buyback rate (0.29) showed that these interbank rates adjust to policy rate changes within a month, regardless of whether the policy rate is revised upwards or downwards. table 5: summary of pass-through from policy rate to interbank market mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 12 | p a g e var itbc obbr short-run coeff 0.8781 0.7101 pvalue (0.0032)*** (0.0024)*** ect coeff -0.6203 -0.4375 pvalue (0.0000)*** (0.0000)*** long-run coeff 1.4155 1.6229 pvalue (0.0003)*** (0.0001)*** ect+ coeff 1.0000 1.0000 pvalue (0.0000)*** (0.0000)*** ect coeff 1.0000 1.0000 pvalue (0.0000)*** (0.0000)*** mal months 0.1965 0.6626 mal+ months 0.1219 0.2899 mal months 0.1219 0.2899 wald pvalue (0.0000)*** (0.0000)*** adj-r2 0.2289 0.4508 sc 0.0931 0.332 het 0.7947 0.5025 source: author’s compilation from eviews ***, ** and * denote significance at 1%, 5% and 10% levels, respectively. 4.2 response from the interbank rate to the retail lending and deposit rates 4.2.1 response from the interbank call rate to the retail rates the second aspect of the analysis examines the pass-through from the interbank rates (interbank call rate and open buy-back rate) to the retail lending and deposit rate (cost of fund approach). the deposit rates are represented by the savings deposit rate, one month, three months, six months, and twelve months deposit rates, while the lending rates are represented by the prime lending rate and the maximum lending rate. the analyses in this section will further be divided into two separate analyses to reflect the response of the interbank call rate to the retail lending and deposit rates and the response of the open buy-back rate to the retail lending and deposit rates. the bound test result for table 6 showed that only the one-month deposit rate had a long-run relationship with the interbank call rate (with an f-stats greater than the lower and upper bound at the 5% level), implying that the rest of the variables are short-run variables. table 6: bound test result of pass-through from interbank call rate to retail rate sdr 1mdr 3mdr 6mdr 12mdr plr mlr f-statistic 1.91 7.6 3.28 3.99 4.97 5.08 4.54 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 13 | p a g e lower(1%) 6.84 6.84 6.84 6.84 6.84 6.84 6.84 upper(1%) 7.84 7.84 7.84 7.84 7.84 7.84 7.84 lower(5%) 4.94 4.94 4.94 4.94 4.94 4.94 4.94 upper(5%) 5.73 5.73 5.73 5.73 5.73 5.73 5.73 cointegration no yes no no inconclusive inconclusive no source: author’s compilation from eviews table 7 summarizes the pass-through process from the interbank call rate to the retail lending and deposit rates. the results showed that in the short run, the savings deposit rate, twelve months deposit rate, and the prime lending rates are insignificant at a 5% level, while the one month (0.01), three months (0.01) and six months deposit rate (0.02) had an incomplete pass-through with a lower degree. the maximum lending rate (0.01) also had a lower and incomplete pass-through. these results were in line with the previous outcome, albeit to a considerably lower degree. furthermore, the speed of adjustments of one-month (5%), three months (5%), six months (7%), twelve (11%) months deposit rate, and the prime lending rate (9%) was characteristically low in line with their short-run outcomes. that is the adjustment speed towards equilibrium is generally very slow for the series. in the long run, the one-month deposit rate also displayed an incomplete pass-through, also in line with the short-run outcomes. furthermore, the positive and negative correction terms would only be computed for the one-month, three months, and six months deposit rates since they were the only results with significant short-run and error correction outcomes. this implies that the savings rate, twelve-month deposit rates, prime lending rate, and maximum lending rates have insignificant correction terms, and therefore, insignificant mean adjustment lags. the positive correction terms for the one-month and three months deposit rates were insignificant, while the sixmonth deposit rate had a significant positive correction term. however, the three variables all had significant negative correction terms. therefore, the positive mean adjustment lags for one-month and three-month deposit rates were also insignificant and irrelevant (notice that they were very high compared to the negative, which shows the results for the positive terms are spurious). thus, the six months deposit rate fully adjusts to an upward interbank call rate change within a month, while the oneand three-month deposit rate fully adjust to a downward change in the interbank call rate within eight months; however, the six months deposit rate fully adjusts to a negative change in the interbank rate within a month. finally, the wald tests for the one-month, three months, and six months deposit rates support the presence of asymmetries among the positive and negative correction terms. the unresponsive nature of lending rates on the pass-through from the interbank call rate to the lending rate implies that the lending rate is sticky to changes in the interbank call rate. table 7: summary of pass-through from interbank call rate to retail rate var sdr 1mdr 3mdr 6mdr 12mdr plr mlr mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 14 | p a g e srun coeff 0.0019 0.0138 0.0135 0.0205 0.0056 0.0029 0.0092 pvalue (0.41) (0.05)** (0.05)** (0.02)** (0.69) (0.45) (0.10)* ect coeff -0.0262 -0.0546 -0.0562 -0.0711 -0.1082 -0.0870 -0.0182 pvalue (0.20) (0.02)** (0.03)** (0.02)** (0.01)*** (0.01)*** (0.13) lrun coeff 0.1775 0.4957 0.2401 0.2885 0.3278 0.0338 1.1113 pvalue (0.24) (0.06)* (0.14) (0.07)* (0.06)* (0.47) (0.11) ect+ coeff 1.0000 0.0033 -0.0064 1.0000 1.0000 0.0044 0.0070 pvalue (0.00)*** (0.87) (0.73) (0.00)*** (0.00)*** (0.48) (0.24) ect coeff 1.0000 0.1360 0.1222 1.0000 1.0000 0.0161 0.0112 pvalue (0.00)*** (0.00)*** (0.00)*** (0.00)*** (0.00)*** (0.08)* (0.19) mal months 38.15 18.10 17.55 13.78 9.19 11.39 54.44 mal+ months 0.9981 298.85 154.14 0.98 0.99 226.61 141.54 mal months 0.9981 8.07 8.07 0.98 0.99 61.93 88.46 wald pvalue (0.00)*** (0.03)** (0.00)*** (0.00)*** (0.00)*** (0.76) (0.00)*** adjr2 0.9472 0.9273 0.9135 0.8837 0.7898 0.8632 0.9827 sc 0.6926 0.8772 0.8369 0.6521 0.6889 0.3768 0.9387 het 0.8964 0.1519 0.2069 0.0825 0.0551 0.2845 0.162 source: author’s compilation from eviews ***, ** and * denote significance at 1%, 5% and 10% levels, respectively. 4.2.2 response from the open buy-back rate to the retail rates the second aspect of this section measures the response from the open buy-back rate to the retail lending and deposit rates. the bound test result in table 8 showed that there is no long run relationship among the series table 8: bound test result from open buy back rate to retail lending and deposit rate sdr 1mdr 3mdr 6mdr 12mdr plr mlr f-statistic 1.4 4.08 2.9 3.67 3.85 4.37 1.87 lower(1%) 6.84 6.84 6.84 6.84 6.84 6.84 6.84 upper(1%) 7.84 7.84 7.84 7.84 7.84 7.84 7.84 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 15 | p a g e lower(5%) 4.94 4.94 4.94 4.94 4.94 4.94 4.94 upper(5%) 5.73 5.73 5.73 5.73 5.73 5.73 5.73 cointegration no no no no no no no source: author’s compilation from eviews in the short run, the one-month and six months deposit rates were significant, while the maximum lending rate was the only lending rate found to be significant. the pass-through for the one month (0.01), six months (0.02), and maximum lending rates (0.01) were also found to be incomplete and very low, in line with the results from the pass-through from the interbank call rate to the retail rates. the adjustment speed for the onemonth (5%), three months (5%), six months (7%), and twelve months (10%) deposit rates and the prime lending rate (9%) were also found to be characteristically low in line with the interbank call rate outcomes. since the onemonth and six months deposit rates had significant short-run and error correction outcomes, this study computed their positive and negative correction terms and their mean adjustment lags. the positive and negative correction terms show that the one-month and six months deposit rates fully adjust to a change in the open buy-back rate either upward or downward. their mean adjustment lags further suggest that they adjust within a month to the upward or downward movements in the open buy-back rate. finally, the wald test shows that there are asymmetries in the way the positive and negative correction terms respond to changes in the open buy-back rate. the unresponsive nature of lending rates on the pass-through process from the open buy-back rate to the lending rate implies that the lending rate is sticky to changes in the interbank rate. these outcomes corroborate the previous outcomes on interest rate pass-through from the interbank call rate to the retail lending and deposit rates. table 9: summary of pass-through from open buy-back rate to retail rate s-run coeff 0.0035 0.0135 0.0107 0.0185 0.0177 -0.0051 0.0137 pvalue (0.16) (0.09)* (0.17) (0.06)* (0.24) (0.32) (0.04)** ect coeff -0.0253 -0.0496 -0.0536 -0.0677 -0.0965 -0.0893 0.0173 pvalue (0.21) (0.05)** (0.04)** (0.02)** (0.02)** (0.01)*** (0.17) l-run coeff 0.1394 0.2712 0.1987 0.2737 0.1836 0.0391 0.7946 pvalue (0.28) (0.21) (0.26) (0.12) (0.27) (0.49) (0.14) ect+ coeff 0.0387 1.0000 -0.052 1.0000 1.0000 -0.0076 0.001 pvalue (0.12) (0.00)*** (0.00)*** (0.00)*** (0.00)*** (0.48) (0.89) ect coeff 0.0456 1.0000 0.0045 1.0000 1.0000 -0.0131 0.0148 pvalue (0.14) (0.00)*** (0.75) (0.00)*** (0.00)*** (0.11) (0.11) mal months 39.39 19.89 18.46 14.5 10.18 11.14 57.01 mal+ months 25.75 0.9865 19.025 0.9815 0.9823 130.91 986.3 mal months 21.85 0.9865 219.84 0.9815 0.9823 75.95 66.64 wald pvalue var sdr mdr 1 mdr 3 mdr 6 mdr 12 plr mlr mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 16 | p a g e adj-r2 0.9471 sc 0.6236 0.2113 0.5231 0.7944 0.7808 0.3942 0.5645 het 0.5399 0.1352 0.1014 0.1089 0.089 0.0803 0.0057 source: author’s compilation from eviews ***, ** and * denote significance at 1%, 5% and 10% levels, respectively. 4.3 response from the policy rate to the retail lending and deposit rates the final aspect of these analyses examines the pass-through from the policy rate to the retail lending and deposit rates. first, the bound test results in table 10 showed that there was no long-run relationship among the observed variables. table 10: bound test result from policy rate to retail lending and deposit rate sdr 1mdr 3mdr 6mdr 12mdr plr mlr f-statistic 4.28 4.01 3.44 2.85 4.31 3.94 3.01 lower(1%) 6.84 6.84 6.84 6.84 6.84 6.84 6.84 upper(1%) 7.84 7.84 7.84 7.84 7.84 7.84 7.84 lower(5%) 4.94 4.94 4.94 4.94 4.94 4.94 4.94 upper(5%) 5.73 5.73 5.73 5.73 5.73 5.73 5.73 cointegration no no no no no no no source: author’s compilation from eviews the short-run results show that the pass-through from the policy rate to the retail lending and deposit rates is incomplete and characterized by a lower degree of pass-through from the policy rate to the retail rates. this outcome of an incomplete pass-through corroborates the outcome generated from the passthrough from the policy rate to the interbank rate, albeit to a lower degree this time around. the error correction terms also suggest that the savings, one month, three months, and six months deposit rates adjust at a slow speed of 5%, while the twelve months deposit rate and the prime lending rate adjust at a slow speed of 9%. however, the maximum lending rate adjusts at a slow speed of 3%. the positive and negative corrections terms of one month, three months, and six months deposit rates suggest that these rates adjust completely to a change in the policy rate either upwards or downwards, while the six months and twelve months deposit rates adjust strongly to a change in the policy rate either upwards or downwards. however, the lending rates (prime and maximum lending rates) adjust slowly to an upward or downward change in the policy rate. furthermore, the mean adjustment lags suggest that the five (5) deposit rates will fully adjust to an upward or downward policy rate change within a month, while it will take around three months for the maximum lending rate to fully adjust to an upward change in the policy rate and it will take around 10 months for the maximum lending rate to fully respond to a downward change in the policy rate. this result is also similar to the outcomes of the prime lending rate even though it had an insignificant shortrun result, and its negative mean adjustment lag is around eight months. finally, the wald test suggests (0.18) (0.00)*** (0.00)*** (0.00)*** (0.00)*** (0.01)** (0.00)*** 0.9206 0.9122 0.8821 0.7847 0.8645 0.9823 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 17 | p a g e that there are asymmetries in the way the positive and negative correction terms respond to changes in the policy rate, except for the twelve months deposit rate, which suggests it takes around ten months for a change in the policy rate to fully reflect on the twelve months deposit rate. these outcomes imply that the deposit rates adjust faster to an upward or downward change in the policy rate compared to the lending rates. table 11: summary of pass-through from policy rate to retail rate s-run coeff 0.0229 0.0409 0.0381 0.3586 0.0792 0.0043 0.0546 pvalue (0.00)*** (0.08)* (0.08)* (0.03)** (0.07)* (0.73) (0.02)** ect coeff -0.0483 -0.0478 -0.0518 -0.0504 -0.095 -0.0856 -0.0321 pvalue (0.03)** (0.05)** (0.04)** (0.09)* (0.02)** (0.01)*** (0.05)** l-run coeff 0.4749 0.8552 0.7357 1.0624 0.8337 0.0501 1.6984 pvalue (0.02)** (0.22) (0.21) (0.18) (0.13) (0.74) (0.01)*** ect+ coeff 0.861 1.0000 1.0000 1.0000 0.9133 0.3267 0.289 pvalue (0.00)*** (0.00)*** (0.00)*** (0.00)*** (0.00)*** (0.00)*** (0.00)*** ect coeff 0.6128 1.0000 1.0000 1.0000 0.9415 0.1262 0.0969 pvalue (0.00)*** (0.00)*** (0.00)*** (0.00)*** (0.00)*** (0.04)** (0.08)* mal months 20.23 20.06 18.57 12.73 9.69 11.63 29.45 mal+ months 1.13 0.96 0.96 0.64 1.01 3.05 3.27 mal months 1.59 0.96 0.96 0.64 0.98 7.89 9.76 wald pvalue (0.05)** (0.56) (0.02)** (0.02)** adj-r2 0.9207 0.7878 0.8627 0.9824 sc 0.5134 0.4106 0.8216 0.8928 0.7429 0.3137 0.5337 het 0.6166 0.1147 0.0858 0.0002 0.0514 0.051 0.0003 source: author’s compilation from eviews ***, ** and * denote significance at 1%, 5% and 10% levels, respectively. 5. conclusion and policy recommendations this paper examines interest rate pass-through in nigeria, with a focus on the pass-through process from the policy rate to the money market and retail rates and from the money market rates to the retail rates. the results show that there were an incomplete short-run pass-through albeit at a higher degree from the policy rate to the interbank rate, while in the long run, the pass-through process overshoots. however, this pass-through was found to be very low from the policy rate to the retail rates and from var sdr mdr 1 mdr 3 mdr 6 mdr 12 plr mlr (0.01)*** (0.00)*** 0.9129 0.8853 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 18 | p a g e the money market rates to the retail rates. the mean adjustment lags were very low, suggesting that it takes a quicker period (in terms of months) for changes in the policy rate to fully reflect in the interbank and retail rates. finally, compared to the lending rates, the deposit rates were found to respond more significantly, albeit slowly to changes in the policy rate and money market rates, also suggesting that the lending rates are stickier to monetary policy changes. from these outcomes, it can be argued that the introduction of the policy rate improved the interbank market tremendously and the policy reforms were significantly targeted at reducing distortions within the interbank market. in essence, we recommend that the monetary authorities critically appraise the size of interest rate pass-through to the retail and money market rates in light of the heterogeneous response from the policy rate to the retail and money market rates and the adjustment process toward their long-run equilibrium. also, the weak pass-through between the money market and the retail lending and deposit rates suggests that other supplementary measures are necessary to remove the distortions in the retail lending and deposit rates to ensure that the retail rates fully adjust in line with the policy rate change and other money market rate changes. references ahmad, a.h., aziz, n. & rummun, s. 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(2014). “the effect of monetary policy on prices in nigeria: a factor augmented vector autoregressive (favar) modelling approach” central bank of nigeria, nigeria. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 21 | p a g e mordi, c. n. o., adebiyi, m. a. & omotosho, b. s. (2019). “modelling interest rates pass-through in nigeria: an error correction approach with asymmetric adjustments and structural breaks” mpra paper no 96171, 1 – 25. mueller-spahn, s. 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(1996). “asymmetric adjustment of commercial bank interest rates:evidencefrom malaysia and singapore” journal of international money and finance 15(3):485 –496. siakoulis, v., petropoulos, a., lazaris, p. & lialiouti, g. (2018). “interest rate pass-through in the euro area: are policy measures efficient in crisis periods? evidence from a multi state markov model on a panel dataset” 2nd annual workshop of escb research cluster 3, organized jointly by the bank of greece and the european central bank. siklar, i., dogan, e. & dinc, m. (2016). “interest rate pass through in turkey: the measurement of the monetary transmission mechanism dynamics” journal of business & economic policy 3(4), 38 – 45. sweiden, o. d. (2011). “interest rate pass-through: the case of jordan” ekonomska istraživanja, 24(1), 13 – 27. tai, p. n., sek, s. k., & har, w. m. 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(2015). “the interest rate pass-through in the euro area during the sovereign debt crisis” reserve bank of new zealand working paper no, 3, 1 – 51. yilmaz, a. b., yergin, h. & oğrak a. (2018). “an application on interest rate pass-through in turkey” international journal of humanities and social science invention, 7(6), 74 – 83. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 1 | p a g e unraveling the idiosyncratic volatility puzzle: insights from the sri lankan market dr. kasun s. perera and dr. anusha r. silva department of finance, faculty of management and finance, university of colombo, sri lanka abstract: the capital asset pricing model (capm) has been a cornerstone in asset pricing literature, assuming that investors hold well-diversified portfolios, making idiosyncratic volatility irrelevant for pricing stock returns. however, merton (1987) contends that information asymmetries prevent investors from achieving full diversification, making idiosyncratic volatility a critical factor in asset pricing. supporting this argument, goetzmann and kumar (2008) provide empirical evidence that a significant portion of investor portfolios in the united states consists of undiversified holdings. this study reevaluates the traditional view by examining the role of idiosyncratic volatility in asset pricing, challenging the capm's assumption of perfect diversification. by considering the prevalence of undiversified portfolios, it explores how idiosyncratic volatility may indeed impact stock returns, shedding light on its relevance as a pricing factor. through empirical analysis and theoretical insights, this research contributes to the ongoing discourse on asset pricing models and their applicability in real-world investment scenarios. keywords: capital asset pricing model (capm), idiosyncratic volatility, diversification, asset pricing, information asymmetry. 1. introduction the capital asset pricing model (capm), one of the major developments in the asset pricing literature, assumes investors hold the market portfolio in equilibrium (fu, 2009). hence, it denotes that only market risk should be priced in stock returns as the idiosyncratic volatilitycan be fully eliminated through diversification (pukthuanthongle &visaltanachoti, 2009). therefore, all the empirical asset pricing models assume that the investors holdthe market portfolio in equilibrium so that they are not expecting a return for holding the idiosyncratic volatility as it can be fully eliminated through diversification. hence, it is assumed only systematic risk should be priced in average stock returns and idiosyncratic volatility is irrelevant. however, merton (1987) argues that due to existence of information asymmetries in the market, investors cannot fully diversify the idiosyncratic volatility as they unable to hold a well-diversified portfolio. supporting merton’s argument, goetzmann and kumar (2008) depict that out of a sample of more than 62,000 households in the united states during the period of 1991-1996, over 25 percent of the investor portfolios have only one stock whereas more than 50 percent of the investor portfolios have not more than three stocks. they further show that very smaller amount of investor portfolios (five percent to ten percent) have more than ten stocks. hence, this shows that the idiosyncratic volatility is an important factor in asset pricing as the investors are holding undiversified investment portfolios. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 2 | p a g e accordingly, merton (1987) anticipates a positive relationship between average stock returns and idiosyncratic risk. he argues that investors are expecting a premium for bearing the idiosyncratic volatility. however, some empirical findings have created a substantive puzzle in the asset pricing literature in relation to the aforementioned relationship. for instance, ang, hodrick, xingand zhang(2006) demonstrate that the portfolios with the highest idiosyncratic volatility yield significantly lower returns where they conclude that it has created a puzzling surprise in the asset pricing literature. however, bali and cakici (2008) note that this relation mainly depends on several factors such as choices of data frequency, portfolio weighting schemes, break point calculations and choice of screens in sample selection. this is clearly in line with fama (1998) who reports that changes in the long term returns of the stocks are highly sensitive to the methodology and statistical approaches that are used to measure them in different studies. in addition to that, it is surprising to observe the existence of idiosyncratic volatility in the united states, as it is considered to be one of the highly transparent markets in the world (pukthuanthong-le &visaltanachoti, 2009). nevertheless, the existence of idiosyncratic volatility becomes further complicated in the context of other markets. for instance, kumari, mahakudandhiremath(2017) note the existence of idiosyncratic volatility becomes complicated in the context of emerging markets as these markets characterize with features such as higher transaction costs, multiple tax regimes, lack of transparency, illiquidity which are unique to such markets.therefore, this clearly challenges the standpoint of empirical asset pricing models such as capm on the relation between risk and returns of an asset.hence, it is questionable whether the systematic risk is the only risk that should be priced in stock returns (pukthuanthong-le &visaltanachoti, 2009). since, a considerable body of extant literature on idiosyncratic volatility is focused on developed stock markets such as the united states, it is important to investigate the existence of idiosyncratic volatility from another market context’s point of view. accordingly, the present study focuses on the idiosyncratic puzzle from the sri lankan context as there is a dearth of research on idiosyncratic volatility in sri lanka and particularly in the frontier market context. though, pukthuanthong-le and visaltanachoti (2009) examine the pricing of idiosyncratic volatility by using the capm, sri lankan stock market has been given only a cursory attention in that study. hence, there is a need of an in-depth study focusing only on the sri lankan stock market. thus, this study revisits the relationship between average stock returns and idiosyncratic volatility with an updated data while using thefive-factor asset pricing model offama and french (2015). moreover, the current study employs the exponential generalized autoregressive conditional heteroscedasticity (egarch) model to estimate the idiosyncratic volatility of stocks. therefore, the contribution of the present study to the existing literature is two-fold. firstly, it sheds light on idiosyncratic volatility puzzle from a frontier market point of view and thereby it explains the influence of idiosyncratic volatility on average stock returns. secondly and more importantly, this study provides novel striking evidence on the characteristics of idiosyncratic volatility particularly in terms of profitability and investment factors with the use of a five-factor asset pricing model of fama and french (2015). the remainder of the paper consists as follows; section 2 discusses the existing literature in the light of idiosyncratic volatility while section 3 elaborates the data and methodology employed in the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 3 | p a g e current study. section 4 provides a comprehensive analysis of data whereas section 5 provides the conclusion of the study. 2. review of related literature based on the foundation laid by the portfolio selection problem of markowitz (1952), modern portfolio theory (mpt) notes that the investment portfolios are constructed based on the performance of different assets and risk appetite of the investors. however, being a normative theory, portfolio selection explains how investors should behave while as a positive theory, asset pricing attempts to predict investment decisions based on mean-variance analysis (fabozzi, gupta&markowitz, 2002). hence, the asset pricing theory builds a nexus between risk and return of an asset. even though the asset pricing theory emerges with the capm of sharpe (1964), famaand french (2004) note that simplified assumptions of capm made it empirically less successful; many extensions have been made to the capm in order to examine the relation between risk and return of an asset. for instance, arbitrage pricing model (ross, 1976), three-factor asset pricing model (fama& french, 1993), four-factor asset pricing model (carhart, 1997) and five-factor asset pricing model (fama& french, 2015) are some of the popular factor models that develop to determine the price of an asset. nevertheless, all factor models expect investors to act upon the changes in the market as quickly as they observe them.this is so because the financial models presume that markets are frictionless and investors are equipped with all information (merton, 1987). on contrary, the empirical evidence shows various trading frictions in the market that prevent investors from making accurate investment decisions (hou&moskowitz, 2005; miller & scholes, 1982;amihud&mendelson, 1986; amihud, 2002; pastor &stambaugh, 2003). moreover, the information asymmetries in the market prevent the investors from holding diversified portfolios. in the context of a stock market, there are low priced securities with high idiosyncratic volatility where kumar (2009) identifies them as ‘lottery-like’ securities. confirming the findings of kumar (2009), bali, cakiciand whitelaw (2011) highlight that investors tend to choose ‘lottery-like’ securities to overcome the imperfect diversification problem. hence, it is questionable to what extent the role of idiosyncratic volatility can be ignored in asset pricing decisions. moreover, in the presence of information asymmetries in the market, factor models poorly perform in capturing the diversification decisions of investors (merton, 1987). therefore, ang et al. (2009) argue that there is a possibility of generating a nexus between average stock returns and idiosyncratic volatility since the factor models fail to specify the role of idiosyncratic volatility in asset pricing decisions. this clearly highlights that idiosyncratic volatility plays a critical rolein investment decisions. despite its relative significance in investment decisions, scholars have used different methods to estimate the idiosyncraticvolatility of stocks. for instance, in the path breaking seminal work of ang et al. (2006) on idiosyncratic volatility, the authors use one month lagged idiosyncratic volatility as a proxy for idiosyncratic volatility of stocks while bali andcakici, (2008) also adopt the same technique in their study. in contrast, while highlighting the estimation errors of the previous techniques, fu (2009) suggeststhe egarch technique of nelson (1991) to estimate the idiosyncratic volatility of stocks. similarly, pukthuanthong-le and visaltanachoti(2009)and kumariet al.(2017) also follow fu’s approach in order to estimate the idiosyncratic volatility of stocks. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 4 | p a g e although, ang et al. (2006) assume that idiosyncratic volatility follows a random walk, fu (2009) denies the assumption of time varying property of idiosyncratic volatility can be approximated by a random walk process. supporting fu’s argument, based on a cross country analysis with a sample of 36 countries, pukthuanthong-le and visaltanachoti (2009) state that adoption of one month lagged idiosyncratic volatility estimation method leads to severe estimation errors. therefore, based on the empirical evidence, fu (2009) and pukthuanthong-le and visaltanachoti (2009) negate the use lagged idiosyncratic volatility of stocks to derive at the inferences between average stock returns and idiosyncratic volatility. in spite of the strengths and weaknesses of each estimation method, the empirical findings on idiosyncratic volatility have created a substantive puzzle in the asset pricing literature. however, as per bali and cakici (2008), the existence of methodological differences among previous studies leads to conflicting arguments. therefore, fu (2009) emphasises that idiosyncratic volatility warrants not only a special attention but also a quality estimation process in deriving at the inferences between average returns and idiosyncratic volatility. 3. data and methodology 3.1 data the data includes monthly stock returns and other accounting details pertinent to 214 non-financial firms listed on the colombo stock exchange (cse) over a period of 163 months from september 2004 to march 2018. all required data is obtained from cse data library, annual reports of listed companies and annual reports of central bank of sri lanka. further, following sriyalatha (2008), monthly stock returns are adjusted for bonus issues and rights issues. as in fama and french (1992), samarakoon (1997), and abeysekera and nimal (2016), this study excludes the firms with negative book-to-market ratio and firms listed under the banks, finance and insurance sector since such firms are heavily geared and higher level of gearing indicates distress risk for non-financial firms (fama& french, 1992). the data includes with respect to the following variables; all share total return index (astri) is used as the proxy for market return (rm) while three-month government treasury-bill rate is used as a proxy for risk free rate of return (rf). the market capitalization is used as a proxy for size (size) while the book-to-marketequity (b/m) ratio is used as the proxy for value. moreover, net profit as a fraction of book equity is used as a proxy for profitability (prof) while the annual growth rate of the assets is used as the proxy for investment (inv). 3.2factor construction at the end of september each year t, the factor return portfolios are constructed and reformed at the end of september year t+1 (samarakoon, 1997;abeysekera&nimal, 2017). according to abeysekera and nimal (2016), this enables to overcome the look-ahead biasness problem. in the current study, the factor return portfolios are constructed based on independent 2 x 3 sorts on size-b/m, size-prof, and size-inv. the stocks are sorted as big and small stocks based on the market caiptalisationwhere the stocks in the top 50 percent of the market capitalization is categorized as big (b) stocks while bottom 50 percent is categorized as the small (s) stocks (fama& french, 1993). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 5 | p a g e moreover, based on b/m, the stocks are categorised as growth (g), neutral (n) and value (v) stocks (bottom 30 percent, middle 40 percent, top 30 percent) and the intersection of independent 2 x 3 sorts produce six portfolios: sg, sn, sv, bg, bn, bv(fama& french, 1993). similarly, the stocks are categorised as weak (w), neutral (n), robust (r) based on prof and as aggressive (a), neutral (n), conservative (c) based on inv which leads to generate 2 x 3 sorts of size-prof (sw, sn, sr, bw, bn, br) and size-inv (sa, sn. sc, ba, bn,bc) (fama& french 2015). in addition to conventional size factor based on 2 x 3 sort of size-b/m(smbb/m), the use of 2x3 sorts on sizeprof and size-invproduce two additional size factors namely, smbporfandsmbinv. therefore, size factor (smb) from the three 2x3 sorts is defined as the average of smbb/m, smbporfandsmbinv. table 1 shows a summary of factor construction process in the current study. table 1: construction of size, value, profitability and investment factors sort breakpoints factors and their components 2x3 sorts on size and b/m, or size and prof, or size and inv size: cse median smbb/m = (sg + sn + sv)/3 – (bg + bn +bv)/3 smbporf= (sr + sn + sw)/3 – (br + bn +bl)/3 smbinv= (sa + sn + sc)/3 – (ba + bn + bc)/3 smb = (smbb/m + smbprof+ smbinv)/3 b/m: 30th percentiles and 70th hml= (sv + bv)/2 – (sg + bg)/2 prof: 30th percentiles and 70th rmw= (sr + br)/2 – (sw + bw)/2 inv: 30th percentiles and 70th cma= (sc + bc)/2 – (sa + ba)/2 note: researchers’ construction based on fama and french (2015). size, b/m, prof and inv are market capitalisation, book-to-market ratio, profitability and investment respectively. in the 2x3 sorts, the size group, small (s), neutral (n) and big (b), the b/m group, growth (g), neutral (n) andvalue (v), the profgroup, robust (r), neutral (n) and weak (w), the inv group, conservative (c), neutral (n) and aggressive (a). the factors are smb (small minus big), hml (value minus growth), rmw (robust minus weak), cma (conservative minus aggressive). 3.3 estimation of idiosyncratic volatility as in fu (2009), in the current study the authors have employed the egarch (p,q) model of nelson (1991) to estimate the idiosyncratic volatility of stocks and generated nine different egarch models for each stock using the permutation of1 p 3, 1 q 3 order. akaike information criterion (aic) has been used in order to determine the best model for each stock.the mean and variance equations of the egarch (p,q) model are specified in the equation (1) and equation (2). rit – rft = αi + bi(rmt – rft) + sismbt + hi hmlt + rirmwt + ci cmat + εit where εit~n (0, σit2) (1) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 6 | p a g e whererit rftis excess return of stock i at month t where (rm-rf) is the market factor and smb is the monthly size factor.hml is the monthly value factor whilermw and cma are monthly profitability and investment risk factors respectively. ln σit2is log of the conditional variance of the stock returns of stock i at time t while αi bi , ci and are constant in the egarch model, vector of coefficients and asymmetric coefficient respectively. further, the conditional distribution of residuals (εit) in the mean equation is based on the set of information at t-1 which is assumed to be normal with the mean of zero and variance of σit2 whereas the conditional variance (σit2) in the variance equation is a function of past p-period of residual variance and past q-period of return shocks where α i 0, bi+ ci 1, and λ 0 if volatility is asymmetric. the idiosyncratic volatility (ivol) of stocks is measured as the square root of the conditional variance of residuals of five-factor asset pricing model estimated using the egarch model. furthermore, the selected firms in the sample of the current study have at least 30 monthly return observations in order to overcome the look-ahead biasness problem (fu, 2009; pukthuanthong-le & visaltanachoti, 2009). 3.4 portfolio formation in order to draw inferences between idiosyncratic volatility and average stock returns, the authors have formed idiosyncratic volatility sorted portfolios in the current study. accordingly, five equal-weight and value-weight idiosyncratic volatility sorted portfolios formed to analyze the association between average stock returns and idiosyncratic volatility. 3.5 gibbons, ross and shanken (1989) test the null hypothesis of gibbons, ross, and shanken (grs) (1989) test notes that regression intercepts of different asset portfolios developed through the asset pricing models are not significantly different from zero. thus, in order to achieve the objective of the current study the authors have used the grs test for idiosyncratic volatility sorted portfolios. 4. summary statistics 4.1 descriptive statistics table 2 shows the descriptive statistics of the variables used in the study. the average stock return is found to be 0.93 percent in sri lanka while fu (2009) reports a mean return value of 1.18 percent with respect to the united states. further, market factor is found to be highly volatile compared to other risk factors whereabeysekera and nimal (2017) note similar findings in relation to the cse. also, ang et al. (2009) highlight that market factor seems to be highly volatile in the asian context. even though, the mean value of size factor (0.37 percent) slightly deviates from the previous findings, a mean size factor closer to zero is in line with the findings offama and french (2012) and abeysekera and nimal (2017). however, the average value factor of 0.6 percent (see table 2) is found to be parallel with both local and international findings. for instance, abeysekera and nimal (2016) reports a mean value factor of 0.54 percent in the sri lankan context whilefama and french (2012) and ang et al. (2009) report average value factors of 0.62 percent and 0.72 percent forasia pacific and asia respectively. table 2: descriptive statistics 𝑅 r m r f smb hml rmw cma ivol mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 7 | p a g e mean 0.93% -8.89% 0.37% 0.60% 0.45% 0.06% 10.61% std. dev. 7.15% 7.42% 3.04% 4.22% 3.82% 3.27% 1.81% t-mean 1.655 note: is the average stock returns. rm-rfis the market factor where the market risk premium is the excess of astri return over risk free rate of return (i.e. three-month government treasury bill rate). smb is the monthly size factor where hml is the monthly value factor. rmw and cma are monthly profitability and investment risk factors respectively. ivol is the monthly idiosyncratic volatility of stocks estimated through the egarch model by using fama and french (2015) five-factor asset pricing model. despite the relative consistence with previous empirical findings on mean values of popular risk factors, the average values on profitability (0.45 percent) and investment (0.06 percent) factors are contrasted considerably to that of the previous findings. for instance, in the united states,the mean values of profitability and investment factors are found to be 0.25 percent and 0.33 percent respectively (fama& french, 2015) while in the asian pacific region, the mean values of these factors are found to be 0.21 percent and 0.39 percent respectively (fama& french, 2017). interestingly, the mean value of idiosyncratic volatility (10.61 percent) is slightly closer to the average value of 12.67 percent in the united states (fu, 2009). nevertheless, in a cross country analysis, pukthuanthong-le and visaltanachoti (2009) record a mean value for idiosyncratic volatility as high as 15.98 percent for sri lanka. 4.2 equal-weight and value-weight portfolio return analysis table 3 shows the results of portfolio return analysis where the panel a shows the equal-weight average portfolio returns while panel b shows the value-weight average portfolio returns.accordingly, some interesting empirical findings can be observed with respect to idiosyncratic volatility of stocks. the empirical results in panel a depict that portfolio 5 (stocks with highest idiosyncratic volatility) has generated substantially higher average return (1.90 percent) compared to the average return of portfolio 1 (lowest idiosyncratic volatility)(0.14 percent). further, the average return differential of 1.76 percent between portfolio 5 and portfolio 1 is found to be highly statistically significant. hence, this confirms the existence of idiosyncratic volatility in the sri lankan context and it is statistically significant and positively related with the average stock returns. market share 29.04% 20.90% 17.29% 16.82% 15.94% profitability 11.32% 9.30% 7.24% 3.05% -0.09% investment 133.71% 46.73% 61.34% 86.79% 31.56% 15.233 1.542 1.798 1.506 0.241 74.758 table 3: idiosyncratic volatility ( ivol sorted portfolios ) panel a: equal weight average returns portfolios formed on ivol ) (low 1 2 3 4 5 (high ) (5 1) 𝑅 % 0.14 % 0.16 0.42 % 0.94 % 1.90 %** 1.76 %* (0.0014) (0.0016) (0.0042) (1.3530) (2.0308) (2.9720) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 8 | p a g e 𝑅 profitability 11.32% 9.30% 7.24% 3.05% -0.09% investment 133.71% 46.73% 61.34% 86.79% 31.56% note: is the average stock returns. the market share of each ivol sorted portfolio is calculated by using the market capitalisation of each ivol portfolio as a percentage of the total market capitalisation of all ivol sorted portfolios. profitability is the average of the net profit-to-book equity ratio of each ivol sorted portfolio. investment is the average of the growth of total assets of each ivol sorted portfolio. newey-west (1987) adjusted t-statistics are reported in parentheses. * and ** indicate 1 percent and 5 percent significance levels respectively. interestingly, the empirical results of the value-weight average returns in panel b of table 3 present a contradictory argument for the positive relation between average stock returns and idiosyncratic volatility. the empirical results depict that portfolio 5 (stocks with highest idiosyncratic volatility) has generated substantially lower average return (-0.24 percent) compared to the average return of portfolio 1 (lowest idiosyncratic volatility) (0.07 percent). moreover, the difference of value-weight average returns of portfolio 5 and portfolio 1 is 0.30 percent with a t statistic of -1.2576. however, this average return differential is found to be economically and statistically insignificant. additional to the above empirical findings, table 3 demonstrates more striking evidence on idiosyncratic volatility of stocks. the results depict that stocks with highest idiosyncratic volatility have the lowest market share of 15.94 percent compared to the stocks with lowest idiosyncratic volatility (29.04 percent). this indicates that the stocks with high idiosyncratic volatility tend to be small in the cse. in fact, this empirical finding is consistent with the previous studies where hou and moskowitz (2005), ang et al. (2006), bali and cakici (2008) and fu (2009) also note that idiosyncratic volatility is high with small stocks. moreover, the empirical findings on profitability and investment yield novel evidence in relation to the idiosyncratic volatility. the empirical evidence in table 3 shows that profitability of the idiosyncratic volatility sorted portfolios has drastically declined as the idiosyncratic volatility of stocks increases. for instance, the profitability of the lowest idiosyncratic volatility sorted portfolio (portfolio 1) is found to be 11.32 percent while the profitability of the highest idiosyncratic volatility sorted portfolio (portfolio5) is found to be -0.09 percent. in other words, this implies that when the idiosyncratic volatility of stocks increases the profitability of stocks starts to fall. this confirms the argument of fu (2009) on the idiosyncratic volatility where he notes that idiosyncratic volatility is firm specific and it does not move in line with the market. hence, the impact of idiosyncratic volatility varies from one firm to another where the results show that when the idiosyncratic volatility becomes high, it negatively affects the profitability of the firms. panel b: value weight average returns portfolios formed on ivol ) (low 1 2 3 4 5 (high ) (5 1) 𝑅 % 0.07 % 0.05 % 0.15 % 0.25 % 0.24 0.30 % (0.4790) ( 0.0005) (0.0015) (0.0025) ( 0.0024) ( 1.2576) market share 29.04 % 20.90 % 17.29 % 16.82 % 15.94 % mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 9 | p a g e furthermore, fama and french (2015) highlight that small stocks tend to be less profitable compared to big stocks; the profitability premium is higher for small stocks compared to big stocks. the empirical findings of table 3 pertinent to characteristics of the idiosyncratic volatility sorted stock portfolios lend direct support for this argument. for instance, as discussed earlier, small stocks tend to have higher idiosyncratic volatility compared to big stocks, indicating less profitability of small stocks due to their high idiosyncratic volatility. hence, this clearly supports the argument of fama and french (2015) on higher profitability premium on small stocks. on the other hand, table 3 demonstrates another piece of interesting evidence on idiosyncratic volatility of stocks. that is, as per the results, it can be observed that stocks with higher idiosyncratic volatility have the lowest investment value compared to stocks with lower idiosyncratic volatility. hence, it seems that stocks with higher idiosyncratic volatility suffer from future growth prospects due to higher level of volatility in the firm specific risks which hinder the capital investments of such firms. furthermore, fama and french (2015) argue that expected investment premium is quite larger for small firms. the findings of this study clearly in line with this argument where the stocks with higher idiosyncratic volatility tend to be small and their investment values are relatively lower compared to big stocks. hence, the investors expect a higher investment premium (fama& french, 2015). moreover, fama and french (2015) report that small firms tend to invest more despite their lower level of profitability. perhaps as shown in the results of table 3, presence of high idiosyncratic volatility with small stocks might be the reason which hinders the ability of such firms to reap benefits from their investments. 4.3 grs test in the grs test, the null hypothesis denotes that there is no significant difference between the intercepts of the asset returns under consideration. in other words, tailoring to the current study, this indicates that the intercepts of the idiosyncratic volatility sorted stock portfolios are not significantly different from each other. thus, it rejects the presence of idiosyncratic volatility of stocks. moreover, it should be noted that grs test has been carried out only for equal-weight portfolios as value-weight portfolio returns generate statistically insignificant results (see table 3). according to empirical results depicted in table 4,fama and french five-factor (ff 5) alpha of lowest ivol portfolio is -4.44 percent while it is as high as 1.03 percent for the highest ivol portfolio. similar to a hedging portfolio strategy highlighted by fu (2009), longing highest ivol portfolio and shorting lowest ivol portfolio produces a statistically significant monthly return of 5.47 percent. the grs test statistic of 26.28 strongly rejects the null hypothesis of grs test which states that all intercepts are not significantly different from zero. in other words, grs test reconfirms the findings of the portfolio analysis of this study and it validates the presence of idiosyncratic volatility of stocks in the cse. table 4: fama and french five-factor (ff 5) alpha values portfolios formed onivol 1 (low) 2 3 4 5 (high) ff 5 alpha -4.44%* -3.37%* -2.70%* -1.47% 1.03% (-5.2669) (-3.2757) (-2.4387) (-1.3003) (0.7089) note:newey-west (1986) adjusted t-statistics are reported in parentheses. * indicates 1 percent level of significance. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 10 | p a g e 5. conclusion all empirical asset pricing models assume that the role of idiosyncratic volatility is irrelevant as the investors can avoid the exposure to the idiosyncratic volatility by holding well-diversified portfolios with many securities (bali, engle& murray, 2016). further, in the absence of market imperfections merton (1987) notes that theoretically investors have zero level of exposure to the firm specific risk. however, the empirical studies provide strong evidence against this theoretical stance and highlight that investors are commanding reasonable compensation for bearing the idiosyncratic volatility (ang et al., 2006; bali & cakici, 2008; ang et al., 2009; fu, 2009). this study attempted to shed a light on the idiosyncratic volatility puzzle from a south asian market point view where both portfolio analysis and grs test results confirmed the presence of idiosyncratic volatility in the sri lankan context. furthermore, the empirical results revealed that idiosyncratic volatility has a statistically strong and positive influence on the average stock returns. therefore, it indicates that investors expect an adequate return for bearing idiosyncratic risk. moreover, the current study yields some novel striking empirical evidences in terms of the characteristics of the idiosyncratic volatility of stocks. accordingly, the results of the portfolio analysis demonstrated that the stocks with higheridiosyncratic volatility are less profitable while having lower growth prospects. hence, it seems high idiosyncratic volatility is coupled with less profitable firms with lower level of investments. moreover, it is also found that idiosyncratic volatility is high with small stocks. in other words, this indicates that small stocks carry high idiosyncratic volatility while being exposed to lower level of profits and investments. hence, as fama and french (2015) argue, the results of the current study also document that critical issues in asset pricing models are coupled with small stocks. thus, one of the key messages of this study is that it is still questionable as to why there is a high demand for small stocks in the market despite their lower level of exposure to profits and investments while bearing a higher level of idiosyncratic volatility. references abeysekera, a. p., & nimal, p. d. (2016). the impact of the financial sector on asset pricing tests: evidence from the colombo stock exchange. asian journal of finance & accounting, 8(2), 113– 124. abeysekera, a. p., & nimal, p. d. (2017). the four-factor model and stock returns: evidence from sri lanka. afroasian journal of finance and accounting, 7(1), 1–15. amihud, y. (2002). illiquidity and stock returns: cross-section and time-series effects. journal of financial markets, 5(1), 31–56. amihud, y., & mendelson, h. (1986). asset pricing and the bid-ask spread. journal of financial economics, 17(2), 223– 249. ang, a., hodrick, r. j., xing, y., & zhang, x. (2006).the cross-section of volatility and expected returns, thejournal of finance, 61(1), 259–299. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 11 | p a g e ang, a., hodrick, r. j., xing, y., & zhang, x. (2009). high idiosyncratic volatility and low returns: international and further us evidence, journal of financial economics, 91(1), 1–23. bali, t. g., & cakici, n. 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(2008).equity portfolio diversification.review of finance, 12(3), 433– 463. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 12 | p a g e hou, k., & moskowitz, t. j. (2005). market frictions, price delay, and the cross-section of expected returns. the review of financial studies, 18(3), 981–1020. kumar, a. (2009). who gambles in the stock market?. the journal of finance, 64(4), 1889–1933. kumari, j., mahakud, j., &hiremath, g. s. (2017). determinants of idiosyncratic volatility: evidence from the indian stock market. research in international business and finance, 41, 172–184. markowitz, h. (1952). portfolio selection. the journal of finance, 7(1), 77–91. merton, r. c. (1987). a simple model of capital market equilibrium with incomplete information.the journal of finance, 42(3), 483–510. miller, m. h., & scholes, m. s. (1982). dividends and taxes: some empirical evidence. the journal of political economy, 90(6), 1118–1141. nelson, d. b. (1991). conditional heteroskedasticity in asset returns: a new approach. econometrica, 59(2), 347–370. newey, w. k. & west, k. d. (1987).a simple, positive semi-definite, hetroskedasticity and autocorrelation consistent covariance matrix.econometrica 55, 703-708. pastor, l., & stambaugh, r. f. (2003). liquidity risk and expected stock returns. the journal of political economy, 111(3), 642–685. pukthuanthong-le, k., &visaltanachoti, n. (2009). idiosyncratic volatility and stock returns: a cross country analysis. applied financial economics, 19(16), 1269–1281. ross, s. a. (1976). the arbitrage theory of capital asset pricing. journal of economic theory, 13(3), 341–360. samarakoon, l. p. (1997). predictability of short-horizon returns in the sri lankan stock market. sri lankan journal of management, 1(3), 207–224 sharpe, w. f. (1964). capital asset prices: a theory of market equilibrium under conditions of risk. the journal of finance,19(3), 425–442. sriyalatha, m. a. k. (2008). does the all share price index represent the colombo stock market?.the meijo review, 9(3), 75–90. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 34 | p a g e basel iii regulations and their influence on banking operations: a study of loan quantity and interest rates dr. dimitrios gavalas and professor maria kritikou university of aegean, business school, dept. of shipping, trade &transport, chios, greece. abstract: in the aftermath of the 2008 financial crisis, a pressing need for financial sector regulation and supervision reform became evident. this reform effort was initiated by the g20, with key organizations like the financial stability board and the basel committee on banking supervision (bcbs) taking the lead. their goal was to enact a comprehensive agenda of regulatory changes to enhance the resilience of the banking sector, enabling it to better withstand financial and economic stressors while minimizing adverse effects on the real economy. these reform measures, introduced over a two-year period starting in 2009, comprised several critical components. the initial installment, known as basel ii, included strengthening trading book capital requirements, imposing higher capital requirements for re-securitization products held in both the banking and trading books, and providing enhanced guidance on pillar ii, which focuses on the supervisory review process. subsequently, in late 2010, the bcbs released basel iii, outlining further reforms. these measures aimed at refining regulatory capital definitions, introducing a leverage ratio as a risk-based capital requirement safeguard, establishing capital buffers, enhancing risk coverage by improving the methodology for measuring counterparty credit risk, and implementing rigorous liquidity measurement standards. these regulatory reforms mark significant progress in bolstering the financial sector's resilience and risk management capabilities. this study delves into their implications, effectiveness, and broader impacts on the global financial landscape. keywords: financial regulation, basel iii, banking sector, risk management, financial stability. 1. introduction towards the end of 2008, it became clear that weaknesses in financial sector regulation and supervision had significantly contributed to the crisis. the efforts to reform the financial sector regulation began under the aegis of g20, and both the financial stability board and the basel committee on banking supervision (bcbs) embarked on an ambitious agenda for regulatory reforms (fsi, 2010). during the next two years a number of initiatives were taken by the bcbs with the objective of improving the banking sector’s ability to absorb shocks arising from financial and economic stress and to reduce the risk of spill-over from the financial sector to the real economy. the first installment of these measures announced in july 2009 (basel ii) included strengthening of the trading book capital requirements, higher capital requirements for re-securitization products held in both the banking book and trading book and strengthening of guidance on pillar ii (supervisory mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 35 | p a g e review process). in late 2010 the bcbs issued the basel iii document enumerating measures focused on improvements in the definition of regulatory capital, introduction of a leverage ratio as a backstop for risk-based capital requirement, capital buffers, enhancement of risk coverage through improvements in the methodology to measure counterparty credit risk and liquidity measurement standards (hakura&cosimano, 2011). the reforms focus firstly on the micro-prudential (bank-level) regulations which will help raise the resilience of individual banking institutions during periods of stress; secondly, on macro-prudential regulations involving system-wide risks that can build up across the banking sector as well as the procyclical amplification of these risks over time (bis, 2010b). the new regulations tighten the definition of bank capital and require that banks hold a larger amount of capital for a given amount of assets and expand the coverage of bank assets. the purpose of this paper is to estimate whether and to what extent these higher capital requirements will lead to higher loan rates and slower credit growth. this paper aims to broaden and deepen the understanding of the likely impact of the new capital requirements on bank lending and volume of lending, introduced under the basel iii framework rates. complementing the studies mentioned above, the contribution of this paper is twofold concerning the understanding and testing of the impact of the new regulations on the banks. firstly, the paper derives empirically testable relations from a structural model of the capital channel of monetary policy developed by chami and cosimano (2010). in doing so it follows barajas et al. (2010) analysis of large bank holding companies in the united states. in this model, loan demand shocks are transmitted to the credit supply via the regulatory capital constraint. in particular, a bank’s decision to hold capital is modeled as a call option on the optimal future loans issued by the bank. this option value of the bank’s capital increases when the expected level of loans and the amount of capital required by the regulator increase. the bank’s choice of capital influences its loan rate since the marginal cost of loans is a weighted average of the marginal cost of deposits and equity. consequently, the loan rate raises with an increase in required capital as long as the marginal cost of equity exceeds the marginal cost of deposits. another contribution of this paper is that it considers two different groupings of banks: (i) commercial banks in advanced european economies that experienced a banking crisis between 2007 and 2010; and (ii) commercial banks in advanced european economies that did not experience a banking crisis between 2007 and 2010. it would have been preferable to extend the time range but there was a lack of appropriate data for the next two years (2011 and 2012). the empirical estimation of our data relies on a generalized method of moment (gmm) estimation procedure which captures the banks’ simultaneous decisions on how much capital to hold, at what level to set the loan rate and the size of their loan portfolio (gropp&heider, 2010; miller et al., 2010; hall, 2005). in line with cosimano and hakura (2011) the first stage regression for banks’ holdings of capital is specified in terms of previous-period changes in capital, interest expenses (interest payables) and non-interest expenses (figure 1). the hypothesis is that there is a negative and convex relationship between a bank’s capital and each of these factors. in particular, an increase in the future marginal cost of loans results in the bank issuing fewer loans so that the need for equity fades. the loan rate is the dependent variable in the second stage regression and is specified in terms of the optimal bank capital mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 36 | p a g e predicted by the first stage regression as well as interest and non-interest expenses and the level of economic activity. figure 1: the generalized method of moment (gmm) estimation procedure the key findings of the paper are as follows. first, a 1 percent increase in the equity-to-asset ratio is associated with a 0.05 percent average increase in the loan rate for banks in countries that experienced a banking crisis during 2007-2010. for banks in countries that did not experience a banking crisis during 2007-2010 it is associated with a 0.02 percent average increase. secondly, assuming a 1.3 percentage point increase in the equity-to-asset ratio to meet the basel iii regulations, the countrybycountry estimations imply a reduction in the volume of loans by an average 4.97 percent in the long run for the banks in countries that experienced a crisis and by 18.67 percent for the banks in countries that did not experience a crisis. the wide variance in the results reflects cross-country differences in the elasticity of loan demand with respect to loan interest rate and bank’s net cost of raising equity. the authors’ model shows that the estimated elasticity of loan demand ranges from -1.00 percent for ireland to -6.59 percent for denmark. an upper bound on the net cost of raising equity (i.e. the return on equity relative to the marginal cost of deposits) is estimated to range from 0.01 basis points in sweden to 20 basis points in ireland. the remainder of the paper is organized as follows. section 2 refers to related literature. section 3 presents some descriptive statistics for the two groupings of banks examined in the paper. section 3 describes the structural model for banks’ optimal holding of capital and presents the specification of the empirical tests for bank capital, lending rates and loans. the core principals of the gmm estimator first stage regression second stage regression holdings of capital loan rate δ ( capital ) δ ( ) interest expenses δ non ( interest expenses) optimal bank capital level of economic activity interest expenses non interest expenses mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 37 | p a g e are presented in section 4. section 5 reports the results. finally, the conclusion is presented in section 6. 2. related literature there are several studies which have handled the effects of capital requirements upon banking performance. to begin with some of them seek the degree on which capital requirement levels affect the profitability of commercial banks. for example, rojas-suarez (2002) argued that capital standards are not found to strengthen banks in emerging countries when chiuri et al. (2002) found that the enforcement of capital requirements is found to reduce the supply of finance; to help prevent negative macroeconomic effects, capital requirements should be phased in gradually. the worst impact is usually felt when capital requirements are implemented in the aftermath of a crisis. in response to the deposit insurance post crisis, demirguc-kunt and kane (2002) challenge the rationale of encouraging countries to adopt explicit deposit insurance without first addressing supervisory and institutional financial weaknesses. ‘weak’ countries that adopt explicit deposit insurance usually find that the economic conditions subsequently suffer because private sector monitoring is replaced with poorquality government monitoring (cullet al., 2002; laeven, 2002). several studies in this category offer a descriptive debate over arbitrary balance of regulation (e.g. di noia& di giorgio, 1999; de bondt&prast, 2000 inter alia). ferri et al. (2001) argue that the linking of bank capital requirements to private sector ratings would prove undesirable for non-high-income countries. corporate and bank ratings in low-income countries are not updated as often or as extensively as high-income countries. accordingly, banks in lower-income countries with improved asset quality would be disadvantaged. analysis of explicit or implicit deposit insurance is a familiar regulatory theme in regard to risk-shifting within an economy. explicit deposit insurance occurs when a government guarantees the safety of bank deposits. the level of coverage may vary between different types of depositors and banks to avoid bank runs but not without moral hazard issues to contend (laeven, 2002). implicit deposit insurance entails uninsured deposits. the expectation of government bailout of the depositor is extremely high in eastern europe and latin america and moderately high in asia and africa (hovakimian et al., 2003). it is recommended that banking supervision should be assigned to an agency formally separated from the central bank because the inflation rate is higher and more volatile in countries where the central bank acts as a monopolist regulator. not all countries can afford deposit insurance, especially those with weak banks and regulators (di noia& di giorgio, 1999). moreover, one part of literature argues that there are significant macroeconomic benefits from raising bank equity. higher capital requirements lower leverage and the risk of bank bankruptcies (e.g. admati et al., 2010). another part of literature points out that there could be a significant cost of implementing a regime with higher capital requirements (i.e. bis, 2010a). higher capital requirements will increase banks’ marginal cost of loans if the marginal cost of capital is greater than the marginal cost of deposits, i.e. if there is a net cost of raising capital. in that case, a higher cost of equity financing relative to debt financing would lead banks to raise the price of their lending and could slow loan growth and hold back the economic recovery (angelini et al., 2011). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 38 | p a g e other studies have examined the impact of higher capital requirements on bank lending rates and the volume of lending. kashyap et al. (2010) calibrate key parameters of the united states’ banking system to identify the impact of an increase in the equity-to-asset ratio. they find an upper bound of 6 basis points for the increase in u.s. banks’ lending spreads following an increase in the capital-to-asset ratio in line with that required under basel iii. bis (2010a) estimates a significantly higher increase in the lending spread on the order of between 12.2 and 15.5 basis points, based on simulations with 38 macroeconomic models maintained by the central banks of advanced economies. angelini et al. (2011) reports similar findings. similarly with the help of aggregate banking data slovik and cournede (2011) use accounting relations to find that lending spreads could be expected to increase by about 15 basis points. several papers have analyzed the impact of monetary policy on banks with capital constraints ending in differing conclusions. whether monetary policy affects bank lending or not depends on the assumption that bank loans are financed by reservable deposits or on the imperfect elasticity of the supply of non-reservable deposits. for example, labadie (1995) using an overlapping generations framework shows that the addition of capital constraints on banks has no real effect. this result hinges on the assumption that banks can costlessly raise equity or external funds. on the other hand kopecky and vanhoose (2004a, 2004b) following deterministic models assume an increasing marginal cost of equity in a competitive banking industry with capital constraints binding in the short term; monetary policy in their framework has real effects. thakor (1996) uses an asymmetric information model of bank lending but maintains the assumption of costly external funds. he shows that monetary policy impacts bank lending. furthermore, bolton and freixas (2006) provide an asymmetric information explanation for the high cost of external funds for banks. in a general equilibrium model they demonstrate how an open market sale of securities decreases the net interest margin for the bank which shifts lending away from firms with poor projects. on the other hand, firms with positive net present value projects as well as banks shift away from bonds since they are crowded out by government bonds. however, with the total capital constraint always binding, the total amount of lending does not change. finally, van den heuvel (2002) using a dynamic model of banking analyses the role of bank capital channel in the transmission of monetary policy. he shows simulations in which the resulting interest rate mismatch implies that monetary policy affects the supply of loans through its impact on the value of bank capital. 3. data and descriptive statistics annual data regarding commercial banks for a number of advanced european countries are obtained from the bankscope database for the 2003-2010 period. two different groupings of banks are examined. the first grouping includes the commercial banks in a group of european economies that experienced a banking crisis between 2007 and 2010. the second grouping includes the commercial banks in a group of european economies that did not experience a banking crisis between 2007 and 2010. the sample consisted of advanced european economies where the amount of available information was sufficient for performing all necessary calculations. how may one define a banking crisis? the imf (1998) defines a banking crisis as a situation in which bank runs and widespread failures induce banks to suspend the convertibility of their liabilities or mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 39 | p a g e which compels the government to intervene in the banking system on a large scale. to identify banking crises existing empirical studies (kaminsky& reinhart, 1999; glick & hutchison, 2001; bordo et al., 2001 inter alia) rely on the observation of certain events such as forced bank closures, mergers, runs on financial institutions and government emerging measures. for instance, demirguckunt and detragiache (1998) identify an episode as a crisis when at least one of the following conditions holds: (i) the ratio of non-performing assets to total assets in the banking system exceeded 10%; (ii) the cost of the rescue operation was at least 2% of the gdp; (iii) banking sector problems resulted in a largescale nationalization of banks; (iv) extensive bank runs took place or emergency measures such as deposit freezes, prolonged bank holidays, or generalized deposit guarantees were enacted by the government in response to the crisis. according to von hagen and ho (2007) such observation has several shortcomings. first, it tends to identify banking crises too late. for example, the cost of a bailout is available only after a crisis and with a time lag. events such as the nationalization of banks and bank holidays are likely to occur only when a crisis has already spread to the whole economy. governments may provide hidden support to banks at the early stages of a crisis for political reasons; that is early policy interventions may not be observable. second, there are few objective standards for deciding whether a given policy intervention is ‘large’. third, the timing of crisis periods on this basis is difficult because the exact date of policy interventions is often uncertain or unclear (caprio&klingebiel, 1996). fourth, such a method identifies crises only when they are severe enough to trigger market events. crises successfully contained by prompt corrective policies are neglected. the index of money market pressure (imp), developed by von hagen and ho (2007) has been used in order to identify banking crises. they define the reservesto-bank deposits ratio γ as the ratio of total reserves held by the banking system to total non-bank deposits in the banking sector. in a period of high tension in the money market this ratio increases either because the central bank makes additional reserves available to the banking system or because depositors withdraw their funds from the banks. actually, the imp denotes the weighted average of changes in the ratio of reserves to bank deposits and changes in the short-term real interest rate (the real interest rate on short term loans), (figure 2). figure 2: ways of reaction for the central bank, in case of increase in the the weights are the sample standard deviations of the two components. thus, the index is defined as: t r t impt demand for reserves increase in demand for reserves central bank short term i nterest rate supply of bank reserves mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 40 | p a g e r (1) where∆γ is the change in total bank reserves relative to non-bank deposits, ∆r is the change in the short term real interest rate and σ refers to the standard deviation of each variable. table 1 reports the year and quarter in which imp meets two criteria: (i) it exceeds the 98.5 percentile, 97 percentile, and 95 percentile of the sample distribution of imp for each advanced economy; and (ii) there is an increase in imp by at least five percent from the previous period. the first condition assures that only exceptional events are identified as crises. however, since every empirical distribution must have a 98.5 percentile, the second condition is used to allow for the possibility that countries had no banking crisis during the sample period. note that relaxing the first condition and using a lower percentile raises the risk of calling too many episodes crises, while tightening it increases the risk of missing true crises. table 1 identifies banking crises in european economies using the imp. based on this index, austria, belgium, germany, greece, netherlands, sweden, spain, italy, and the united kingdom are identified as having experienced a banking crisis between 2007 and 2010 when the cutoff is the 98.5 percentile (shown in faded color). table 1: banking crises in european economies identified using the von hagen and ho (2007) index of money market pressure. thresholds country 98.5% 97% 95% austria 2008q4 1994q4,2008q4 1994q4,1995q4,1999q3,2008q4 belgium 2006q4,2008q3 2005q4,2006q4,2008q3 1997q4,2005q4,2006q4,2008q3 czech republic 1997q2,1997q4 1997q2,1997q4,2008q4 1994q1,1997q2,1997q4,2008q4 denmark 1993q1,1993q3 1993q1,1993q3,2000q3 1993q1,1993q3,2000q3,2008q3 finland 1992q3,1999q4 1992q3,1999q4,2008q3 1992q3,1999q4,2000q3,2008q3 france 1992q3,1993q3 1992q3,1993q3 1992q3,1993q3,2008q3 germany 2008q3 1997q4,2008q3 1997q4,2000q4,2008q3 greece 2008q4,2010q1 1993q1,2008q4,2010q1 1993q1,1998q3,2008q4,2010q1 ireland 1992q3 1992q3 1992q3,2008q3,2009q1 italy 1992q3,2008q4 1992q3,2000q2,2008q4 1992q3,1999q4,2000q2,2008q4 netherlands 2008q3 2003q3,2008q3 2001q3,2003q3,2008q3,2009q3 portugal 1992q3,1994q2 1992q3,1994q2,2008q3 1992q3,1994q2,2007q3,2008q3 spain 1992q4,2008q3 1992q4,2007q3,2008q3 1992q4,1995q2,2007q3,2008q3 sweden 2008q4 2008q4 2008q4,2009q3 united kingdom 2008q3,2009q2 1993q3,2008q3,2009q2 1993q3,2007q3,2008q3,2009q2 note: each column reports the year and the quarter in which the von hagen and ho (2007) index of money market pressure (imp) meets two criteria: (i) it exceeds the 98.5 percentile, 97 percentile, and 95 percentile of the sample distribution of imp for each advanced economy in the sample; and (ii) the increase in imp from the previous period is by at least five percent (see text for explanation). faded countries represent advance european economies identified as having experienced a banking crisis between 2007 and 2010. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 41 | p a g e a possible objection against this method might be that modern banking crises are asset-side rather liability-side crises. an example is that a banking crisis caused primarily by a collapse in real estates’ prices (e.g. usa in 2007 or china in 2013) or a wave of corporate bankruptcies. but if the demand for reserves increases when the quality of bank assets deteriorates, such a dichotomy is irrelevant for the purposes of this study. a second objection is that this method is not applicable to environments where interest rates are controlled by the central bank. tightening the second condition increases the risk of missing true crisis episodes. in the empirical work, using a 10% minimum increase would exclude some well-known crisis episodes in the data. but the imp has the advantage that its quality does not depend on the flexibility of interest rates as long as the central bank’s interest rate management relies on market measures to control the interest rate. a third objection might be that using the imp, one can identify the beginning but not the end of a banking crisis. this is true, but after studying the more relevant literature it seems that there is no consensus on what kind of criteria one should use to declare that a crisis is over. such issue is recommended for further research. later on, in tables 2-3 bank profitability is examined and represented by the return on equity (roe). it seems that this measurement was markedly affected by the 2007-2010 financial crisis for each grouping of banks. further insight into the changes in the banks’ profitability can be obtained from the equation expressing the roe as the product of the equity multiplier (a/e) and the return on assets (roa). the roa can be decomposed using methodology of koch and macdonald (2007) as follows: a a nim nii nie sg pll tax (2) roe e roa e a a a a a a , where e is equity; a is total assets; nim is the net interest margin calculated as the difference between interest income (ii) and interest expense (ie); nii is non– interest income; sg is security gains (or losses); nie is non–interest expense; pll is provisions for loan losses, and tax is the taxes paid. table 2 shows the degree of banks’ profitability as measured by the roe in european economies that registered a financial crisis between 2007 and 2010.these banks only registered a negative roe in 2009 (shown in faded color). the decline in these banks profitability is largely attributable to the decline in (nii+sg-tax)/a stemming from losses on securities (a small percentage of the decline can also be attributed to nii because of the decline in off-balance sheet assets; it is presumed that taxes did not change appreciably over this period and the 0.4 percentage point increase in the loan loss provision ratio that are amplified by the sharp increase in the equity multiplier between 2007 and 2010. the equity multiplier for this group of banks increases substantially in 2009. furthermore, the noninterest expense ratio declined by almost one percentage point between 2007 and 2010. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 42 | p a g e table 2: banking indicators for european economies that had a banking crisis in 2007-2010 2007 2008 2009 2010 equity-asset ratio mean 14.2 13.5 11.2 10.9 median 8.7 7.9 8.1 8.2 std. dev. 17.1 17.4 12.8 12.6 no. of obs. total capital ratio 892 929 497 484 mean 18.1 14.8 14.9 14.8 median 12.2 12.4 12.9 12.8 std. dev. 29.1 9.7 8.3 8.2 no. of obs. tier 1 capital ratio 364 461 101 95 mean 15.7 12.4 12.4 12.4 median 9.6 10.6 10.8 10.6 std. dev. 30.7 9.5 7.5 7.3 no. of obs. return on average equity (roe) 344 424 317 296 mean 9.8 3.4 -0.5 0.3 median 8.2 4.4 4.1 3.9 std. dev. 17.5 28.3 24.1 23.8 no. of obs. decomposition of bank profitability 911 937 492 488 equity multiplier (a/e) 7.2 7.4 8.5 8.1 net interest margin (nim /a ) 3.2 2.6 3.1 2.9 interest expense to total assets (ie/a) 3.3 2.6 1.7 1.5 noninterest expenses (nie /a ) 5.2 5.1 4.0 3.8 loan loss provisions (pll/a ) 0.4 0.5 0.9 0.7 noninterest income plus securities gains, net of taxes (nii + sg tax )/a 4.1 3.4 2.1 1.8 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 43 | p a g e off-balance sheet items to total assets mean 21.4 18.3 19.3 18.5 median 6.5 5.1 9.1 8.8 std. dev. 61.6 55.3 36.8 32.3 no. of obs. 701 744 426 389 similar results are reported in table 3 for the banks in european countries that did not experience a financial crisis with the exception of the decline in roe being larger for this group of banks (shown in faded color) due to their larger equity multiplier. table 3: banking indicators for european economies that did not have a banking crisis in 2007-2010 2007 2008 2009 2010 equity-asset ratio mean 8.7 7.6 7.3 7.1 median 6.3 5.6 5.4 5.1 std. dev. 8.8 8.3 8.9 8.2 no. of obs. total capital ratio 333 333 224 218 mean 13.9 13.5 14.1 13.8 median 11.2 10.9 12.1 11.7 std. dev. 18.6 16.8 16.9 16.7 no. of obs. tier 1 capital ratio 231 242 264 255 mean 11.1 10.9 11.5 11.1 median 8.5 9.2 9.5 9.3 std. dev. 18.8 17.3 17.4 17.3 no. of obs. return on average equity (roe) 221 239 203 188 mean 8.9 2.7 -5.1 3.4 median 8.6 4.5 1.3 1.1 std. dev. 18.6 30.5 38.4 37.8 no. of obs. 351 351 256 222 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 44 | p a g e decomposition of bank profitability equity multiplier (a/e) 11.1 12.1 12.8 12.1 net interest margin (nim /a ) 2.3 2.3 2.0 1.9 interest expense to total assets (ie/a) 2.1 2.2 1.0 1.0 noninterest expenses (nie /a ) 2.2 2.2 2.6 2.5 loan loss provisions (pll/a) 0.1 0.2 0.6 0.3 noninterest income plus securities gains, 1.4 net of taxes (nii + sg tax )/a off-balance sheet items to total assets 1.3 1.3 1.3 mean 20.1 17.8 13.1 13.1 median 8.3 6.2 2.6 2.2 std. dev. 38.1 32.2 31.4 31.2 no. of obs. 337 337 227 211 in summary, the information derived from table 2 and table 3 suggests that the financial crisis had a significant negative impact on bank profitability including banks in countries that did not experience a crisis. the decline was directly associated mostly with capital losses on marketable securities. as a consequence banks experienced a significant deterioration in their equity-to-asset ratios. 4. specification of empirical results following greene (2012), cosimano and hakura (2011) and chami and cosimano (2010), the level of capital held by banks depends on the banks’ anticipation of their optimal loans in the future. capital is seen as a call option in which the strike price is the difference between the expected optimal loans and the amount of loans supported by the capital. the capital limits the amount of loans since a fraction of the total loans must be held as capital. if the optimal amount of loans during the next period exceeds this limit, then the bank would suffer a lost opportunity which is measured by the shadow price on the capital constraint (greene, 2012). in this case the total capital has a positive option value and the bank will tend to hold more capital than required in order to gain flexibility to increase its supply of loans in the future. if on the other hand there is a low demand for loans in the future such that the shock to demand is below the critical level, the total capital serves no purpose resulting in zero payoffs. thereinafter, banks with more capital will have a higher strike price since their loan capacity is greater. as a result, an increase in capital leads to a decrease in the demand for future capital, k’. an increase in the marginal cost of loans leads an impending forecast of a higher marginal cost by the bank since such changes tend to persist into the future. consequently, a bank anticipates a decrease in their optimal future loans and will in turn reduce their holding of capital at present. similarly as stated in cosimano and hakura (2011) an increase in marginal revenue related to stronger economic activity will lead to an increase in optimal loans so that the optimal capital goes up. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 45 | p a g e in view of this and following barajas et al. (2010), the relation for the banks’ choice of capital is specified as: k 0 1 2 k δ k 3 4 k rd 5 6 k cl cd 7 log(a) (3) a a a a a here, k is total current capital, κ’ is future capital, a is total assets, rd is the interest rate on deposits, cl is the non-interest marginal factor cost of loans and cd is the non k interest marginal factor cost of deposits. call options 1 2 0 are generally a decreasing and convex in the strike price (kolb &overdahl, 2010). as a result it is expected that such that α1<0, α2>0. similarly, it is expected that α3<0, α4>0, α5<0 and α6>0. consequently, a decrease in past capital which lowers the strike price should lead to a significant increase in total current capital. this impact should be smaller when the bank has more initial capital consistent with the convex property of call options (hull, 2012). in addition, a decrease in interest and non-interest expenses should lead to an increase in bank capital at a decreasing rate. banks are assumed to have some monopoly power so that they choose the interest rate on loans (rl) such that the marginal revenue of loans equals to its marginal cost (claessens&laeven, 2004). the marginal cost consists of the interest rate on deposits a d k (rd) and the non-interest marginal cost of loans and r deposits a respectively cland cd. the marginal cost of loans also depends on the risk adjusted rate of return on capital (raroc) (see figure 3). figure 3: relationship of marginal revenue and cost of loans thus, following cosimano and hakura (2011) total marginal cost (mc) is given by mc d rd cd cl a drk (4) a marginal cost of loans n on interest marginal cost of loans interest rate on deposits n on interest marginal cost of deposits marginal revenue of loans interest rate on loans r isk adjusted rate of return on capital mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 46 | p a g e here rk is the return on equity (roe), a is total assets and d is deposits so that bank capital is k’ = a d. as a result the marginal cost raises with an increase in bank capital only if rk>(rd+ cd). moreover the marginal revenue of loans depends on economic activity m as it impacts the demand for loans. following fase (1995) the optimal loan rate is given by: rl b0 b1rd b2 cl cd b3 k b4 log a b5 m 1 (5) a an increase in the deposit rate, the non-interest cost of deposits and the provision for loan losses would lead to an increase in the loan rate since the k marginal cost of loans would increase. the marginal cost also increases with an a increase in raroc. this effect is measured by the optimal capital asset ratio as given in equation 5 above. an increase in the demand for loans would raise both marginal revenue and the loan rate. this effect is captured by the level of economic activity (m) as measured by real gdp and the inflation rate. finally, 1 denotes the estimation error. with monopoly power the demand for loans (l) depends on the optimal loan rate of the bank as determined in (5) above and the level of economic activity (m). as a result the demand for loans (l) can be modeled as: l c0 c1 rl c2 m 2 , where ci, (i=0,1,2) are parameters to be estimated. it is expected that an increase in the loan rate would reduce the demand for loans and hence loans issued by the bank. on the other hand an increase in economic activity is expected to raise the demand for loans. note thatc1and c2capture the long-run responses of loans to changes in loan rates and the level of economic activity. hull (2012) argues that banks simultaneously choose the optimal amount of capital to hold, the loan rate, and the quantity of loans. because of this simultaneity a gmm estimation procedure is properly used. in the first stage (figure 4) the capital regression is estimated to determine the bank’s optimal (or projected) level of capital (equation 3). the change in the capitalto-asset ratio, the interest expense ratio, the non-interest expense ratio and the nonperforming loans-to-total assets ratio as well as the interaction of each of these variables with the previous period capital-to-asset ratio are assumed to be instruments for the optimal capital ratio. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 47 | p a g e the predicted demand for capital is then used in the second-stage regression (equation 5) for the bank’s loan rate (figure 5). figure 5: second stage in the generalized method of moment procedure the gmm estimations are conducted following greene (2012) and zeileis (2004) using the bartlett kernel function (analyzed in the following section) thereby yielding heteroskedasticity autocorrelation-consistent (hac) standard errors (using matlab r2011b software). lastly the regression for the demand for loans (equation 6) is estimated using the loan rates predicted by the gmm estimations as an explanatory variable (figure 6). figure 6: regression for the demand for loans the estimations for the two grouping of banks are conducted using data for the 2003 to 2010 period. the estimations are conducted on a country-by-country basis. the number of banks included in every assessment depends on the degree of concentration of the banking system in each country and the availability/accessibility of the data in the bankscope database. 5. heteroskedasticity and autocorrelation consistent (hac) standard errors following laszlo (1999) the following equation shows how the asymptotic covariance matrix of the gmm estimator could be derived in the presence of conditional heteroskedasticity: n where ˆ is the diagonal matrix of squared residuals uˆi2from ~ , the consistent but not necessarily efficient first-step gmm estimator. the resulting estimatesˆcan be used to conduct consistent inference demand for loans sˆ 1n i 1 uˆi2zi zi 1n ˆ (7) figure 4: first stage in the generalized met hod of moment procedure optimal level of capital interest expense capital to asset non interest expense first stage gmm capit al non performing loans to total assets p revious period capital to asset loan rate second stage gmm optimallevel of capital simple regression loan rate mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 48 | p a g e j for the first-step estimator or it can be used to obtain and conduct inference for the efficient gmm estimator. the estimator is now further extended to handle the case of non-independent errors in a time series context. the notation is correspondingly gt g s 0,t s changed so that observations are indexed by t and s rather than i. in the presence of serial correlation . in order to derive consistent estimates of s, j gtgt j is defined as the auto-covariance matrix for lag j. the long-run covariance matrix can be then written s avar g 0 j j (8) j 1 , which may be seen as a generalization of equation (7) with 0 gig i and j gtgt j , j 1, 2, is defined as the product ofzt andut , the auto-covariance matrices may be expressed as j utut jzt zt j .ut ˆ j andut j are then replaced by consistent residuals from first-stage estimation to compute the sample auto-covariance matrices defined as ˆ 1 n j gˆtgˆt j 1 n j zt uˆtuˆt jzt j (9) j n t 1 n t 1 there is no existence of an infinite number of sample autocovariances to insert into the infinite sum in equation (8). furthermore, it is not possible to simply insert all the autocovariances from 1 through n because this would imply that the gˆ i is going off to infinity with the sample number of sample orthogonality conditions size which precludes obtaining a consistent estimate of s. the autocovariances must converge to zero asymptotically as n increases. one way to handle this in would be for the summation to be truncated at a specified lag q. thus the s matrix can be estimated by sˆ ˆ0 q1 k qjn ˆj ˆ j (10) j ut and u t j are replaced by consistent estimates from first-stage , where estimation. the kernel function, j kqn q n defined as the applies appropriate weights to the terms of the summation with bandwidth of the kernel possibly as a function of n (hayashi, 2000). in many kernels consistency is obtained by having the weight sˆ fall to zero after a certain number 1 of lags. one important and frequently used approach to this problem is qn that of newey and west (1987) which generates using the bartlett kernel function and a user-specified value of q. for the bartlett kernel mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 49 | p a g e k if j qn 1, 0 otherwise. these estimates are said to be hac as they incorporate equation7 in computing. the newey–west (bartlett kernel function) specification is only one of many feasible hac estimators of the covariance matrix. andrews (1991) shows that in the class of positive semi-definite kernels the rate of convergence of sˆ s depends on the choice of kernel and bandwidth. the bartlett kernel’s performance is improved by those in a subset of this class including the quadratic spectral (qs) kernel. most (but not all) of these kernels guarantee that the estimatedsˆ is positive, definite and therefore always invertible (hall, 2005). under conditional homoskedasticity the expression for the autocovariance matrix simplifies: j utut j tzt j utut j tzt j (11) and the calculations of the corresponding kernel estimators also simplify (hayashi, 2000). these estimators may perform better than their heteroskedastic/robust counterparts in finite samples. 6. cross-country estimation results 6.1impact of basel iii on banking performance table 4 reports the results of estimating equation (3) as the first stage in the gmm procedure on a country by country basis for the two groupings of banks. due to the availability of data for countries that experienced a financial crisis between 2007 and 2010, results are reported for germany, the united kingdom, greece and sweden. on the other hand, france, netherlands and austria were excluded because of insufficient data. for the second grouping of banks in countries which did not experience a crisis, results are reported for czech republic, denmark and ireland. even though the change in the equity-to-asset ratio has the predicted sign α1<0 for the u. k., greece, denmark and ireland, it is statistically significant for only two countries (the u.k. and denmark). the estimated coefficients on this variable for the other countries have the wrong sign and are statistically insignificant except for sweden. the interaction term α2>0 has the correct sign for the u.k., greece, denmark, and ireland; however only the u.k., denmark and ireland are statistically significant. the other countries have the wrong sign with germany and sweden being statistically significant. the results for the interest expense-toasset ratio are more consistent with the theory. all the countries that experienced a crisis have the correct signs α3<0 and α4>0 which are all statistically significant except greece. among the counties that did not experience a crisis, denmark, czech republic, and ireland had correctly signed and significant coefficients. furthermore, the non-interest expense ratio has statistically significant and correct signs α5<0 and α6>0 for the u.k., greece, sweden, and denmark. nonperforming loans have significant and correct signs for none of the countries. the logarithm of total assets is only significant at the one percent level for the u.k. the coefficient on the logarithm of assets is negative for most of the countries implying that larger banks have smaller equity-to-asset ratios. overall, the results are consistent with equation (3). the estimates for equation (5) for the two country groupings are provided in table 5. equity and interest expense ratios have the predicted signs and are statistically significant at the five percent level. the non-interest expense-to-asset ratio has the correct positive effect on the loan income of the banks mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 50 | p a g e for all countries. they are statistically significant except for denmark and ireland. the results for nonperforming loans-to-assets are insignificant for most of the countries. furthermore, table 6 reports the results of estimating the long run loan demand equation (6) for the country-by-country estimations. for most of the countries the loan rate has the expected negative impact on the loans issued by the bank. given the mean predicted loan rate and loans for the banks in each respective country, the elasticity of loan demand with respect to the predicted loan rate in table 7 is estimated to range from 1.00 percent in ireland to 6.59 percent in denmark. consequently, the banks across most of these countries operate at loan levels associated with positive marginal revenue. table 7: impact of a 1.3 percentage point increase in the equity-asset ratio on loans based on regressions for 2003–2010 impact on loan rate * net cost elasticity of of raising equity loan demand ** *** percentage change in loans **** crisis countries germany 0.13 0.11 -1.79 -7.11 sweden 0.04 0.01 -5.88 -3.64 u.k. 0.06 0.04 -2.46 -4.16 average other countries 0.13 0.16 -3.37 -4.97 denmark 0.23 0.17 -6.59 -31.11 ireland 0.21 0.20 -1.00 -6.23 average 0.22 0.18 -3.79 -18.67 source: authors calculations * based on estimates reported in table 5. ** impact on loan rate times the change in asset-to-equity ratio (equity multiplier). ***the elasticity of loan demand for each country banks is calculated by multiplying the estimated coefficient for the loan rate reported in table 6 by the average loan rate divided by average level of loans in the sample. **** this is calculated as the product of the percentage increase in the loan rate times the elasticity of loan demand with respect to changes in the loan rate. table 8 summarizes the results when the estimations are conducted excluding the crisis period from the data. the average impact of the equity-to-asset ratio on the loan rate is slightly smaller when the crisis period is excluded for all countries. the elasticity of loan demand is on average lower in crisis countries and higher for noncrisis countries when the crisis period is excluded. this result might imply that the banks’ customers in crisis (non crisis) countries had a bigger (smaller) change in their demand for loans during the financial crisis. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 51 | p a g e table 8: impact of a 1.3 percentage point increase in the equity-asset ratio on loans based on regressions for 2003–2007 impact on loan rate net cost elasticity of percentage of raising equity loan demand change in loans *** * ** crisis countries germany 0.11 0.09 -2.09 -7.63 u.k. 0.02 0.02 -2.14 -2.16 average other countries 0.06 0.05 -2.11 -4.89 denmark 0.19 0.13 -9.66 -39.23 source: authors calculations * impact on loan rate times the change in asset-to-equity ratio (equity multiplier). ** the elasticity of loan demand for each country banks is calculated by multiplying the estimated coefficient for the impact of the predicted loan rate from the secondstage gmm regression on loan demand by the average loan rate divided by average level of loans in the sample. *** this is calculated as the product of the percentage increase in the loan rate times the elasticity of loan demand with respect to changes in the loan rate. 6.2 comparing the results with those of other studies to phase in the new regulations in a manner that is compatible with the global economic recovery, the bank of international settlements (bis) and the financial stability board (fsb) undertook studies to assess the macroeconomic effects of the transition to higher capital and liquidity requirements (sinha, 2012). in february 2010, a macroeconomic assessment group (mag) was set up by the bcbs (basel committee on banking supervision) and fsb which submitted an interim report in august 2010 (bis, 2010a) and a final report in december 2010 (bis, 2010c). the mag’s quantitative analysis was complemented by consultations with academics and experts in the private sector as well as with the imf. the mag applied common methodologies based on a set of scenariosfor shifts in capital and liquidity requirements over different transition periods. the mag analysis proceeds on the basis that since it is more expensive for banks to fund assets with capital than with deposits or wholesale debt, banks facing stronger capital requirements will seek to use a combination of increasing retained earnings and issuing equity as well as reducing risk weighted assets(rwas), (cornford, 2010). the approach will depend at least partially on the length of time over which capital needs to be increased. if the time span is shorter, banks are likely to emphasise equity issuance, shift in asset composition and reduced lending. in a longer implementation schedule banks will have more flexibility with regard to mechanisms and they may place more reliance on raising additional capital primarily through retained earnings which will substantially mitigate the impact on credit supply and eventually on aggregate activity. based on evidence from past episodes the mag mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 52 | p a g e analysis assumes that banks will initially increase lending margins and reduce the quantity of new lending. any increase in the cost and decline in the supply of bank loans could have a transitory impact on growth especially in sectors that rely heavily on bank credit. in the longer term, however, as banks become less risky both the cost and quantity of credit should recover, reversing the impact on consumption and investment. based on the above intuition the mag analysis was largely formulated on a two-step approach. the first step involves estimating the effect of higher capital targets on lending spreads and lending volumes using statistical relationships and accounting identities to predict how banks will adjust. the second step takes these forecast paths for lending spreads and volumes as inputs into standard macroeconomic forecasting models in use at central banks and regulatory agencies. these models are then used to estimate the effects of changes to lending spreads and bank lending standards on consumption, investment and other macroeconomic variables. in particular the 2009 tier 1 ratio for group 1 banks in the bis study is 10.5 percent. it is interesting to note that this study’s 5.1 roe is identical to the net equityto-risk weighted asset (cet1) ratio for their group 1 banks (banks that have over three billion euros of tier 1 capital) while it is 11.1 percent before the changes in regulation (i.e. for the gross common equity tier 1 ratio) in the bis study. this result suggests that the new equity to risk-weighted asset ratio is close to a pure equity-toasset ratio. the bis estimates that under basel iii the equity to risk-weighted asset (cet1) ratio would fall to 5.7 percent from 11.1 percent for the gross cet1 ratio (pre-basel iii ratio) for group 1 banks. following cosimano and hakura (2011) it would be assumed that most of this decline is associated with tighter standards on bank equity with the removal of goodwill being the most important one. the rest of the decline arises from stricter rules on rwas. the biggest contributors to this increase are adjustments for counterparty risk and the application of the capital definition. table 7 reports calculations assuming capital shortfall of 1.3 percentage points under basel iii for the cross-country results. for the crisis countries a 1.3 percentage point increase in equity-asset ratio is estimated to have a more substantial impact on loans (5.07%). the impact of basel iii is largest in the non-crisis denmark since it is estimated to have both a relatively high elasticity of loan demand with respect to changes in the loan rate and a high net cost of raising equity. if the crisis period is excluded from the estimation period (table 8) then the impact of basel iii in the crisis countries is slightly smaller following the lower elasticity of demand across these countries. on the other hand, the average elasticity of loan demand is larger for the non-crisis countries which dominate the decline in the cost of equity under the shorter time period. the results for the loan rates reported in column 1 in table 7 are broadly consistent with the findings from bis (2010c) for the loan rate which showed that the mean lending rate (weighted by gdp) would increase (across 53 models) by 16.7 basis points over eight years and 15 basis points respectively. however the magnitude is significantly above the upper bound of 6 basis points calibrated in kashyap et al. (2010). 7. conclusions basel iii was developed in response to the deficiencies in financial regulation revealed by the late2000s financial crisis and the flaws spotted in basel ii as discussed in this paper. it is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk agreed upon by the members mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 53 | p a g e of the basel committee on banking supervision in 2010-2011. this innovative framework strengthens bank capital requirements and introduces new regulatory requirements on bank liquidity and bank leverage. the change in the calculation of loan risk in basel ii for instance which some consider a causal factor in the credit bubble prior to the 2007-2008 collapse (in basel ii one of the principal factors of financial risk management was outsourced to companies that were not subject to supervision i.e. credit rating agencies). ratings of creditworthiness and bonds, financial bundles and various other financial instruments were conducted by official agencies without supervision thus leading to aaa ratings on mortgage-backed securities, credit default swaps, and other instruments that proved in practice to be extremely bad credit risks. in basel iii a more formal scenario analysis is applied. this paper aims to broaden and deepen the understanding of the likely impact of the new capital requirements introduced under the basel iii framework on bank lending rates and volume of lending. the contribution of this paper is threefold concerning the understanding and testing of the impact of the new regulations on the banks. firstly, the paper derives empirically testable relations from a structural model of the capital channel of monetary policy developed by chami and cosimano (2010). in doing so it follows barajas et al. (2010) analysis of large bank holding companies in the united states. in this model loan demand shocks are transmitted to the credit supply via the regulatory capital constraint. in particular, a bank’s decision to hold capital is modeled as a call option on the optimal future loans issued by the bank. this option value of the bank’s capital increases when the expected level of loans and the amount of capital required by the regulator increase. the bank’s choice of capital influences its loan rate since the marginal cost of loans is a weighted average of the marginal cost of deposits and equity. consequently the loan rate increases with an increase in required capital as long as the marginal cost of equity exceeds the marginal cost of deposits. on this basis, the paper’s results suggest that banks’ responses will vary considerably from one european economy to another reflecting cross-country variations in the tightness of capital constraints, banks’ net cost of raising equity, and elasticities of loan demand with respect to changes in loan rates. the country-bycountry estimations which include both large and small banks for which data is available in each country suggest that the net cost of raising equity by 1.3 percentage points ranges from 1 basis point in sweden to 20 basis points in ireland. similarly the estimated elasticities of loan demand range from 1.0 percent in ireland to 6.59 percent in denmark. as a result the average impact of a 1.3 percentage point increase in the equity-asset ratio on loan growth for the crisis countries is 5.07 percent. this impact is significantly higher in the non-crisis countries such as ireland and denmark. the potential for a substantial impact of capital requirements makes it even more important for policy makers in these countries to identify exactly why the elasticity of loan demand or cost of equity is so high in these economies. references admati, a. r., demarzo, p. m., hellwig, m. f. &pfleiderer, p. (2010). fallacies, irrelevant facts, and myths in the discussion of capital regulation: why bank equity is not expensive. working paper no. 42, graduate school of business. california: stanford university. andrews, d. w. k. (1991), heteroskedasticity and autocorrelation consistent covariance matrix estimation.econometrica, 59, 817–858. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 54 | p a g e angelini, p., clerc, l., cúrdia, v., gambacorta, l., gerali, a., locarno, a., motto, r., roeger, w., van den heuvel, s. &vlček, j. (2011). basel iii: long-term impact on economic performance and fluctuations. federal reserve bank of new york staff report no. 485. bis. (2010a). assessing the macroeconomic impact of the transition to stronger capital and liquidity requirements. retrieved august 10, 2014, from http://www.bis.org/list/basel3/index.htm. bis. (2010b). basel iii: international framework for liquidity risk measurement, standards and monitoring. retrieved august 15, 2014, from http://www.bis.org/list/basel3/index.htm. bis. (2010c). assessing the macroeconomic impact of the transition to stronger capital and liquidity requirements. retrieved december 20, 2014, from http://www.bis.org/list/basel3/index.htm. barajas, a., chami, r., cosimano, t. &hakura, d. (2010).u.s. bank behaviour in the wake of the 2007– 2009 financial crisis. imf working paper no. 10/131. baum, c. f. (2006). an introduction to modern econometrics using stata. college station, tx: stata press. berrospide, j. m. & edge, r. m. (2010). the effects of bank capital on lending: what do we know? and what does it mean? federal reserve board, finance and economics discussion series no. 44. bolton, p. &freixas, x. (2006).corporate finance and the monetary transmission mechanism. the review of financial studies,19, 829-870. bordo, m., eichengreen, b., klingebiel, d. & martinez-peria, m. s. (2001). is the crisis problem growing more severe? economic policy, 16, 51-82. caprio, g. &klingebiel, d. (1996). bank insolvencies: cross country experience. world bank working papers no. 1620.retrieved august 22, 2014, from http://elibrary.worldbank.org/docserver/download/1620.pdf?expires=1382181004 &id=id&accname=guest&checksum=849a8f62e6ea1b58f6cbf260fe5174d9. chami, r. &cosimano, t. (2010).monetary policy with a touch of basel. journal of economics and business, 62, 161-175. chiuri, m. c., ferri, g. &majnoni, g. (2002). the macroeconomic impact of bank capital requirements in emerging economies: past evidence to assess the future. journal of banking and finance, 26, 881-904. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 55 | p a g e claessens, s. &laeven, l. (2004). what drives bank competition? some international evidence. journal of money, credit and banking, 36, 563-583. cornford, a. (2010). basel ii and the availability and terms of trade finance, unctad global commodities forum, observatoire de la finance, palais des nations, geneva, 22-23 march 2010. retrieved september 2, 2014, from http://www.unctad.info/upload/suc/gcf/acornford.pdf. cosimano, t. f. &hakura, d. s. (2011). bank behaviour in response to basel iii: acrosscountry analysis. imf working paper 11/119. cull, r., senbet, l. w. &sorge, m. (2002). the effect of deposit insurance on financial depth: a crosscountry analysis. the quarterly review of economics and finance, 42, 673694. de bondt, g. j. &prast, h. m. (2000). bank capital ratios in the 1990s: cross-country evidence. psl quarterly review, 212, 71-97. demirguc-kunt, a. &detragiache, e. (1998).the determinants of banking crises in developing and developed countries. imf staff papers, 45:1, 81–109. demirguc-kunt, a. & kane, e. g. (2002). deposit insurance around the globe: where does it work? journal of economic perspectives, 16, 175-195. di noia, c. & di giorgio, g. (1999). should banking supervision and monetary policy tasks begive to different agencies? international finance, 2, 361-378. fase, m. m. g. (1995). the demand for commercial bank loans and the lending rate. european economic review, 39, 99-115. ferri, g., liu, l. g. &majnoni, g. (2001). the role of rating agency assessments in less developed countries: impact of the proposed basel guidelines. journal of banking and finance, 25, 115-148. financial stability institute.(2010). fsi survey on the implementation of the new capital adequacy framework.occasional paper no.9. flannery, m. j. &rangan, k. p. (2008). what caused the bank capital build-up of the 1990’s. review of finance, 12, 391-429. francis, w. & osborne, m. (2009). bank regulation capital and credit supply: measuring the impact of prudential standards. uk financial services authority, occasional paper no.36, september 2009. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 56 | p a g e glick, r. & hutchison., m. m. (2001). banking and currency crises: how common are twins? article in financial crises in emerging markets, edited by reuven glick, ramon moreno, and mark m. spiegel. cambridge, uk: cambridge university press. greene, w. h. (2012). econometric analysis (7thed.), the pearson series in economics, pearson education, limited. gropp, r. &heider, f. (2010).the determinants of bank capital structure. review of finance, 14, 587622. hakura, d. &cosimano, t. f. (2011). bank behaviour in response to basel iii: a crosscountry analysis. imf working papers 11/119, 1-34. retrieved july 26, 2014, from http://ssrn.com/abstract=1861789. hall, a. r. (2005). generalized method of moments: advanced texts in econometrics. oxford: oxford university press. hansen, l. p. (1982). large sample properties of generalized method of moments estimators.econometrica, 50, 1029-1054. hayashi, f. (2000).econometrics (1st ed). princeton: princeton university press. hovakimian, a., kane, e. j. &laeven, l. (2003).how country and safety-net characteristics affect bank risk-shifting. journal of financial services research, 23, 177-204. hull, j. c. (2012). risk management and financial institutions. hoboken, new jersey: john wiley & sons inc. imf. (1998). chapter iv, financial crises: characteristics and indicators of vulnerability, in world economic outlook. washington, dc. retrieved june 8, 2014, from http://www.imf.org/external/pubs/ft/weo/weo0598/pdf/0598ch4.pdf. kaminsky, g. & reinhart.c. (1999). the twin crises: the causes of banking and balance-ofpayments problems. american economic review, 89, 473-500. kashyap, a., stein, j. c. & hanson, s. (2010). an analysis of the impact of “substantially heightened” in capital requirements on large financial institutions.working paper, university of chicago. koch, t. & macdonald, s. (2007). bank management (7th ed.).marson, ohio: south– western cengage learning. kolb, r. &overdahl, j. a. (2010). financial derivatives: pricing and risk management. hoboken, new jersey: john wiley & sons inc. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 57 | p a g e kopecky, k. j. &vanhoose, d. (2004a).bank capital requirements and the monetary transmission mechanism. journal of macroeconomics, 26, 443-464. kopecky, k. j. &vanhoose, d. (2004b).a model of the monetary sector with and without binding capital requirements. journal of banking and finance, 28, 633–646. labadie, p. (1995). financial intermediation and monetary policy in a general equilibrium banking model. journal of money, credit, and banking, 27, 1290–1315. laeven, l. (2002). international evidence on the value of deposit insurance. the quarterly review of economics and finance, 42, 721-732. laszlo, m. (1999).generalized method of moments estimation, themes in modern econometrics. cambridge: cambridge university press. miller, f. p., vandome, a. f. &mcbrewster j. (2010).generalized method of momentsvdm publishing. newey, w. k. & west, k. d. (1987). hypothesis testing with efficient method of moments estimation. international economic review, 28, 777-787. rojas-suarez, l. (2002). can international capital standards strengthen banks in emerging markets? institute for international economics working paper series, no. 01-10, november. sinha, a. (2012). implications for growth and financial sector regulation, in financial sector regulation for growth, equity and stability, bis papers, no.62, monetary and economic department, proceedings of a conference organized by the bis and cafral in mumbai, 15–16 november 2011. retrieved august 2, 2014, from http://www.bis.org/publ/bppdf/bispap62.pdf. slovik, p. &cournede, b. (2011).macroeconomic impact of basel iii.oecd economics department working papers, no. 844.organization for economics cooperation and development publishing, paris. thakor, a. v. (1996). capital requirements monetary policy, and aggregate bank lending: theory and empirical evidence. the journal of finance, 51, 279–324. van den heuvel, s. j. (2002). the bank capital channel of monetary policy.working paper.university of pennsylvania. von hagen, j. & ho, t. k. (2007).money market pressure and the determinants of banking crisis. journal of money, credit and banking, 39, 1037-1066. wong, k. p. (1997). on the determinants of bank interest margins under credit and interest rate risks. journal of banking and finance, 21, 251-271. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 58 | p a g e zeileis, a. (2004). econometric computing with hc and hac covariance matrix estimators. journal of statistical software, 11, 1-17. table 4: gmm first-stage regressions for holdings of capital note: the table shows the first stage gmm regression for the equity-asset ratio. heteroskedasticity and autocorrelation-consistent standard errors are shown in parentheses; significances of 1 (***), 5(**), and 10 (*) percent are indicated. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 59 | p a g e table 5: gmm second-stage regressions for loan rate note: the table shows the second stage gmm regression for the loan rate. heteroskedasticityand autocorrelation-consistent standard errors are shown in parentheses; significances of 1 (***), 5(**), and 10 (*) percent are indicated. table 6: loan demand equations mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 60 | p a g e note: robust standard errors are shown in parentheses, and significances of 1 (***), 5 (**), and 10 (*) percent are indicated. appendix the generalized method of moments was introduced by hansen, (1982). the equation to be estimated is, in matrix notation, y x uwith typical row yi xi ui . the matrix of regressorsx is n × k, where n is the number of observations. some of the regressors are endogenous, so that xiui 0. the set of regressors are being partitionedinto [x1 x2], with the k1regressorsx1 assumed under the null to be endogenous and the k2 (k − k1) remaining regressorsx2 assumed exogenous, giving yi x1x2 1 2 u . the set of instrumental variables is z and is n × l. this is the full set of variables that are assumed to be exogenous, i.e. iui 0. the instruments are partitioned into [z1 z2], where the l1instruments z1are excluded instruments and the remaining l2 (l−l1) instruments z2 x2 are the included instruments/exogenous regressors (baum, 2006): regressorsx = [x1 x2] = [x1 z2] = [endogenous exogenous] instruments z = [z1 z2] = [excluded included] mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 61 | p a g e the order condition for identification of the equation is l k implying there must be at least as many excluded instruments (l1) as there are endogenous regressors (k1) as z2 is common to both lists. if l = k, the equation is exactly identified by the order condition; if l > k, the equation is over-identified. the order condition is necessary but not sufficient for identification. the assumption that the instruments z are exogenous can be expressed as e(ziui) = 0. in the case of linear gmm the l instruments give a set of l moments:gi iui i yi xi , where gi is l × 1. the exogeneity of the instruments means that there are l moment conditions, or orthogonality conditions, that will be satisfied at the true value of : gi 0. each of the l moment equations corresponds to a sample moment. for some given estimator ˆ , these l sample moments could be written asg ˆ n1 in 1 gi ˆ 1 i n1 i yi i ˆ 1n uˆ. n the intuition behind gmm is to choose an estimator for that brings g ˆ as close to zero as possible. if the equation to be estimated is exactly identified, so that l = k, then there are as many equations (the l moment conditions) as unknowns: thek coefficients in ˆ . in this case it is possible to finda ˆ that solves g ˆ =0. if the equation is over-identified, however, so that l>k, then there are more equations than unknowns. in general it will not be possible to find a ˆ that will set all l sample moment conditions exactly to zero. in this case, an l × l weighting matrix w is used in order to construct a quadratic form in the moment conditions. this gives the gmm objective function:j ˆ ng ˆ wg ˆ . a gmm estimator for is the ˆ that minimizesj ˆ : ˆgmm arg min ˆ j ˆ ng ˆ wg ˆ . in the linear case, deriving and solving the k first order conditions j ˆ 0 (treating ˆ w as a matrix of constants) yields the gmm estimator (the results of the minimization, and hence the gmm estimator, will be the same for weighting matrices that differ by a constant of proportionality). ˆgmm x zwz x 1x zwz y (a) the gmm estimator is consistent for any symmetric positive definite weighting matrix w, and thus there are as many gmm estimators as there are choices of weighting matrix w. efficiency is not guaranteed for an arbitrary w, so the estimator defined in equation (a) is referred as the possibly inefficient gmm estimator. the authors are particularly interested in efficient gmm estimators, namely gmm estimators with minimum asymptotic variance. moreover, for any gmm estimator to be useful, inference should be mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 62 | p a g e conducted and for that,estimates of the variance of the estimator are needed. both require estimates of the covariance matrix of orthogonality conditions, a key concept in gmm estimation. denoting by s the asymptotic covariance matrix of the moment conditions g:s avar g limn 1n uu where s is an l×l matrix and g = 1n u . that is, s is the variance of the limiting distribution of ng . the asymptotic distribution of the possibly inefficient gmmestimator can be writtenas follows. let qxz x i z i . the asymptotic variance of the inefficient gmmestimator defined by an arbitrary weighting matrix w is given by: v ˆgmm q xzwqxz 1 q xzwswqxz 1 q xzwqxz 1 (b) under standard assumptions the inefficient gmm estimator is “ n consistent”. that is, n ˆgmm n 0, v( ˆgmm) , where denotes convergence in distribution.strictly speaking, therefore, hypothesis tests should be performed on gmm, usingequation (b) for the variance-covariance matrix. standard practice, however, is totransform the variancecovariance matrix (b) rather than the coefficient vector (a). this is done by normalizing v ˆ gmm by 1/n, so that the variance-covariance matrixis in fact v ˆgmm 1n q xzwqxz 1 qxz wswqxz q xzwqxz 1 (c) the efficient gmm estimator (egmm) makes use of an optimal weighting matrix w which minimizes the asymptotic variance of the estimator. this is achieved by choosing w = s−1. substituting this into equation (a) and equation (c), the efficient gmm estimator is obtained: ˆ egmm x zs 1z x 1x zs 1z y (d) with asymptotic variance v ˆegmm q xzs 1qxz 1. similarly, n ˆegmm n 0, v( ˆegmm) . if an estimate of s exists, therefore, asymptotically correct inference for any gmm estimator could be conducted, efficient or inefficient. an estimate of s also makes the efficient gmm estimator a feasible estimator. in two-step feasible efficient gmm estimation an estimate of s is obtained in the first step and in the second step the estimator and its asymptotic variance is calculated using equation (d). the first-step estimation of the matrix s requires the residuals of a consistent gmm ~ estimator . efficiency is not required in the first step of two-step gmm estimation, which simplifies the task considerably. but to obtain an estimate of s some further assumptions should be made. this is 1 n mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 63 | p a g e illustrated using the case of independent but possibly heteroskedastic disturbances. if the errors are independent, gi g j 0for i j, and so s avar g gigi ui2zi zi .this matrix can be consistently estimated by an eicker–huber–white robust covariance estimator: sˆ 1 i n1uˆi2zi zi n1 ˆ . n mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 14 | p a g e monetary transmission mechanisms: insights from the turkish economy professor aylin sema erdogdu, istanbul arel university, turkey abstract: the monetary transmission mechanism (mtm) plays a pivotal role in shaping real economic activities, including production, consumption, and employment, by channeling the impact of monetary policy decisions. this dynamic process encompasses the total demand resulting from these policy decisions, as well as their effects on inflation expectations and rates. in the contemporary economic landscape, one of the most prominent repercussions of fluctuations in monetary policy is witnessed in the financial choices made by businesses. such policy changes can significantly influence enterprises' sales, production expenditures, and balance sheets, spanning both durable and nondurable goods production and impacting households' overall expenditure. the mtm can be broadly categorized into two primary components. firstly, it encompasses the analysis of market interest rate fluctuations, delving into how monetary policy decisions affect the asset landscape, including foreign exchange rates and financial market conditions. secondly, it scrutinizes the production-related aspects affected by changes in financial market conditions and inflation rates. the mtm operates through a multifaceted network of channels, influencing households' purchasing decisions and altering firms' balance sheets. this article underscores the diverse channels that constitute the mtm, including the exchange rate channel, interest rate channel, bank credit channel, and balance sheet channel. by exploring these channels, it seeks to unravel the intricate pathways through which monetary changes reverberate across total demand and production levels. keywords: monetary transmission mechanism, monetary policy, interest rate channel, exchange rate channel, bank credit channel, balance sheet channel. 1. introduction monetary transmission mechanism influences real economic activities such as production, consumption and employment through its own dynamics during the implementation of monetary policy decisions. more precisely, it can be defined as the total demand of the monetary policy decisions, and the process of inflation expectations and inflation rates. nowadays, the most important effect of changes in monetary policy occurring due to macroeconomic fluctuations is observed in the financial decisions of companies. changes in the monetary policy are transmitted both to the sales of enterprises which produce durable and non durable goods, through the changes in an enterprise’s total expenditure of households, and to the balance sheets of these legal entities. this approach, known as monetary transmission mechanism, determines how and to the extent to which monetary changes influence total demand and production. based on these descriptions that are explained above, it can be deduced in which way and to what extent monetary changes influence total demand and total production. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 15 | p a g e monetary transmission mechanism can generally be analyzed under two main headings. the first analysis determines the examination of changes in market interest rates. monetary policy determines the transfer of assets such as foreign exchange rates and financial market conditions. the second indicates the production level of the changes in financial market conditions and inflation rates. monetary transmission mechanism functions through a number of channels and the tendency of households to purchase, and it also influences the balance sheets of firms. channels affect the purchasing power decisions of households and the changes in companies’ balance sheets through monetary transmission mechanism. phases affecting manufacturing industry are the exchange rate channel, interest rate channel, the bank credit channel and the balance sheet channel. 2. efficiency analysis of monetary transmission mechanism 2.1. literature review when the literature is reviewed on the monetary transmission mechanism, it is observed that bacchetti and ballabriga (2000) have tested the data for the us and 13 european countries and have reached the conclusion that banking loans are affected by the monetary policies. ferreira (2007), examined the bank performance of the credit channels for the european monetary union member countries, especially for portugal. kashyap and stein (2000) revealed in their studies that small banks have less liquidity and play a greater role on credit volume than their larger counterparts. kishan and opiela (2000) analysed the effects on credit supply through bank assets and bank capital. butz, fuss and vermeulen (2001) used all available industrial databases within the belgian economy to study the effects of monetary policy on firm behaviors. disyatat and vongsinsirikul (2003) have tested the data for the thailand -2001q4 1993q1 period. chirink and kalckreuth (2003) reviewed the interest rate for fixed capital investment firms in germany to determine the importance of the interest rate channel and the credit channel. yue and zhou (2007) have tested the data for china 1996.1 2005.8 period. 2.2. research model this section investigates which channels are active in the monetary transmission mechanism in turkey. in order to examine the effectiveness of the monetary transmission mechanism, as it is a widely used method in the literature and provides reliable results, var analysis method is utilized. this study aims to determine whether the monetary policies used in turkey after 1990s have affected economic development. if they have done so, it will discuss how long these effects last. monthly time series were used, covering the period january 1990 to july 2011. the variables used in the model are selected for representing the operation of the monetary transmission mechanism. our dependent variable is money supply (m1). m1 is represented as the cash in circulation and defined as the sum of deposits in demand deposits in commercial banks and central banks. as an indicators of monetary policy we used, inter-bank interest rate on the market (overnight (o / n)), the istanbul stock exchange national 100 index, the sum of domestic loans in the banking sector (in tl), usd buying exchange rate, consumer price index as the inflation rate (cpi), and for the real sector; the industrial production index (ipi) used. detailed description of the variables and parameters used in the model and their symbols are shown in table 1. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 16 | p a g e table 1. variables m1 money supply tl interest interbank overnight simple weighted average interest rate monthly (%) bist national 100 index (1986 = 100) credit total domestic banking sector tl loans exchange rate central bank buying exchange rate cpi consumer price index monthly change (%) ipi industrial production index in this study, / e-views econometrics software package was used to determine the time-series properties of the data related to the variables. to bring all variables to the same level, logarithm1was used and the first difference of the logarithmic time series were calculated. therefore, these variables are set to the same level. all variables were seasonally adjusted by using the moving average method. the seasonally adjusted time series received "sa" letters at the end of the each variable representation, the unstable variables and the variables that were adjusted to be stationary by taking their first differences labeled with "d" letter at the beginning of the each variable representation. 2.3. working m1 money supply model factors affecting economic variables sometimes create lasting variability in the trends of variables. these changes may be caused by the impact of technological developments and events, such as political changes. the following figure shows the structural break of our model. figure 1. structural break graphics our model are trying to create a model by using the entire period data that is estimated from monetary policy applications from the internal crisis (1994, 2000 and 2001 crises) and external shocks (asian crisis, the russian crisis, the brazilian crisis). the effects can be expressed as the structural breaks observed. structural break was corrected using dummy variables. models and graphics found using dummy variables are listed below. dummy variable (dk) i, 1990 december 2001 january 0, 2002 january may 2004 1, 2004 and june 0, 2004 july 2004 november 1, 2004 from december 2005 to january 0, 2005 february-july 2011, by putting the value of 1. 1 log ( ) log ( ) = log [ / ]» [( ) / ] mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 17 | p a g e table2. dummy variables used model dependent variable: logm1sa sample (adjusted): 1990m01 2011m07 included observations: 259 after adjustments variable coefficient std. error t-statistic prob. c 6.372066 0.377371 16.88543 0.0000 loginterestsa -0.118471 0.014437 -8.205939 0.0000 logbistsa 0.161689 0.019874 8.135788 0.0000 logcreditsa 0.493224 0.019567 25.20640 0.0000 logexchangesa 0.314467 0.021346 14.73171 0.0000 logcpisa -0.052087 0.005200 -10.01651 0.0000 logipisa 0.085000 0.086834 0.978886 0.3286 dk 0.194662 0.031952 6.092328 0.0000 r-squared 0.998686 mean dependent var 14.96179 adjusted r-squared 0.998650 s.d. dependent var 2.696541 s.e. of regression 0.099084 akaike info criterion -1.755297 sum squared resid 2.464226 schwarz criterion -1.645434 log likelihood 235.3110 hannan-quinn criter -1.711126 f-statistic 27262.02 durbin-watson stat 0.730440 prob(f-statistic) 0.000000 dk probe. = 0.000 <0.05 dk is significant. structural break has been corrected as shown in the graphic. figure2. structural break (with dummy variable) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 18 | p a g e our chart did not deviate outside the specified range. structural break has been corrected. 2.4. pre-testing and evaluation of results. whether or not the time series are stationary or not and the presence of a unit root were examined by the widely used improved dickey-fuller (adf) test, and the co-integration degree of the series was determined. 2.5. delay length analysis the results of the tests performed to determine the length of the delay to be used in the model are given in table 3. the results symbolized with '' * '' related to testing show the appropriate lag length. table3. determine the lag order criteria var lag order selection criteria endogenous variables: loginterestsa logbistsa logcreditsa logexchangesa logm1sa logcpisa logipisa exogenous variables: c sample: 1990m01 2011m11 included observations: 244 lag logl lr fpe aic sc hq 0 -984.6632 na 7.99e-06 8.128387 8.228716 8.168794 1 1690.345 5174.606 3.59e-15 -13.39627 -12.59364 -13.07301 2 1850.057 299.7883 1.45e-15 -14.30375 -12.79882* -13.69765 3 1953.843 188.8566 9.27e-16 -14.75281 -12.54559 -13.86386* 4 2004.963 90.08695 9.15e-16* -14.77018* -11.86066 -13.59839 5 2038.298 56.83496 1.05e-15 -14.64179 -11.02996 -13.18714 6 2076.128 62.32582 1.16e-15 -14.55023 -10.23610 -12.81274 7 2114.008 60.23538 1.29e-15 -14.45908 -9.442652 -12.43874 8 2140.686 40.89105 1.58e-15 -14.27611 -8.557381 -11.97292 9 2174.893 50.46986 1.83e-15 -14.15486 -7.733830 -11.56882 10 2216.910 59.58147 2.01e-15 -14.09762 -6.974292 -11.22874 11 2269.413 71.43814 2.03e-15 -14.12633 -6.300702 -10.97460 12 2354.503 110.8971 1.59e-15 -14.42216 -5.894229 -10.98758 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 19 | p a g e 13 2411.837 71.43176 1.58e-15 -14.49047 -5.260235 -10.77304 14 2469.657 68.72068* 1.58e-15 -14.56276 -4.630232 -10.56249 15 2512.774 48.77166 1.81e-15 -14.51454 -3.879710 -10.23142 * indicates lag order selected by the criterion lr: sequential modified lr test statistic (each test at 5% level) fpe: final prediction error aic: akaike information criterion sc: schwarz information criterion hq: hannan-quinn information criterion in this context, the longest delay time in all periods is taken as 15 months. according to the test results, the optimal lag length in likelihood ratio test (lr) is 14 months, the last prediction error (fpe) is 4 months, akaike information criterion (aic) is 4 months, schwarz information criterion is 2 months, and hannan–quinn information criterion (hq) is 3 months. the appropriate lag length for the var model is set as 2 months, based on the schwarz information criterion. 2.6. unit root analysis the results of the unit root analysis are given in the following table. in this study, the stationary model and the stationary in the model including both constant and trend will be examined. money supply logarithm is taken, seasonally adjusted and identified as logm1sa. the results of the model with a constant for logm1sa variable are shown below. table 4. unit root test results of constant m1 variable null hypothesis: logm1sa has a unit root exogenous: constant lag length: 2 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -4.518377 0.0002 testcriticalvalues: 1%level -3.455786 5%level -2.872630 10%level -2.572754 *mackinnon (1996) one-sided p-values. according to the τ statistics given by mackinnon, 1%, 5%, 10% (-3455, -2872, -2572), as t value (-6737), whose significance levels are calculated, is high as the absolute value, δlogm1sa has no unit root, and the series is stationary. the results of the model is located in constant and linear trend logm1sa. table 5. unit root test results of constant and linear trend m1 variable null hypothesis: logm1sa has a unit root exogenous: constant, linear trend lag length: 2 (automatic based on sic, maxlag=2) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 20 | p a g e t-statistic prob.* augmented dickey-fuller test statistic 0.745462 0.9997 test critical values: 1% level -3.994310 5% level -3.427476 10%level -3.137059 *mackinnon (1996) one-sided p-values. according to mackinnon τ statistics, 1%, 5%, 10% (-3994, -3427, -3137), the significance levels of t value (0745) are calculated. since it is low as the absolute value, the logm1sa series has unit root; the series is not in stationary state. δlogm1sa is produced to make the new series stable. table 6. unit root test results first degree of difference constant and linear trend m1 variable null hypothesis: d(logm1sa) has a unit root exogenous: constant, linear trend lag length: 1 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -16.5269 0.0000 test critical 1% level values: -3.99431 5% level -3.42748 10% level -3.13706 *mackinnon (1996) one-sided p-values. according to the t statistics given by mackinnon, 1%, 5%, 10% (-3994, -3427, -3137), the significance levels of t value (-16,526) is calculated. since it is high as the absolute value, δlogm1sa has no unit root series. they are stationary. constant and linear trends logm1sa have been co integrated. the logarithm of the actual basic interest rate and the seasonally adjusted time series has been identified as loginterestsa. the results of the model are located in constant loginterestsa. table 7. unit root test results of constant interest variable null hypothesis: loginterestsa has a unit root exogenous: constant lag length: 1 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic 0.247957 0.9751 test critical values: 1% level -3.455685 5% level -2.872586 10% level -2.572730 *mackinnon (1996) one-sided p-values. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 21 | p a g e in accordance with mackinnon τ statistics, 1%, 5%, 10% (-3.456; -2872; -2572), t value significance levels are calculated (0.247). it is low as the absolute value, so loginterestsa has the unit root; the series is not in a stationary state. δloginterestsa is designed to make the new series stable. table 8. unit root test results first degree of difference constant interest variable null hypothesis: dloginterestsa has a unit root exogenous: constant lag length: 0 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -23.61517 0.0000 test critical values: 1% level -3.455685 5% level -2.872586 10% level -2.572730 *mackinnon (1996) one-sided p-values. in accordance with the mackinnon τ statistics, 1%, 5%, 10% (-3.456; -2872; -2572), as t value (-23 615), whose significance levels are calculated, is high as the absolute value, δloginterestsa has no unit root; the series is in stationary state. constant and linear trend loginterestsa has been cointegrated. the results of the model is located in constant and trend loginterestsa. table 9. unit root test results of constant and linear trend interest variable null hypothesis: loginterestsa has a unit root exogenous: constant, linear trend lag length: 1 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic 2.200790 0.4867 test critical values: 1% level -3.994167 5% level -3.427407 10% level -3.137018 *mackinnon (1996) one-sided p-values. according to mackinnon τ statistics, 1%, 5%, 10% (-3.994; -3427; -3137), t value (-2200), whose significance levels are calculated, is low as the absolute value, the loginterestsa has unit root; the series is not stationary. δloginterestsa is designed to make it stable. table 10. unit root test results first degree of difference constant and linear trend interest variable mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 22 | p a g e null hypothesis: dloginterestsa has a unit root exogenous: constant, linear trend lag length: 0 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -23.79151 0.0000 test critical values: 1% level -3.994167 5% level -3.427407 10% level -3.137018 *mackinnon (1996) one-sided p-values. according to mackinnon τ statistics, 1%, 5%, 10% (-3.994; -3427; -3137), t value (-23 791), whose significance levels are calculated, is high as the absolute value, and thus, δloginterestsa has unit root and these series are stationary. constant and linear trend loginterestsa has been cointegrated. the logarithm of the national 100 index (closing price) and seasonally adjusted time series has been defined as the logbistsa. the result of the model is located in constant logbistsa table 11. unit root test results of constant bist variable null hypothesis: logbistsa has a unit root exogenous: constant lag length: 1 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic 1.418092 0.5733 test critical values: 1% level 3.455685 5% level 2.872586 10% level 2.572730 *mackinnon (1996) one-sided p-values. in accordance with t statistics given by mackinnon, 1%, 5%, 10% (-3455, -2872, -2572), since t value (1418), whose significance levels are calculated, is low as the absolute value, logbistsa has unit root; the series is not in stationary state. δlogbistsa is designed to make the new series stable. table 12. unit root tests results the first degree of difference constant and linear trend bist variable null hypothesis: dlogbistsa has a unit root exogenous: constant, linear trend lag length: 0 (automatic based on sic, maxlag=2) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 23 | p a g e t-statistic prob.* augmented dickey-fuller test statistic -12.52862 0.0000 test critical values: 1% level -3.994167 5% level -3.427407 10% level -3.137018 *mackinnon (1996) one-sided p-values. according to mackinnon τ statistics, 1%, 5%, 10% (-3456, -2872, -2572), as t value (-12 471), whose significance levels are calculated, is high as the absolute value, δlogbistsa has unit root, and the series is in stationary state. since it as large as the absolute value, δlogbistsa has no unit root and the series is in stationary state. constant and linear trend logbistsa has been cointegrated. the results of the model are located in constant and trend logbistsa. table 13. unit root test results of fixed bist variable null hypothesis: logbistsa has a unit root exogenous: constant, linear trend lag length: 1 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -1.121951 0.9223 test critical values: 1% level -3.994167 5% level -3.427407 10% level -3.137018 *mackinnon (1996) one-sided p-values. in accordance with t statistics given by mackinnon, 1%, 5%, 10% (-3994, -3427, -3137), the significance levels of t value (-1121) are calculated. it is low as the absolute value, logbistsa has unit root, and the series is not in stationary state. δlogbistsa is designed to make the new series stable. table 14. unit root tests results the first degree of difference constant and linear trend bist variable null hypothesis: dlogbistsa has a unit root exogenous: constant, linear trend lag length: 0 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic 12.52862 0.0000 test critical values: 1% level 3.994167 5% level 3.427407 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 24 | p a g e 10% level -3.137018 *mackinnon (1996) one-sided p-values. mackinnon τ statistics are given as 1%, 5%, 10% (-3994, -3427, -3137), and the significance levels of t value (-12 528) are calculated. since it is high as the absolute value, δlogbistsa has unit root, and the series are in stationary state. constant and linear trend logbistsa has been cointegrated. the logarithm of the purchase price dollar currency exchange and the seasonally adjusted time series have been described as the seasonally adjustedlogexchangesa. the results of the model are presented in constant logexchangesa. table 15. unit root test results of constant exchange variable null hypothesis: logexchangesa has a unit root exogenous: constant lag length: 1 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -3.573792 0.0069 test critical values: 1% level -3.455685 5% level -2.872586 10% level -2.572730 *mackinnon (1996) one-sided p-values. according to t statistics given by mackinnon, 1%, 5%, 10% (-3455, -2872, -2572), t value (-3573), whose significance levels are calculated, is high as the absolute value. logexchangesa has no unit root, and the series is in stationary state.the results of the model are located in constant and trend logexchangesa. table 16. unit root test results of constant and linear trend exchange variable null hypothesis: logexchangesa has a unit root exogenous: constant, linear trend lag length: 1 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -0.272673 0.9911 test critical values: 1% level -3.994167 5% level -3.427407 10% level -3.137018 *mackinnon (1996) one-sided p-values. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 25 | p a g e in accordance with t statistics given by mackinnon, 1%, 5%, 10% (-3994, -3427, -3137), the significance levels of t value (-0272) are calculated. as it is low as the absolute value, δlogexchangesa has unit root, and the series are not in stationary state. δlogexchangesa is produced to make the new series stable. table 17. unit root tests results the first degree of difference constant and linear trend exchange variable null hypothesis: dlogexchangesa has a unit root exogenous: constant, linear trend lag length: 0 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -10.56528 0.0000 test critical values: 1% level -3.994167 5% level -3.427407 10% level -3.137018 *mackinnon (1996) one-sided p-values. in accordance with mackinnon τ statistics, 1%, 5%, 10% (-3994, -3427, -3137), significance levels of t value (-10 565) are calculated. as it is high as the absolute value, δlogexchangesa has no unit root, the series is in stationary state. constant and linear trend δlogexchangesa has been cointegrated.the logarithm of the industrial production index and seasonally adjusted time series has been described as logipisa., and the results of the model with a constant for logipisa variable are presented below. table18. unit root tests results of constant ipi variable null hypothesis: logipisa has a unit root exogenous: constant lag length: 1 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -2.336287 0.1614 test critical values: 1% level -3.455685 5% level -2.872586 10% level -2.572730 *mackinnon (1996) one-sided p-values. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 26 | p a g e in accordance with t statistics given by mackinnon, 1%, 5%, 10% (-3457, -2872, -2573), t value (-2336) significance levels are calculated. it is low as the absolute value, logipisa has unit root, and the series is not in stationary state. δlogipisa is designed to make the new series stable. table 4. 19. unit root tests results the first degree of difference constant ipi variable null hypothesis: dlogipisa has a unit root exogenous: constant lag length: 0 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -24.30972 0.0000 test critical values: 1% level -3.455685 5% level -2.872586 10% level -2.572730 *mackinnon (1996) one-sided p-values. according to mackinnon τ statistics given as 1%, 5%, 10% (-3457, -2873, -2573), t value (-24 309) significance levels are calculated. since it is low as the absolute δlogipisa has no unit root; the series is stationary. constant and linear trend δlogipisa has been cointegrated. the results of the model are located in constant and trend logipisa. table 20. unit root tests results of constant and linear trend ipi variable null hypothesis: logipisa has a unit root exogenous: constant, linear trend lag length: 1 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -3.554144 0.0359 test critical values: 1% level -3.994167 5% level -3.427407 10% level -3.137018 *mackinnon (1996) one-sided p-values. in accordance with t statistics given by mackinnon, 1%, 5%, 10% (-3994, -3427, -3137), as t value (3554), whose significance level is calculated, is high as the absolute value logipisa has no unit root. constant and linear trend δlogipisa has been cointegrated. the logarithm of banking sector domestic credit volume and the seasonally adjusted figure is described as logcreditsa. the results of the model with a constant for logcreditsa variable are displayed below. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 27 | p a g e table 4. 21. unit root test results of constant credit varieble null hypothesis: logcreditsa has a unit root exogenous: constant lag length: 1 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -4.549155 0.0002 test critical values: 1% level -3.455685 5% level -2.872586 10% level -2.572730 *mackinnon (1996) one-sided p-values. according to τ statistics given by mackinnon, 1%, 5%, 10% (-3456, -2873, -2573), as t value (-4549), whose significance levels are calculated, is high as the absolute, logcreditsa has no unit root and the series is in stationary state. table 4. 22. unit root test results of fixed constant and linear trend credit variable null hypothesis: logcreditsa has a unit root exogenous: constant, linear trend lag length: 1 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -0.691602 0.9720 test critical values: 1% level -3.994167 5% level -3.427407 10% level -3.137018 *mackinnon (1996) one-sided p-values. in accordance with t statistics given by mackinnon, 1%, 5%, 10% (-3994, -3427, -3137), significance levels of t value (-0691) are calculated. it is low as the absolute value, so, logcreditsa has unit root, the series is not stationary. δlogcreditsa is designed to make the new series stable. table 23. unit root test results first degree of difference constant and linear trend credit variable null hypothesis: dlogcreditsa has a unit root exogenous: constant, linear trend lag length: 2 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -6.175402 0.0000 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 28 | p a g e test critical values: 1% level 3.994453 5% level -3.427546 10% level -3.137100 *mackinnon (1996) one-sided p-values. in accordance with t statistics given by mackinnon, 1%, 5%, 10% (-3996, -3428, -3137), as t value (6175), whose significance level is calculated, is high as the absolute value, δlogcreditsa has no unit root and the series is in stationary state. constant and linear trend δlogcreditsa has been cointegrated. the logarithm of the consumer price index and the seasonally adjusted figure has been identified as logcpisa. the model results for constant logcpisa variable are given below. table 4. 24. unit root test results of constant cpi variable null hypothesis: logcpisa has a unit root exogenous: constant lag length: 0 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -1.401741 0.5814 test critical values: 1% level -3.455585 5% level -2.872542 10% level -2.572707 *mackinnon (1996) one-sided p-values. according to τ statistics given by mackinnon, 1%, 5%, 10% (-3455, -2872, -2572), as t value (-1401), whose significance levels are calculated, is low as the absolute value, logcpisa has unit root, the series is not stationary. δlogcpisa is designed to make new series stable. table 25. unit root tests results first degree of difference constant cpi null hypothesis: dlogtufesa has a unit root exogenous: constant lag length: 0 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -15.94255 0.0000 test critical values: 1% level -3.455685 5% level -2.872586 10% level -2.572730 *mackinnon (1996) one-sided p-values. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 29 | p a g e according to mackinnon τ statistics, 1%, 5%, 10% (-3455, -2872, -2572), since t value (-15 942), whose significance levels are calculated, is high as the absolute value, δlogcpisa has no unit root; the series is in stationary state. constant and linear trend δlogcpisa has been cointegrated. the results of the model are located in constant and trend logcpisa. table 4. 26. unit root test results of constant and linear trend cpi variable null hypothesis: logcpisa has a unit root exogenous: constant, linear trend lag length: 0 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic -2.012527 0.5913 test critical values: 1% level 3.994026 5% level -3.427339 10% level -3.136978 *mackinnon (1996) one-sided p-values. in accordance with t statistics given by mackinnon, 1%, 5%, 10% (-3994, -3427, -3136), as t value (2012), whose significance levels are calculated, is low as the absolute value, logcpisa has unit root and the series is not in stationary state. δlogcpisa is designed to make the new series stable. table 27. unit root tests results the first degree of difference constant and linear trend cpi variable null hypothesis: dlogcpisa has a unit root exogenous: constant, linear trend lag length: 0 (automatic based on sic, maxlag=2) t-statistic prob.* augmented dickey-fuller test statistic 15.93696 0.0000 test critical values: 1% level 3.994167 5% level 3.427407 10% level -3.137018 *mackinnon (1996) one-sided p-values. according to mackinnon τ statistics, 1%, 5%, 10% (-3994, -3427, -3137), since t value (-15 936), whose significance levels are calculated, is high as absolute value, δlogcpisa has no unit root; the series is in stationary state. constant and linear trend δlogcpisa has been cointegrated. all the variables have constant and linear trends and they are in stationary state. 2.7. sorting variable mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 30 | p a g e in light of all this information; the variables are sorted according to how they are influenced by the monetary transmission mechanism as m1sa, interestsa, bistsa, creditsa, exchangesa, cpisa and ipisa. 3. conclusion the model results suggest the exchange rate channel in turkey have influence over the general level of prices. however, it does not significantly influence production levels. as mostly imported raw materials are used in the production phase in turkey, exchange rate shocks adversely affect the real economy. on the other hand, conditions are reversed for exports. the price level of final goods increases drastically due to exchange rate shocks, which has a negative impact on the balance sheet. turkey has been struggling with hyperinflation for decades. therefore, the financial sector has been returning to the market with short term contracts. thus, the effect of changes in monetary policy causes the goods and services sector to emerge for a short duration. the development of stock prices is negatively affected due to the continuing development on the capital market operations. results include no findings over stock prices and credit channel. on the other hand, short term debt financed the budget deficit and raised the real interest rates in the 1990s. this led accelerated investment banks to purchase government bonds rather than funding the open market. thus, the banking sector entered into the crisis by not fulfilling the most basic function of financial intermediation. the restructuring process that was executed in the aftermath of the 2001 crisis was considered to be an obstacle to the operations of credit channels. comments in the financial system in turkish economy and the analysis of applications made to create var models support the literature. traditional interest rates work effectively in turkey. the fact that the exchange rate channel has no considerable effect on the overall outcome, it is observed that it significantly affects the general price level. in addition, stock prices and the credit channel are deemed to be working ineffectively. references sahn, byung chan; “monetary policy and the determination of the interest rate and exchange rate in a small open economy with increasing capital mobility”, federal reserve bank of st.louis working paper, 1994 – 024a, 1-27. angeloni, ignazio, anil k. kashyap, benoit mojon ve daniele terlizzese, (2003) “monetary transmission in the euro area: does the interest rate channel explainit all?”, nber working paper, no: 9984, p.1 – 41. arcangelis, giuseppe de and di giorgio giorgio; “monetary policy shocks and transmission in italy: a var analysis”, 1999.http://www.econ.upf.edu/docs/papers/downloads/446.pdf bernanke, ben s. and alan s. blinder; “the federal funds rate and the channels of monetary policy”, american economic review, 82 (4), 1992, p. 901-921. charoenseang, june and pornkamol manakit; ‘‘thai monetary policy transmission in an inflation targeting era’’, journal of asian economics, 18, 2007, p. 144 –157. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 31 | p a g e ferreira, cândida; ‘‘the bank lending channel transmission of monetary policy in the emu: a case study of portugal’’ the european journal of finance, 2007, vol. 13, no. 2, p.181-193. friedman, milton; ‘‘john maynard keynes’’ economic quarterly, federal reserve bank of richmond, 83/82 (spring), 1997, p.123. friedman, milton and anna j. schwartz ‘‘monetary trends in the united states and the united kingdom’’, chicago and london, the university of chicago press. holtemoller, oliver; “identifying a credit channel of monetary policy transmission and empirical evidence for germany”, 2002. iturriaga, felix. j. lopez; “more on the credit channel of monetary policy transmission: an international comparison”, applied financial economics, vol 10, 2000, p.423-434. mehrotra, aaron n.; (2007), “exchange and interest rate channels during a deflationary era – evidence from japan hong kong and china”, journal of comparative economics, 35, p. 188210. papadamou, stephanos and georgios oikonomou; ‘‘the monetary transmission mechanism: evidence from eight economies in transition’’, international economic journal, 21, (4), 2007. yue yi ding and shuang–hong zhou (2007), ‘‘empirical analysis of monetary policy transmission’’, chinese business review, 6, (3), p.6 13. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 43 | p a g e the dynamics of trade credit terms in response to interest rate changes 1dr. william s. lim and 2dr. mohammad a. rashid 1school of administrative studies, york university, toronto, canada 2faculty of business administration, university of new brunswick, fredericton, canada abstract: this study investigates the impact of trade credit on the credit channel of monetary policy transmission. despite the growing interest in monetary policy effectiveness, a comprehensive theoretical model explaining the empirical observation that trade credit mitigates the effects of central bank actions has been lacking. in this paper, we introduce a partial equilibrium model incorporating third-degree price discrimination with menu costs. our key finding suggests that, in low-inflation periods, the increase in net present value (npv) resulting from optimizing credit terms and product prices is insufficient to outweigh even minimal menu costs associated with short-term interest rate changes. as a result, credit terms and product prices remain stable over time. this outcome aligns with empirical evidence from ng, smith, and smith (1999) and mateut (2005) and provides a plausible explanation for the meltzer (1960) hypothesis, which posits that trade credit fluctuates less than bank credit in the credit channel transmission of monetary policy. furthermore, we draw parallels between this phenomenon and exchange rate pass-throughs and discuss the effectiveness of monetary easing during a pandemic. keywords: trade credit, credit channel, monetary policy, npv optimization, menu costs. 1. introduction how does trade credit affect the credit channel of monetary policy transmission? this interest in monetary policy effectiveness has increased in recent years. however, there has not been a satisfactory theoretical model to explain the empirical stylized fact that trade credit dampens the impact of central bank actions. in this paper, we present a partial equilibrium model of third-degree price discrimination with menu costs. the main result is that the increase in npv from optimizing credit terms and product prices is less than even miniscule menu costs for short-term interest rate changes in low-inflation periods. therefore, credit terms and product prices are stable over time. this finding is consistent with ng, smith and smith’s (1999) and mateut’s (2005) empirical evidence and may also explain the meltzer (1960) hypothesis on credit channel transmission of monetary policy, i.e., trade credit fluctuates less than bank credit. in short, certain empirical phenomena related to the credit channel could be rationalized by assuming that firms set trade credit terms to maximize npv and take menu costs into account. finally, similarities to exchange rate pass-throughs and the effectiveness of monetary easing in a pandemic are discussed. the rest of the paper is organized as follows: extant literature is reviewed in section 2, while section 3 performs the analysis. in section 4, numerical results show credit terms and product prices are stable even with large changes in interest rates. menu costs are considered and the meltzer (1960) effect is mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 44 | p a g e shown to hold in section 5. section 6 concludes with a discussion of exchange rate pass-throughs and the effectiveness of monetary easing in a pandemic. 2. review of factors affecting trade credit terms many theories have been proposed to explain the use of trade credit by vendors and the determination of credit terms. credit terms specify when invoiced amounts are due and whether a cash discount could be taken for earlier payment. the credit period is the length of time allowable for payment of the invoice amount. the cash discount is the percentage amount that can be subtracted from the invoice if the customer pays within the discount period. smith (1987) argues that a supplier provides trade credit in order to protect non-salvageable investment in the client’s relationship. mian and smith (1992) focus on the information advantage of trade credit over traditional financing. emery (1984) proposes trade credit as a means of alleviating credit market imperfections, while emery (1987) emphasizes that trade credit provides the means for the vendor to manage fluctuations in product demand. brick and fung (1984) consider the differential of tax rates between a supplier and its buyer as the reason for the provision of trade credit. petersen and rajan (1994) suggest credit rationing as a reason, while schwartz and whitcomb (1980) and petersen and rajan (1997, p.664) suggest price discrimination as a motive for trade credit. equally, if not more, important as the abovementioned theories of trade credit are those that integrate credit policy with other policy decisions. it has been recognized (kim and atkins, 1978; kim and chung, 1990) that suboptimal results will occur whenever interrelated policy variables are modeled independently. therefore, it is desirable that credit management decisions be made jointly with other policy decisions. perhaps the most important area of integration is the integration of a firm’s credit policy with its product pricing as recognized by kim and atkin (1978, p.403) who state that “it is conceptually incorrect to analyze credit programs in isolation of pricing schemes.” their paper, along with atkins and kim (1977), use wealth-maximizing frameworks in their integrating efforts. the determination of an optimal cash discount from a theoretical perspective originated with lieber and orgler (1975) who developed expressions for the expected net present value or npv of accounts receivable and implicit form solutions of the optimal discount. later, hill and riener (1979) derived an explicit form solution of an optimal discount in a situation where the firm has no bad-debt exposure and the fraction of buyers discounting is known with certainty. beranek (1991) provided analysis of behavioral factors determining the optimal cash discount. recognizing that the provision of a cash discount is equivalent to a reduction in price, rashid and mitra (1999) linked it to the price elasticity of demand. further recognizing that a cash discount for early repayment separates buyers with respect to their borrowing costs, lim and rashid (2002, 2008) introduce a partial equilibrium model of thirddegree price discrimination where the firm sets two prices to maximize npv: a product price, and a cash discount (which determines the effective price in the second market). setting two prices then requires two elasticities: a cash discount elasticity of demand (which measures the sensitivity of sales to the cash discount or credit terms in general), and the product price elasticity of demand (which measures the sensitivity of sales to the product price). the main conclusion of their paper is that the effect of the cash discount elasticity is mainly on the optimal cash discount, while the effect of product price elasticity is mainly on the optimal product price. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 45 | p a g e 3. theoretical analysis in order to solve for the product price, p, and the cash discount, d, lim and rashid (2002, 2008) needed two separate elasticities of demand, q: (a) the cash discount elasticity of demand, denoted by ηd, where: .q d ηd = (1) d q and (b) the product price elasticity of demand, denoted by ηp, where: .q p ηp = (2) q p since this paper builds on the model of lim and rashid (2002, 2008), it is essential that the assumptions, notation and the model be presented briefly. a single period framework is assumed. at the beginning of the period, both production and sale of q quantity of output takes place, with the variable cost per unit, v, assumed to be constant. given the length of credit period n2 days, the firm considers providing a cash discount rate, d, for early repayment of invoices by customers. if a cash discount is provided, we denote the discount period as n1 days. the sales are assumed to be uniformly distributed among customers. we assume that p fraction of customers take the cash discount, and of the (1-p) fraction that decline the cash discount, a λ fraction of these customers pay on day n2. thus, (1-p)(1-λ) fraction of customers are those who do not take the cash discount and do not pay on day n2. this (1-p)(1-λ) fraction therefore default and become a bad debt loss. the firm sets not only the value of d but also the level of p . assuming that the annual cost of short-term funds, k, is initially constant, the net present value of accounts receivable is given by: v = p (1-d) pq(1+k)-n1/360 + (1-p)λpq(1+k)-n2/360 – vq (3) the first term represents the present value of payments by customers who take the cash discount, while the second term represents the present value of payments by customers who do not take the cash discount and pay on day n2. the last term gives the variable cost of production, q. the firm’s problem is to optimally choose the cash discount rate, d, and the product price, p. the optimal cash discount rate and product price will be denoted by d* and p* respectively. the separation of customers to those taking the cash discount and those not taking the cash discount makes the model one of third-degree price discrimination, similar to the model in layson (1998). layson denotes each market by 1 and 2, and denotes price and quantity by p and q. equation (3) above would then be a special case of layson’s (1998) profit function, π(p1,p2)=p1q1+p2q2-c(q), where p1=p(1-d)(1+k)-n1/360, p2=p(1+k)n2/360, q1=pq, q2=(1-p)λq and c(q)=vq. as our model is one of price discrimination, we would also require the three conditions for price discrimination to exist as postulated by carroll and coates (1999): (i) the firm must have some market power; (ii) there can be at best imperfect arbitrage opportunities; and (iii) customers must have different price elasticities of demand. the imperfect arbitrage opportunities result from mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 46 | p a g e imperfect financial markets (emery, 1984). behavioral specifications of p, λ and q are given in appendix 1. the theoretical derivation of the simultaneous equations determining the optimal cash discount rate and product price is shown in appendix 2. the simultaneous equations are: z d p p d p 0 (4) (1 d ) p d d d (1 d ) d d z p p (1 d ) (1 ) (1 p p) (1 ) p 0 p p (5) where z = v (1+k)n2/360, θ = (1+k)(n2-n1)/360 and σ = v (1+k)n2/360. z is then the npv of accounts receivable at the end of the credit period n2. equations (4) and (5) constitute a system of simultaneous equations in d* and p* where ηd and ηp play an important role. in equation (4), the effect of ηd is embodied in the last two terms as the first two terms simply represent a trade-off between the time value of money of early receipt of payment and the cash discount expense. in equation (5), if ηp=-1, the first order condition cannot be satisfied because the first two terms become zero while the last term is positive. for 0<|ηp|<1, all three terms in equation (5) are positive, again making it impossible for this condition to hold. 4. numerical results for the solution of the simultaneous system in equations (4) and (5), a specific relationship between p and d has to be assumed. following rashid and mitra (1999), we assume p=bd where b is a positive constant. instead of recursive substitution used by rashid and mitra (1999) and lim and rashid (2002, 2008), we solve equations (4) and (5) using the “solver” tool in ms excel. using empirical estimates from the 1993, 1998 and 2003 national survey of small business finances as reported in lim, rashid and mitra (2006) and bad debt estimates found in scherr (1989), the model is calibrated as follows: λ = 0.99; k = 10% per annum; v = $0.8 per unit of output; n1 = 10 days; n2 = 30 days; b = 10. for a selected pairs of values of ηd and ηp, table 1 presents optimal cash discount rates and optimal product prices. table 1 optimal cash discount rates and optimal product price at various demand elasticities mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 47 | p a g e ηd ηp d* (top of each cell), p* (bottom of each cell ) -1.5 -2.0 -2.5 -3.0 0.005 0.0172 $2.444 0.0155 $1.629 0.0144 $1.357 0.0137 $1.222 0.01 0.0222 $2.447 0.0199 $1.631 0.0183 $1.358 0.0171 $1.222 0.015 0.0262 $2.451 0.0233 $1.632 0.0213 $1.359 0.0199 $1.223 0.02 0.0295 $2.454 0.0261 $1.634 0.0238 $1.360 0.0222 $1.224 as noted in lim and rashid (2002, 2008), higher (lower) is the product price elasticity of demand, lower (higher) is the optimal product price. also, higher (lower) is the cash discount elasticity of demand, higher (lower) is d*. as customers with higher cash discount elasticities have higher borrowing costs, this explains survey evidence that customers with higher borrowing costs are offered higher cash discounts. as ηd rises, the rate of increase in d* slows down. we also find what lim and rashid (2002, 2008) term a “simultaneity effect”, that is, the cash discount is directly related to the contribution margin, and results from the assumption of interdependent demands. the effect of the cash discount elasticity ηd on the optimal cash discount d* is much larger than the effect of the product price elasticity ηp on d*. this confirms lim and rashid’s (2002, 2008) main theoretical finding for a 60-day credit period and is consistent with lim, rashid and mitra’s (2006) empirical evidence as described in section 1. for most grids of ηd and ηp, the numerical values of d* are around 2%. lim, rashid and mitra (2006) examine buyer firms from the 1993, 1998 and 2003 national survey of small business finances and find that the median and mode discount rates are 2%. ng, smith and smith (1999) examine supplier firms and find the same 2% discount. maness and zietlow (2005) present an overview of cash discount practices consistent with competitive suppliers offering a 2% discount. for the three pairs of the two elasticities, table 2 illustrates the effect of k on d* and p*. note that while k increases from 0% to 20%, with (ηd,ηp) = (0.005,-1.5), the optimal cash discount only increases from 1.55% to only 1.87% while the optimal product price increases from $2.43 to only $2.46. similar results are observed for other pairs of elasticities. therefore, credit terms and product prices are stable even with large changes in macroeconomic interest rates. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 48 | p a g e table 2: effect of variations in k on d* and p* at three selected pairs of ηd and ηp d* (top of each cell), p* (bottom of each cell) k (%) ηd , ηp 0 5 10 15 20 0.005, -1.5 0.0155 $2.42 6 0.016 4 $2.43 6 0.017 2 $2.44 4 0.017 9 $2.45 3 0.018 7 $2.46 1 0.02, -1.5 0.028 0 $2.43 7 0.028 7 $2.44 6 0.029 5 $2.45 4 0.030 2 $2.46 2 0.0309 $2.47 0 0.005, -3 0.0119 $1.212 0.012 8 $1.217 0.013 7 $1.22 2 0.014 5 $1.22 6 0.015 4 $1.23 0 5. adding menu costs to the model. menu costs refer to the direct costs of price adjustment (like changing a menu). zbaracki et al. (2004) identify and measure three types of managerial costs (information gathering, decision-making, and communication costs) and two types of customer costs (communication and negotiation costs) related to price adjustment. they find that the managerial costs are more than six times, and customer costs more than twenty times, the menu costs, confirming mccallum’s (1988) notion that menu costs are of insignificant magnitude. in total, the price adjustment costs comprise 1.22% of the company’s revenue, with menu costs comprising just 3.57% of the total price adjustment costs (or 0.0435% = 3.57%*1.22% of the company’s revenue). zbaracki et al. (2004, pp. 523 and 530) have excluded fixed costs from their calculations. thus a company would incur menu costs of 0.0435% of revenues each time a price change is made. also, the estimates of menu costs obtained from zbaracki et al. (2004) are for a billion-dollar company. if there are economies of scale in menu costs, then a smaller company would incur menu costs larger than 0.0435% of revenues. a profit-maximizing firm would only change its credit terms when the increase in the npv of its accounts receivables exceeds the menu costs. with the npv of accounts receivables, v, given by equation (3), the revenues are given by the first two terms. the increase in npv as a percentage of mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 49 | p a g e revenues is calculated in appendix 3. suppose that k is initially at 5%. also suppose (ηd,ηp)= (0.005,1.5). from table 2, d* is 1.64% and p* is $2.436. now if the central bank raises short-term interest rates such that k is now 10%, the firm must decide whether to change d and p to their new optimal levels of 1.72% and $2.444 respectively. assuming that k stays at 10% for the next 30 days, in our model, the menu costs at the end of the credit period is 0.0435%*1.1^(30/360) = 0.0438% of revenues. the firm will change d and p if ∆z is greater than 0.0438%. now zd = 2.575% and zp = 0.07%. both zd and zp are evaluated at the old optimum of d=1.64% and p=$2.436, but with k=10% (i.e., at the new value of k which is exogenous). so ∆d = 1.72%-1.64% = 0.08% or 0.0008 and ∆p = $2.4444-$2.4356 = $0.0088. thus zd*∆d = 0.00207% of revenues, which is the increase in npv when the firm optimizes its cash discount, and zp*∆p = 0.00063% of revenues, which is the increase in npv when the firm optimizes its product price. the total increase in npv when the firm optimizes both d and p is ∆z = 0.0027% of revenues, which is well below the menu costs of 0.0438% of revenues. even though npv increases when the firm optimizes d and p, the increase is much less than the menu costs. therefore, the firm would optimally choose not to change d and p. table 3 shows the menu costs (as a percentage of revenues) at the end of the credit period for different levels of k. these menu costs will be compared to the estimates of the increase in npv from optimizing d and p, as shown in tables 4 to 8, where each table is for different pairs of elasticities. tables 4 to 6 have the bad-debt loss falling proportionately as the cash discount, d, increases (∂λ/∂d=0), table 7 has the bad-debt loss about constant (∂λ/∂d=0.1), and table 8 has the bad-debt loss increasing as d increases (∂λ/∂d=-0.625). we assume that k=5% initially, and the central bank can increase k from 5% to the levels of k reported in the tables. for example, k=20% refers to the central bank raising k from 5% to 20% and lists the optimal d* and p* for k=20% and computations of the npv increase. the point is to find out how much k must increase from 5% in order for the increase in npv from optimizing d and p to be larger than the menu costs. the second column in each table lists the optimal d* and p* for the respective k. the third column in each table lists the increase in npv (as a percentage of revenues) when the firm optimizes d, which is zd*∆d. in order to calculate zd with ∂λ/∂d nonzero in tables 7 and 8, we replace zd with zd', with zd' = 100*[(∂z/∂d)/d + (1-p) * ∂λ/∂d * d]/a where ∂z/∂d is defined by equation (4). the fourth column in each table lists the increase in npv (as a percentage of revenues) when the firm optimizes p, which is zp*∆p. note that zp is unaffected by ∂λ/∂d. the fifth column in each table lists the total increase in npv (as a percentage of revenues) when the firm optimizes both d and p, which is ∆z. table 3: menu costs as a percentage of revenues at end of credit period (day n2) k menu costs (% of revenues) k menu costs (% of revenues) 5% 0.0437% 28% 0.0444% 10% 0.0438% 29% 0.0444% 15% 0.0440% 30% 0.0445% 20% 0.0442% 31% 0.0445% 21% 0.0442% 32% 0.0445% 25% 0.0443% 36% 0.0446% 27% 0.0444% 47% 0.0449% mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 50 | p a g e table 4: increase in npv as a percentage of revenues at end of credit period (day n2) (ηd,ηp) = (0.005,-1.5); ∂λ/∂d= 0 k d*, p* zd * ∆d zp * ∆p ∆z 5% 0.0164, $2.436 10% 0.0172, $2.444 0.00207% 0.00063% 0.00270% 15% 0.0179, $2.453 0.00805% 0.00239% 0.01044% 20% 0.0187, $2.461 0.0176% 0.0051% 0.0227% 25% 0.0195, $2.468 0.0304% 0.0088% 0.0392% 27% 0.0198, $2.471 0.0364% 0.0104% 0.0468% 2 30% 0.0202, $2.476 0.0461% 1 0.0132% 0.0593% 2 1 npv increase from change in cash discount only exceeds menu costs 2 npv increase from change in cash discount and product price exceeds menu costs table 5: increase in npv as a percentage of revenues at end of credit period (day n2) (ηd,ηp) = (0.02,-1.5); ∂λ/∂d= 0 k d*, p* zd * ∆d zp * ∆p ∆z 5% 0.0287, $2.446 10% 0.0295, $2.454 0.00185% 0.00055% 0.00240% 15% 0.0302, $2.462 0.00717% 0.00208% 0.00925% 20% 0.0309, $2.470 0.0156% 0.0045% 0.0201% 25% 0.0310, $2.477 0.0267% 0.0077% 0.0344% 28% 0.0319, $2.481 0.0347% 0.0099% 0.0446% 2 32% 0.0324, $2.487 0.0466% 1 0.0132% 0.0598% 2 1 npv increase from change in cash discount only exceeds menu costs 2 npv increase from change in cash discount and product price exceeds menu costs table 6: increase in npv as a percentage of revenues at end of credit period (day n2) (ηd,ηp) = (0.005,-3); ∂λ/∂d= 0 k d*, p* zd * ∆d zp * ∆p ∆z 5% 0.0128, $1.217 10% 0.0137, $1.222 0.00223% 0.00260% 0.00483% 15% 0.0145, $1.226 0.00869% 0.00992% 0.01861% 20% 0.0154, $1.230 0.0190% 0.0214% 0.0404% 21% 0.0155, $1.231 0.0215% 0.0241% 0.0456% 2 25% 0.0162, $1,234 0.0329% 0.0364% 0.0693% 2 29% 0.0169, $1.237 0.0464% 1 0.0507% 0.0971% 2 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 51 | p a g e npv increase from change in cash discount only exceeds menu costs npv increase from change in cash discount and product price exceeds menu costs table 7: increase in npv as a percentage of revenues at end of credit period (day n2) (ηd,ηp) = (0.005,-1.5); ∂λ/∂d= -0.1 k d*, p* zd * ∆d zp * ∆p ∆z 5% 0.0139, $2.435 10% 0.0146, $2.443 0.0019% 0.0006% 0.0025% 15% 0.0153, $2.452 0.0074% 0.0024% 0.0098% 20% 0.0161, $2.460 0.0163% 0.0053% 0.0216% 25% 0.0168, $2.467 0.0282% 0.0090% 0.0372% 27% 0.0171, $2.470 0.0339% 0.0107% 0.0446% 2 31% 0.0176, $2.476 0.0464% 1 0.0144% 0.0608% 2 1 npv increase from change in cash discount only exceeds menu costs 2 npv increase from change in cash discount and product price exceeds menu costs table 8: increase in npv as a percentage of revenues at end of credit period (day n2) (ηd,ηp) = (0.005,-1.5); ∂λ/∂d= -0.625 k d*, p* zd * ∆d zp * ∆p ∆z 5% 0.0058, $2.433 10% 0.0060, $2.442 0.0007% 0.0007% 0.0014% 15% 0.0063, $2.451 0.0027% 0.0027% 0.0054% 20% 0.0065, $2.459 0.0060% 0.0057% 0.0117% 30% 0.0071, $2.475 0.0164% 0.0147% 0.0311% 36% 0.0074, $2.484 0.0250% 0.0217% 0.0467% 2 47% 0.0081, $2.499 0.0452% 1 0.0367% 0.0819% 2 although uncommon in the united states in recent decades with historically low inflation, absolute shortterm rate changes over 15% could be recent phenomena in some countries, explaining world bank survey evidence that trade credit fluctuates more in such countries. for example, the world bank has survey evidence that trade credit fluctuated significantly after financial crises in developing countries when short-term interest rates fluctuated between 9 and 44 percentage points over a month. 5. conclusion in this paper, numerical computations showed that credit terms and product prices are stable even with large changes in macroeconomic interest rates. using a menu cost estimate by zbaracki et al. (2004) of just 0.0435% of revenues, it would require an increase in short-term interest rates from 5% to over 20% for the benefits of increasing trade credit interest rates and product prices to outweigh the menu costs. although uncommon in the united states in recent decades with historically low inflation, absolute mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 52 | p a g e short-term rate changes over 15% could be recent phenomena in some countries, explaining world bank survey evidence that trade credit fluctuates more in such countries (e.g., indonesia, south korea and thailand in the asian financial crisis of the late 1990s). this finding led to our main conclusion that the empirical phenomena of credit terms and product prices being stable over time (in the united states in recent decades) and of the meltzer (1960) effect could be rationalized by assuming that firms set credit terms to maximize npv and take menu costs into account. our results on credit policy have some commonality with the literature on exchange rate pass-throughs. in the early years of floating exchange rates, economists expected to find a close association between movements in exchange rates and national price levels. based on purchasing-power parity, it was felt that control of domestic inflation would become more problematic in an environment of exchange rate volatility. however, a substantial literature, covering many countries, has documented that exchange rate changes are, at best, weakly associated with changes in domestic prices at the consumer level. the low-degree of “exchange rate pass-through” both at the disaggregated level, for individual traded goods prices, and more generally, in aggregate price indexes, has been extensively documented. (devereux and yetman, 2002, p.347). this led devereux and yetman (2002) to develop a simple theoretical model of endogenous exchange rate pass-through that focuses exclusively on the role of price rigidities that come about because of the presence of “menu costs”. in their model calibration, they find that for annual rates of inflation higher than 25 percent, firms will adjust prices every period so price rigidity disappears completely. in that case, the pass-through from exchange rate changes to prices is complete. in short, in countries with very high inflation (or very high interest rates), prices become essentially flexible as the cost to firms of maintaining fixed prices fully offsets the menu costs. in our model, firms only adjust credit terms and product prices when short-term interest rates change more than 15 percent. pass-throughs to credit terms and product prices are higher in periods with higher nominal interest rates (and thus higher absolute interest rate changes). many industrialized countries seemed to have experienced a decline in exchange rate pass-through to consumer prices in the 1990s, despite large exchange rate depreciations in many of them. bailliu and bouakez (2004) state the fact that this documented decline in exchange rate pass-throughs in recent years coincided with the lowinflation period that most industrialized countries have entered and that these two phenomena are correlated. sekine (2006) finds that pass-throughs have declined over time for all his sample countries. the decline in second-stage passthrough (from import prices to consumer prices) is associated with the emergence of a low inflation environment as well as a rise in import penetration. these results are consistent with our model, which predicts that credit terms and product prices would remain stable in recent decades due to low inflation. outside of the united states and other industrialized countries, however, credit terms have not been stable, especially in countries which suffered through financial crises. devereux (2001) presents evidence that exchange rate passthrough is very rapid for emerging markets, but slow for advanced economies. he quotes the governor of the central bank of mexico, guillermo ortiz, who stated on 24 june 1999 that: “the pass-through of exchange rates to inflation was much higher in mexico than in canada, australia or new zealand. and this has to do a lot with history, with credibility of monetary policies, and this is one of the big challenges that we are facing today in mexico in the conduct of mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 53 | p a g e monetary policy. and we have to really build sufficient credibility so that this pass-through from exchange rate movements to inflation ceases to be such an automatic reaction.” our model suggests that the stability of credit terms in the united states is due to the credibility established by the federal reserve in maintaining a low and stable inflation environment where shortterm interest rate changes are gradual. the converse would, however, also be true. monetary easing in times of recession (like during a pandemic) may not result in lower trade credit interest rates or more generous credit terms as the benefits of companies changing credit terms might be offset by menu costs. this explains the common observation that trade credit or credit card interest rates remain high even though the federal funds rate is near zero. references atkins jc, kim yh. 1977. comment and correction: opportunity cost in the evaluation of investment in accounts receivable. financial management 6: 71-74. bailliu j, bouakez h. 2004. exchange rate pass-through in industrialized countries. bank of canada review spring 2004:19-28. beranek w. 1991. behavioral relations, operating factors and the optimal cash discount. the 7th international symposium on cash, treasury and working capital management, kim, y (ed). chicago, october 1991. brick ie, fung wkh. 1984. taxes and the theory of trade debt. journal of finance 39: 1169-1176. carroll k, coates d. 1999. teaching price discrimination: some clarification. southern economic journal 66(2): 466480. devereux mb. 2001. monetary policy, exchange rate flexibility, and exchange rate pass-through. revisiting the case for flexible exchange rates, proceedings of a conference held at the bank of canada, november 2000, bank of canada, ottawa, ontario, canada. devereux mb, yetman j. 2002. price-setting and exchange rate pass-through: theory and evidence. price adjustment and monetary policy, proceedings of a conference held at the bank of canada, november 2002, bank of canada, ottawa, ontario, canada. dwor-frecaut d, colaco fx, hallward-driemeier m. 2000. asian corporate recovery, findings from firm-level surveys in five countries. world bank, washington, d.c. processed. emery gw. 1984. a pure financial explanation for trade credit. journal of financial and quantitative analysis 19: 271285. emery gw. 1987. an optimal financial response to variable demand. journal of financial and quantitative analysis 22: 209-225. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 54 | p a g e graham jr, harvey cr. 2001. the theory and practice of corporate finance: evidence from the field. journal of financial economics 60: 187-243. hill nc, riener kd. 1979. determining the cash discount in the firm’s credit policy. financial management 8: 68-73. kim yh, atkins jc. 1978. evaluating investments in accounts receivable: a maximizing framework. journal of finance 33: 403-412. kim yh, chung kh. 1990. an integrated evaluation of investment in inventory and credit: a cash flow approach. journal of business finance & accounting 17: 381-390. layson sk. 1998. third-degree price discrimination with interdependent demands. journal of industrial economics 46:511-524. lieber z, orgler ye. 1975. an integrated model for accounts receivable management. management science 22: 212219. lim w, rashid m. 2002. an operational theory integrating cash discount and product pricing policies. journal of american academy of business 1: 282-288. lim, w, rashid m. 2008. variations on the operational theory integrating cash discount and product pricing policies. the business review, cambridge, 10: 1-7. lim w, rashid m, mitra d. 2006. changes in credit terms and clientele effects on the cash discount rate in credit policy. review of business research 6: 141-151. love i, zaidi r. 2003. trade credit and financing constraints: evidence from the east asian crisis. world bank, washington, d.c. processed. maness ts, zietlow jt. 2005. short-term financial management, third edition. thomson southwestern. mateut s. 2005. trade credit and monetary policy transmission. journal of economic surveys 19: 655-670. mailto:contact@americaserial.com mailto:contact@americaserial.com william lim and muhammad rashid 55 american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 55 | p a g e journal of finance and bank management, volume 10, december 2022 mccallum bt. 1986. on “real” and “sticky-price” theories of the business cycle. journal of money, credit and banking 18: 397-414. meltzer ah. 1960. mercantile credit, monetary policy, and size of firms. review of economics and statistics 42: 429-437. mian sl, smith jr. cw. 1992. accounts receivable management policy: theory and evidence. journal of finance 47: 169-200. ng ck, smith jk, smith rl. 1999. evidence of the determinants of credit terms used in interfirm trade. journal of finance 54: 1109-1129. rashid m, mitra d. 1999. price elasticity of demand and an optimal cash discount rate in credit policy. financial review 34: 113-126. scherr f. 1989. modern working capital management: text and cases, prentice hall, inc.: eaglewood cliffs, nj. schwartz ra, whitcomb d. 1980. the trade credit decision. handbook of financial economics, bicksler j (ed). northholland: amsterdam. sekine t. 2006. time-varying exchange rate pass-through: experiences of some industrial countries. bis working papers no. 202, bank of international settlements, basel switzerland. smith j. 1987. trade credit and informational asymmetry. journal of finance 42: 863-869. zbaracki mj, ritson m, levy d, dutta s, bergen m. 2004. managerial and customer costs of price adjustment: direct evidence from industrial markets. review of economics and statistics 86: 514533. appendix 1. behavioral specifications in theoretical model a1a. the specification of p: p = p (d, p), where δp/δd > 0 and δp/δp= 0 (a1) the excess of the opportunity cost of not taking the cash discount over individual borrowing rates of marginal customers after an increase in the cash discount explains why δp/δd > 0. it is this proportion, p, which reflects the demand interdependencies of the two markets. if a larger proportion of customers take the cash discount with an increase in d, demand in the other market (those not taking the cash discount) must fall. next, with a reduction in the product price, the amount of borrowing needed declines, which may result in lower borrowing rates. if this happens, then the effect on p is positive. on the other hand, with a reduction in product price, quantity demanded rises, requiring more borrowing and perhaps higher borrowing rates. if this happens, then the effect on p is negative. it is difficult to know which of the two opposing effects is stronger. therefore, we let δp/δp= 0 throughout. a1b. the specification of λ: λ = λ (d,p), where δλ/δd ≤ 0 and δλ/δp = 0 (a2) δλ/δd = 0 requires that among the customers who are not taking the cash discount, the percentage of those who would have paid on day n2 and the percentage of those who would have defaulted is unchanged after an increase in the cash discount. δλ/δd > 0 implies that, with an increase in the cash discount, customers who would have defaulted as a fraction of the customers who do not take the cash discount decrease. this effect is quite unlikely. thus, we postulate that δλ/δd is either negative or has the highest value of zero. initially we would let δλ/δd=0. with δp/δp=0, we may expect the bad-debt loss (1-p)(1-λ) to increase when the product price increases (i.e., δλ/δp<0). however, with a uniform mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 48 | p a g e occupational segregation and gender wage differentials in cameroon nadine zeh faculty of economics and management, university of marouacameroon, po. box: 391, maroua abstract: the labor market in cameroon has faced significant challenges due to economic conditions and demographic factors, resulting in a restructuring of the labor force. this has led to deteriorating employment conditions, increased precarious work, and the growth of the informal sector. women in cameroon, in particular, face overrepresentation in low-wage jobs, especially in the informal agricultural sector. while there have been advancements in women's participation in the labor market, gender disparities persist, with women often occupying lower-paying positions. this paper examines the evolving role of women in the cameroonian labor market, highlighting progress in terms of professional equality in top positions, yet acknowledging ongoing challenges such as the gender pay gap and rural gender inequalities. the study also emphasizes the economic invisibility of women's domestic and reproductive work, which, despite its critical role in maintaining households and communities, remains largely unrecognized. understanding these dynamics is essential for addressing labor market inequalities and promoting gender equality in cameroon. keywords: cameroon labor market, gender disparities, informal sector, gender pay gap, rural gender inequalities 1. introduction in cameroon, the economic situation and the demographic weight have led to a destructuration of the labour market. the employment situation and the availability of social services have considerably deteriorated with the development of precarious employment and an expansion of the informal sector. labour market indicators in cameroon show strong disparities (national institute of statistics (nis), 2012; ekamena, 2014; baye, epo & ndenzako, 2016; international labour organization (ilo), 2017). the informal sector provides the most opportunities for professional insertion; in fact, it currently occupies about 90% of workers (nis, 2016). in cameroon, women tend to be over-represented in lowwage jobs and especially in the informal agricultural sector where productivity and farm incomes are lower (nis, 2012). the female population is represented in all sectors of activity, particularly in the service sector. however, according to the ilo (2017), informal employments are highly concentrated in the service sector. since the 1990s, the behaviour of women in the labour market in cameroon has evolved. the progresses in terms of professional equality in the labour market are reflected in the portion of women in the top jobs. currently, there are eight women ministers and three women secretaries of state in the government, a percentage of 17.18%, compared to 11.7% in 2012 and 6.7% in 2002. today, women represent 35% of parliament compared to 13.9% in 2012 and 5.9% in 2002. despite these progresses, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 49 | p a g e the place of women in senior positions of responsibility remains limited and the gender pay gap is still current. in rural zones, gender inequalities are widespread in the labour market, where men and women often work in different combinations of employment, as selves-employed farmers, temporary workers, or unpaid family workers. rural women continue to be penalised by the invisibility of their work in the home economy. they are strongly engaged in domestic and reproductive functions, which are crucial for the maintenance of home, families, parents and communities, but this is seen as an extension of family duties, which explains that this important part being economically invisible. despite these effects on gender equality and economic productivity, employment segregation occurs in both developed and developing countries. it also depends on social norms and beliefs and local constraints on labour supply and demand. this is of particular concern as gender attitudes are persistent and continue to hamper access to better opportunities for women in many countries (giuliano, 2018). this is a serious preoccupation for equity, gender equality and the implications of low autonomy on the well-being of women and children. effective arguments have been made for policies to improve women's position in the labour market. in particular, a growing body of research points to the adverse effect of gender employment gaps on the overall productivity and growth potential of emerging economies (klasen & lamanna 2009). occupational segregation has significant costs for the economy. indeed, the limited participation of women in leadership and management positions could be trammed to innovation and economic growth; it limits efforts to encourage women's participation in the labour market (das & kotikula, 2019). some studies have shown that there are benefits to having a more diverse workforce as there are economic costs associated with gender inequalities in the labour market. according to these approaches, the economic benefits of increasing women's labour force participation have beneficial effects on productivity and economic growth (ngai & petrongolo, 2017; ostry, alvarez, espinoza & papageorgiou, 2018). progresses are being made in several countries to reduce gender gaps in human capital (education and health), but these progresses are not always associated with improved conditions for women in the labour market. despite significant improvements in policies related to women's empowerment over the past decades, women's participation in the labour market has remained low, even in developed countries (lagarde & ostry, 2018). patterns of occupational gender segregation vary depending on countries. globally, women tend to be concentrated in low productivity sectors (das & kotikula, 2019). women are found predominantly among the unemployed and family workers. they continue to occupy the majority of atypical, informal, temporary and parttime jobs (ilo, 2019). under these conditions, women would not achieve full economic and social autonomy. according to the data in cameroon, there is a persistence of limited access of women to certain jobs, which would also lead to a persistence of gender wage gaps. the aim of this study is to characterise the evolution of wage differentials between men and women in the labour market, taking into consideration the distribution of men and women according to socio-professional categories in cameroon since 2001. it is up for us to determine whether women and men work in different jobs because of their different preferences and attitudes or rather because of selection mechanisms in the labour market, thus maintaining wage gaps. the research for explanations, sources and estimates of these gaps is a reason to explain and reduce the persistence of employment inequalities. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 50 | p a g e this study will have five sections, after the introduction, in the second section we will make a survey of the theoretical contributions, the third section will be devoted to the methodology and in the fourth section we will present the results and then the conclusion. 2. the theoretical literature review 2.1. theoretical contributions to occupational segregation one theoretical explanation for occupational segregation is bergmann's “crowding hypothesis” (bergmann, 1971, 1974). according to this model, competition is imperfect in the labour market; the dominant group (men) can ration the entrance into certain types of jobs and thus benefit from a higher wage rate in these jobs. in contrast, the disadvantaged group (women) is excluded from these jobs and accumulates a limited number of jobs. the increase in the participation rate of women in the labour market has not reduced the concentration of female jobs and the occupational segregation of men and women. 2.1.1. horizontal segregation the human capital approach is used to explain the phenomenon of occupational segregation. it predicts that women will tend to be specialised in occupations of their preference and where their career discontinuities are not penalised, i.e. in rather low-skilled occupations (polachek, 1981). however, in reality, members of both sexes are found in jobs requiring a higher investment in specific human capital, which is inconsistent with the theory. some economists have developed theoretical models that explain occupational segregation in the labour market in terms of employer behaviour. for example, according to becker (1957), employers have a taste for discrimination. arrow (1972) and phelps (1972) argue that employers do not have such preferences, but that women are excluded from certain jobs because of the imperfect information employers have about them. according to arrow (opcit), if women know that they will be excluded from certain jobs, they will less invest in human capital. however, institutional economists believe that segregation is not due to discrimination, but to the structure of the labour market. killingsworth (1987) bases his approach on labour market favouritism towards men. it assumes that the market is made up of two types of jobs (a and b) and that employers discriminate in favour of male employees in accessing the better-paid b job, even though women are also equally productive. he then shows that this discrimination leads to several results that are consistent with certain stylised facts observed in the labour market. in particular, the job tenure gap will be larger in jobs where women are under-represented (job b) (havet & sofer, 2002). 2.1.2. vertical segregation vertical segregation is a limit to women's access to the hierarchical functions. this access seems to be limited by an invisible and transparent "glass ceiling". to explain the glass ceiling, we use arguments related to the sociology of work and organisations, the sociology of the family, or the sociology of professions. one argument has to do more with the characteristics of the work organisation in managerial occupations, which are essentially adapted to men's strategies and less often compatible with women's strategies and aspirations. the search of a balance between professional and family investment leads women to give up continuing careers that require time commitment and permanent availability. the norm of permanent availability/mobility is one of the conditions for gaining power (maruani & nicole, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 51 | p a g e 1989). women managers are more likely to live alone, and when they are in a couple, they are more likely to be the partners of managers and therefore have to negotiate their mobility and availability with a spouse who is himself preoccupied with his own promotion (pochic, 2004). another factor is the fundamental role of networks in accessing leadership positions. women often lack the information, connections, and support needed to reach higher positions because they are cut off from the networks, both formal and informal, whose support is essential for advancement within the company. because they receive less attention and encouragement from their superiors, they may feel less legitimate. this factor works in a loop, as the higher percentage of men at the decision making level contributes to maintaining the glass ceiling (maruani & nicole, op.cit). another argument that contributes to the creation of the 'glass ceiling' is related to the stereotypical conception of the skills required and in the conception of responsibility or qualification. the notion of hierarchical responsibility is defined in relation to the number of subordinates under one's instruction, and careers are based more on manly principles such as competition or courage. furthermore, the implementation of the competence approach in the new classification systems combines over-valuation of the technical dimension and under-valuation of the relational dimension (sehili, 2000). relational and behavioural skills are often less recognised on the labour market and are not subject to real formal learning processes because they are assumed to be 'innate', natural because they are acquired within the family socialisation (daune-richard, 2001). 2.2. a theory of job market segmentation according to the employment segmentation theory (doeringer and piore, 1971), the distribution of wages and socio-economic status in the labour market less depends on the distribution of education levels than the structure of the labour market. while the proponents of the neoclassical human capital theory assert that there are two types of jobs, namely skilled and unskilled, employment segmentation theory reprents it differently. the basic assumption of this theory is that the labour market is divided into two sectors: the primary sector and the secondary sector. the difference between the two sectors has more to do with the quality of the jobs themselves than with the qualifications of the employees. jobs in the primary sector are good jobs, while jobs in the secondary sector are bad jobs. the secondary sector is characterised by jobs requiring a very low level of qualification, offering only inconstant employment, low pay, poor working conditions and small chance to progress in their career. the staff is not unionised and is predominantly dominated by people from disfavored groups: ethnic minorities, women and older people, immigrants. on the other hand, the primary sector is characterised by jobs that are hierarchical to each other and relatively well paid, on-the-job training, clear differences in wages (wage structure), opportunities for promotion, well-defined work rules and job stability (doeringer & piore, op.cit). the primary sector is divided into two tiers: the lower-jobs tier and the upper-jobs tier. the two tiers are distinguished by the same differences as between the primary and secondary markets. compared to subordinate jobs, senior jobs are characterised by greater security, higher levels of education, creative freedom and relatively higher incomes (griffin, kalleberg & alexander, 1981). according to segmentation theory, the valuation of education depends on the type of market in which the individual is hired: differences in human capital are not expressed by differences in wage gains if one is in the primary market (granahan & shakow, 1990). according to doeringer & piore (op.cit), the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 52 | p a g e labour market is structured according to the level of technological complexity of production. individuals are recruited for jobs when they have human capital that matches the technical requirements. wages are not determined by the level of education, but by the characteristics of the jobs. this is why, for jobs that are technically unsophisticated and belong to the lower primary sector, educational attainment does not influence recruitment and pay determination. this approach explains why people are paid according to the functions they perform and not according to their education levels. 3. methodology 3.1. specification of the model the occupied job is an important phenomenon that differentiates populations in the labour market and thus the allocation of wages. a method for decomposition of the wage differential is provided by brown, moon & zoloth (1980). this method is an extension of the oaxaca-blinder (1973) decomposition; it introduces job occupation differences into the analysis of wage differentials incorporating distinctions in wage differentials between job categories, i.e. due to different job structures (inter-category gap) and also within the same job categories (intra-category gap). these two types of wage gaps are further decomposed in order to distinguish between the justified portion and the portion attributable to discrimination. the main idea is to measure how the total gender wage gap is explained by gender differences in job allocation (occupational segregation). to determine the brown & al. (1980) wage decomposition equation, we start from the ols wage equations for men and women respectively, expressed as follows: w h j ˆjh x hj et w fj ˆjf x fj (1) h f where j denotes the job category occupied, w j and w j are the logarithm of the wage average of men h ̂ f are the vectors of the estimated coefficients, x hj and x f j are the matrices of and women respectively, ˆj and j the individual average characteristics of the workers. if we take pjh and pjf , the probabilities of working in category j where j=1,...j. it follows that : j j w hj w fj pwjh h j pjf w f j (2) j 1 j 1 by adding and subtracting from the right-hand side of equation (2), we get: w h w fj p f w h w f j pjh pjf pjf w hj (3) j mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 53 | p a g e j 1 j 1 the first term represents the within-occupational component, which measures the part of the gap that is due to wage differences within occupations. the second term corresponds to the inter-occupational component: this is the portion of the wage differential is attributable to differences in the distribution of male and female workers across job occupation. both terms can be decomposed into explained and unexplained components. the equation of brown et al (1980) can be written: w j pj j j j f j h h p jf pjf (4) h f f ˆh x hj x fj pjf x fj hj fj x hj ˆjh pjh p j x j ˆj w j 1 j 1 j 1 j 1 the first two terms of equation represent the intra-occupational component of the wage gap. the first term is the explained portion which captures the part of the within occupation differential that is due to the different levels of labor market characteristics. the second term is the unexplained portion, that is, the portion of the within wage differential that arises from gender differences in the rates of return to labor market characteristics and that is interpreted as wage discrimination. the third and fourth terms on the right hand side correspond, respectively, to the explained and f unexplained portions of the inter-occupational component. the parameter p j represents the nondiscriminatory occupational structure for female. the explained portion of the inter-occupational term measures the part of the across occupation wage differential that results from differences in male and female endowments. the unexplained portion reflects the part of the across occupation wage differential that is not explained by differences in the two groups’ characteristics and that is understood as employment discrimination (meurs & ponthieux, 1999). to estimate the wage decomposition using the brown et al (1980) method, the first step is to predict the probability of men's access to job occupations based on a set of individual characteristics. these are age, age2 , experience, education and place of living. this requires an estimation of the reduced form of the multinomial logit model for the sample. the second step is to simulate the distribution of the occupations for women as if they had the same employment access structure as men. the third step is to estimate the wages of both populations for each occupation category. the six categories include: senior managers, skilled workers, manual workers, patrons, family helpers and apprentices combined into one category and self-employed. the total gender pay gap is then decomposed into different terms. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 54 | p a g e 3. 2. data and variables of the study in cameroon, the data sources that gather information to quantify the more recent evolution of wage discrimination are the ecam ii, ecam iii and ecam iv databases, which are respectively the second, third and fourth cameroon household consumption surveys conducted in 2001, 2007 and 2014. the limitation of this work is that the employee population is considered homogeneous according to the criterion of actual working time during the reference week. however, salaried workers in the urban milieu are often subjects to the phenomenon of underemployment because of the importance of seasonal jobs. this is all the more important as certain professions (nursing, textiles, etc.) are predominantly female and others (fishing, crafts, transport, etc.) predominantly male. it is therefore likely that part of the gender wage gap is due to this phenomenon of underemployment, which is not apprehended by the cameroon household surveys. we restrict our analyses on individuals aged from 15 to 60 who declare themselves to be employed and receive a salary. the wage variable is the logarithm of the declared monthly income, either as an amount or as an interval. it includes wages, salaries and other earnings in cash from the activity. for the selfemployed it also corresponds to the net business income, i.e. the profit, or to the mixed income for the informal production units, as the profit is difficult to calculate in their case. the variables selected to explain income are: age, age squared, gender, level of education, experience, socio-professional occupation, place of living. 4. results table 1 presents the total wage gaps in 2001, 2007 and 2014 which are 0.9877, 0.6787 and 0.7899 respectively. we note that the gender wage gap in cameroon decreased from 2001 to 2007 by 30.89% and increased by 10% between 2007 and 2014. we can explain this decrease with the financial crisis of 2008 which would have had the effect of deteriorating the labour market, women being the first to undergo the consequences; the gender wage gap would have increased. this study shows a persistence of gender wage differentials between 2001 and 2014. nevertheless, the results show that efforts have been made and continue to be made to reduce gender inequalities in the labour market in cameroon. these results are in line with the findings of a study by the ilo (2017) on the persistence of monthly gender wage gaps between 2005 and 2010 in cameroon. table 1: total gender wage differential years 2001 2007 2014 total differential 0,987745 0,678788 0,789945 source: author's calculation based on ecam 2, ecam 3 and ecam 4 the results of the decomposition of these differentials are contained in table 2 and show each portion thereby determined over the years. they show that the intra-category component explains more of the wage gap than the total gap. indeed, 0.7547 (76.41%) in 2001; 0.5639 (83%) in 2007 and 0.6055 (76.65%) in 2014 represent the intra-category wage gap while 0.2329 (23.59%) in 2001; 0.1148 (17%) in 2007 and 0.1844 (23.35%) correspond to the wage gap that results from gender differences in the distribution of the jobs. thus, a larger part of the total wage gap is due to differences in the wages of men and women within the same occupations, while a small part of this gap is explained by the different distribution of men and women in the same occupations. the results also show that by combining intra mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 55 | p a g e and inter-category effects, the unexplained total attributed to gender discrimination fully justifies the gap. table 2: decomposition of the wage differential on access to socio-professional groups intra-occupational differential inter-occupational differential years 2001 2007 2014 2001 2007 2014 explained portion -0,0072 (0,95%) -0,0229 (-4%) -0,0807 (-13%) 0,0539 23,16% 0,0429 (37,38%) 0,0681 (37%) unexplained portion 0,7620 100,95% 0,5868 (104%) 0,6862 (113%) 0,1790 76,84% 0,0718 (62,62%) 0,1162 (63%) total 0,7547 76,41% 0,5639 (83%) 0,6055 (76,65 %) 0,2329 23,59% 0,1148 (17%) 0,1844 (23,35 %) source: author's calculation based on ecam 2, ecam 3 and ecam 4 the analysis of the intra-category component in the explained and unexplained parts shows the significant importance of the unexplained part in explaining the differentials in the same occupations. indeed, the unexplained portion totally represents and evens more the intra-category component. while 4% in 2007 and 13% in 2014 of this component is explained by differences in labour market characteristics between men and women, 104% in 2007 and 113% in 2014 cannot be explained by these differences. we notice that in 2001, this difference in labour market characteristics between men and women is almost zero (0.95%). noting that; the explained portion is negative from 2001 to 2014, which means that with regard to the differences in individual gender characteristics in the labour market, men are disadvantaged. this means that the enhancement of individual characteristics decreases intracategory gender wage differentials. the results therefore show that a large part of the gender wage gap is not explained by individual endowment differences, but is due to wage discrimination. as regards the inter-category component, 23.16% of the gap in 2001, 37.38% of the gap in 2007 while 37% of the gap in 2014 is explained by differences in characteristics between men and women on the labour market. while 76.84% in 2001; 62.62% in 2007 and 63% in 2014 are explained by discrimination against women in access to certain employment. this highlights an aspect of discrimination that stems from the over-representation of women in lower paying firms and men in higher paying firms. this result points to the existence of horizontal occupational segregation as presented by bergman (1974). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 56 | p a g e table 3: decomposition of the wage differential per socio-professional occupation socioprofessional occupation years intra-occupational differential inter-occupational differential senior manager 2001 -0,0047 (-0,62%) 0,2760 (118,48%) 2007 0,0025 (0,45%) 0,3618 (315%) 2014 0,0108 (1,79%) 0,3699 (200,59%) skilled workers 2001 -0,0217 (-2,87%) 0,6482 (278,24%) 2007 -0,0215 (-3,8%) 1,0814 (942%) 2014 0,0410 (6,78%) 0,8242 (446,91%) manual workers 2001 0,0362 (4,8%) 0,5752 (246,92%) 2007 0,0135 (2,4%) 0,3424 (298,27%) 2014 0,0182 (3,01%) 0,3563 (193,24%) patrons 2001 0,0155 (2,06%) 0,1343 (57,68%) 2007 0,0226 (4%) 0,3314 (288%) 2014 0,0209 (3,45%) 0,1508 (81,76%) selfemployed 2001 0,6668 (88,34%) -1,3918 (-597,45) 2007 0,4816 (85,4%) -2,0013 (-1743%) 2014 0,5016 (82,84%) -1,4026 (-760,56%) family helpers apprentices and 2001 0,0626 (8,29%) -0,0090 (-3,86%) 2007 0,0651 (11,55%) -0,0010 (-0,93%) 2014 0,0128 (2,11%) -0,1142 (-61,96%) total 2001 0,7547 0,2329 2007 0,5639 0,1148 2014 0,6055 0,1844 source: author's calculation based on ecam 2, ecam 3 and ecam 4 the results in table 3 give the decomposition of the total wage gap per component and per socioprofessional category. the decomposition of the intra-category component shows that the sameemployment wage gap is higher in the own-account workers category with a decrease from 2001 to 2014. indeed, this category accounts for 88.34% in 2001, 85% in 2007 and 82.84% in 2014 of the total gap within the same employments, this gap is totally and even more justified by the unexplained portion attributed to wage discrimination against women. the decomposition of the inter-category component also shows that own-account workers have the highest gap, but in the distribution of the occupations, women are the most favoured. the category “selfemployed” has thus contributed over the years in cameroon to reducing the gap in access to employment due to occupational segregation, which often increases the gender wage gap. for manual mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 57 | p a g e workers, the intra-category gap was 4.8% in 2001, 2.4% in 2007 and 3.01% in 2014, while the intercategory gap was 246.92% in 2001, 298% in 2007 and 193.24% in 2014. both gaps are largely explained by wage discrimination on the one hand and by the limited access of women to this occupation on the other. however, we see a decrease of discrimination and limited access of female manual workers in 2014, perhaps women have decided to go over their nature and face the difficulties associated with this occupation occupation. the percentage of senior managers in the total gap in the same employment is the lowest (it is negative in 2001, 0.45% in 2007 and 1.79% in 2014), but it remains sufficiently high in the inter-category component. this means that the gender wage differential is more justified by the occupational segregation that women experience in this occupation. furthermore, the negative sign of the unexplained part of the intra-category difference shows a persistence and increase of gender pay discrimination in the occupation “senior managers” between 2001 and 2014. as for the occupation “skilled workers”, the results show that the wage gap is in favour of women. its percentage of the total intra-category gap is small and negative (-2.87%, -3.8% in 2007 and -6.78% in 2014). this job category therefore contributes to a decrease in the intra-category wage gap. in addition, the percentage in the inter-category component is the highest (278.24% in 2001, 942% in 2007 and 446.91% in 2014) and it is in favour of men as in the occupation “senior managers” and “patrons”. these results show that the gender wage gap observed in the labour market is largely explained by women's limited access to the best high-wage occupations. this corroborates with the results of baye & al. (2016) who show that women in terms of wages are penalised and that the gender wage gap is explained by individual and labour market characteristics. these results in theory could be explained by the fact that decision-makers or employers, based on the fact that women are not able to occupying high positions of responsibility due to their nature and the distribution of roles in the household, will consider the nomination or recruitment of men. offering women positions that allow them time to take care of the home. moreover, the employer is unable to make difference between women who will remain in the labour market in the long term, regardless of atypical working hours or often difficult and demanding working conditions, and those who will leave quickly. he therefore expects lower productivity on average from women, with a relatively high variance, and he will not be prepared to hire them on the same pay terms as men. similarly, women anticipating that they will not have the same capacity as men to occupy certain categories of jobs, will make a bad investment in human capital, or will generally choose occupations where working conditions are compatible with their family responsibilities. conclusion the objective of this study was to determine the evolution of gender wage differentials in the cameroonian labour market between 2001 and 2014. the estimated results of the wage decomposition using the brown et al. method (1980) show that in addition to being discriminated, women are also occupationally segregated, which has persisted since 2001. this is mainly due to the fact that women are majoritary in collective and informal enterprises where salaries are lowest, while men are majoritary in private enterprises and in high-level state positions where salaries are higher. indeed, the results show a clear persistent contrast from 2001 to 2014 between the occupation of “senior manager”, “skilled workers” and “employers” and the occupation of “selfemployed workers”, “manual workers” and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 58 | p a g e “apprentices”. the first ones are the place of a marked occupational segregation towards women which, added to the discriminations against them, creates a strong wage differential between men and women in cameroon. however, the results also show that in some jobs, male “self-employed” workers are occupationally segregated, while male “skilled employees” are discriminated. this study highlights the persistence of the gender pay gap. furthermore, it shows that this persistent wage gap is largely a consequence of the structure of the labour market and is linked to the different position of women and men in this market. despite the government's efforts to reduce inequalities in the labour market through the promotion of gender equality in certain recruitments, gender equality in income is still far from being achieved, and much remains to be done to reduce these gender inequalities. heavy emphasis must be placed not only on the education of the girl child, but also on the access of women to the highest paid job categories. furthermore, in cameroon, the problem of employment is more in terms of underemployment. this underemployment mostly affects women, because they are highly represented in informal sector activities that are not recognised, registered, protected or regulated by the public authorities. hence the need to act to improve working conditions in the informal sector, with a view to enhancing the value of their work and reinforcing their professionalism, which would lead to an aspiration to revise their salary conditions. furthermore, measuring and understanding the phenomenon of occupational segregation in cameroon is more necessary than ever in order to implement effective public action to promote gender-equitable governance. references arrow, k. j. 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(2001). hommes et femmes devant le travail et l'emploi. in t. blöss (eds.), la dialectique des rapports hommes-femmes (pp 127-150), p.u.f., collection sociologie d'aujourd'hui. doeringer, p. b & piore, m.j. (1971). internal labor markets and manpower analysis, health lexington book. ekamena, n.s.n. (2014). les ecarts salariaux de genre au cameroun. revue multidisciplinaire sur l’emploi, le syndicalisme et le travail (remest), numéro spécial travail et genre, 9, (2), 124-146 giuliano, p. (2018). gender: a historical perspective. in s.l. averett, l.m. argys, and s.d. hoffman (eds), oxford handbook of women and the economy (pp 645-672). new york: oxford university press. granahan, j. & shakow, d. m. (1990). labor market segmentation and job-related risk, differences in risk and compensation between primary and secondary labor markets. american journal of economics and sociology, 49(3), 306-323. griffin, l. j., kalleberg a. l., & alexander, k. l. (1981). determination of early labor market entry and attainment, a study of labor market segmentation. sociology of education, 54, 206-221. havet, n. & sofer, c. (2002). les nouvelles théories économiques de la discrimination », travail, genre et société, 7, 83-115. killingsworth, m. (1987). heterogeneous preferences, compensating wage differentials, and comparable worth. quarterly journal of economics, 102 (4), 727-742. klasen, s., & f. lamanna (2009). the impact of gender inequality in education and employment on economic growth: new evidence for a panel of countries. feminist economics, 15, 91-132. lagarde, c., & ostry, j. d. (2018). economic gains from gender inclusion: even greater than you thought. imf blog post, washington, dc: imf. maruani, m. & nicole, c. (1989). au labeur des dames. métiers masculins, emplois féminins. paris, syros/alternatives. meurs, d. & ponthieux, s. (1999). les inégalités salariales entre hommes et femmes dans les années 90. documents d’études de la dares, 28. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 60 | p a g e national institute of statistics, (2012). autonomiser les femmes rurales pour éradiquer la faim et la pauvreté. que révèlent les indicateurs? 27ème journée international de la femme. national institute of statistics, (2016), pauvreté et activité economique, rapport ecam 4. ngai, r. & petrongolo, b. (2017). gender gaps and the rise of the service economy. american economic journal: macroeconomics, 9(4), 1-44. oaxaca, r. l. (1973). male-female wage differentials in urban labour markets. international economic review, 14, 693-704. international labour organization, (2019). women in business and management: the business case for change. genève, bit. international labour organization, 2017. genre et différences salariales dans les emplois formel et informel au cameroun. genève, bit. ostry, d., alvarez j., espinoza r. & papageorgiou c. (2018). economic gains from gender inclusion: new mechanisms. new evidence, fmi, staff discussion notes, 18/06. phelps, e. (1972). the statistical theory of racism and sexism. american economic review, 62, 659661. pochic, s. (2004). les carrières des cadres : entre filières d’emploi et configurations familiales, xièmes journées d’analyse longitudinale du marché du travail « genre et données longitudinales », cereq. sehili, d. (2000). de la "qualification" à la "compétence" : du changement pour les femmes ? in p. rozenblatt (eds) le mirage de la compétence, éditions syllepse. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 38 | p a g e exploring the long-term effects of drought on farming in jowhar, somalia 1abdirashid hussein ali and 2farid ahmed khan 1somali national university, 2professor, department of economics, university of rajshahi, abstract: drought is a recurring natural phenomenon with significant global impacts. various regions around the world, including india, israel, southern africa, and parts of china, experience drought events at different intervals. in some cases, like the north china plain, droughts have occurred frequently, with 35 reported instances over the past four decades. both australia and the united states have faced severe droughts in recent years, with california enduring prolonged periods of low precipitation from 1987 to 1992, and australia experiencing only one drought-free year in a five-year span. northeastern brazil is particularly susceptible to droughts, occurring approximately every four years and often accompanied by flooding. drought events have had severe consequences, resulting in loss of life and economic disruptions on densely populated continents. for instance, between 1985 and 1988, an estimated 28 million people were affected by drought in india, although africa has been arguably the most severely impacted region. keywords: drought, recurring phenomenon, global impact, india, israel, southern africa, north china plain, australia, united states, northeastern brazil, consequences, africa. 1. introduction drought is an overall marvel. dry grounds in india experience dry spell once at regular intervals, and a comparative recurrence is seen in israel, southern africa, and parts of china, albeit in the north china plain there have been 35 announced dry seasons over the most recent forty years. australia and the united states have both experienced significant dry seasons this century: california endured back-toback long stretches of low precipitation between 1987 and1992 and australia was totally liberated from a dry spell for just a single year in a similar five-year time frame. in northeastern brazil, dry spells happen eight out of at regular intervals, frequently joined by floods. drought has been reprimanded for the demise and financial disturbance on totally occupied mainland’s; in 1985 – 1988, for instance, 28 million individuals are accepted to have been influenced by the dry season in india in the time frame, although africa seems to have been the most exceedingly awful influenced. the dry spells of the mid-1980s made a large number of natural evacuees in africa and colossal languishing over those abandoned. three huge droughts occurred in the sahel zone in the twenty-first century— during the 1910s, 1940s, and1970s. the last is of most worry since it appears to have broadcasted the start of usually drier conditions that have impacted 80% of the number of occupants in the sahel (lin, deng, 2013) water deficit during dry season spells is maybe the primary pressing factor factors in reap creation around the globe (nagar, 2017) it can provoke basic yield decline or even mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 39 | p a g e reap disillusionment. near the negative effects of water weight on the yield sum, the quality can similarly be influenced (w. paper and issues, 2011). the horn of africa is experiencing the most genuine food crisis on earth today over 12 million people are truly impacted in djibouti, ethiopia, kenya, and somalia which is the point of convergence of the crisis. the circumstance has extended when contrasted with what acquired a half year back, undoubtedly there is an expansion of about 38% in the dry season circumstance to the degree that starvation was authoritatively announced by the united nations on the twentieth of july 2011 in the center of southern somalia (wilhite, 2000). in 1974 was given the name of abartidabadeer (“long-tailed”) by people throughout the ogden and somalia, because it was triggered by a drought that lasted for two years. there is a widespread perception in somali region that droughts occur more frequently than in the past. ‘i remember when i was a child, the droughts didn’t happen so often. somali region has truth be told endured a progression of dry seasons since 1999/2000 and a few zones have confronted three years or a greater amount of sub-optimal precipitation. despite the way that droughts impact occupations in rural zones most direct and rapidly, since trained creatures and yield creation depend clearly upon precipitation, dealers and expert centers whose business depends upon country compensation are moreover unfavorably affected, as they face declining interest for their product and ventures. retail stores in country settlements lost compensation, and a couple of stores needed to close down. ('most associations are engaging to find enough customers'; 'the families who were our customers are buying only one quarter what they used to take (w. paper and issues, 2011). in hypothetically, drought by implication affects rural exercises. the immediate effect incorporates diminished harvest yield, rangeland, and wood productivities. the outcome of these effects brings about a decrease in the pay of ranchers and agro-based businesses, it includes food deficiency and movement to metropolitan zones. this makes dry spell transients increment tension on the social foundation of the metropolitan territories and prompts expanded destitution (cafer, 2011). agriculture usually plays a vital role in the economy of every nation that exists. not only for the reason that it tends to feed the entire population of a country but also in the respect that agriculture correlates and interacts with all the related industries of that country. (“agricultural production and productivity,” 2014). a country is generally viewed as a social and politically stable country on the off chance that it has a truly steady agrarian premise. a stable horticultural industry guarantees a country of food security. food security is viewed as one of the necessities of any country. no country can viably develop with a stable farming base while holding a country of "hungry individuals", as these hunger individuals can do nothing what-so-ever towards building up their country. food security forestalls starvation which has customarily been viewed as perhaps the biggest issue being capable by the little agricultural countries. most nations rely on farming items and related enterprises for their significant kind of revenue. indeed, even the recently non-industrial nations will find that they rely on and can profit enormously from their farming industry (lin et al, 2013). drought is a current problem that results from harmful agriculture production of somalia that cause came from less rain or unearned expected water that generally has not rained in most somali regions. however, reduction of agriculture production can create a decrease of income of the farmers, increase in poverty level, enhancing the rate of mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 40 | p a g e unemployment, less of gross domestic production, so the researcher requires to investigate this problem whether exist or not. (s. paper, 2010). after the somali government imploded in 1991, the nation crushed by the common war, and tribe partition assumes a significant part in the troublesome circumstance that exists in our local country. sadly, it is made uncountable relocation from rustic metropolitan for purpose of endurance because a large portion of the ranchers rely on essential of horticultural creation so they moved at the spot that appropriates for life yet the low pay of the rancher is a significant angle that has it is own difficult which makes inaccessibility of fundamental requirements of the ranchers if there is an absence of water there is no farming creation so the two elements are the establishment of each general public on the planet (africana, 2011). this study has fulfilled the improvement of water that farmers get from the rivers and promote farmers to enhance their productivity of agriculture to reduce poverty and increase their standard of living. the primary target of this investigation is to look at the significant part of drought in agriculture in somalia between the time frames 1970 and 2018, applying the with the help of spss software using frequency, percentage, and means to accomplish this wide level headed, this paper is explicitly planned. this is to identify the impact of farming in jowhar somalia, to focus the relationship between drought and on livestock in jowhar somalia to identify the effect of drought on socioeconomic 1.2: conceptual framework figure 1: conceptual framework drought can reduce livestock and socioeconomic and necessary productive farm, resulting negative significance direct and indirect impact of livestock and socio-economic agriculture sector. drought can also contribute insect outbreak increase in wildfire and altered rates of carbon, nutrient and water cycling. the direct impact of socioeconomic impact of drought is crop failure and pasture losses. these costs are often passed on to consumers through increased prices. if plant growth is stopped by drought forage quality may decline rapidly because livestock selectively graze the highest quality forage first. the rate of decline in forage quality and during drought is much more pronounced than in an average growing season but the high risk of socioeconomic droughts remains as climate change prediction presage a warmer climate with possibility worsening reduction of socio economic, farming and livestock. economic impacts to the agricultural sector. drought can also contribute to insect outbreaks, increases in wildfire and altered farming livestock drought socioeconomy the relationship between these variables. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 41 | p a g e 2. literature review to explore the role of economic development on farming in mogadishu, somalia. to consider the relationship between livestock production and economic development in mogadishu, somalia. this study used descriptive design and explanatory data on the agricultural production of livestock and farming, and the economic development from march-28 to june 2017. the study analysis has these two independent variables such as farming and livestock production affects economic development in somalia. the study explored the role of farming and livestock in economic development in mogadishu, somalia. the researchers checked the regression hypothesis before taking place further analysis. the dependent variable economic development was normally allocated to all the actors’ independent variables. two hypotheses were developed after reviewing the literature (ahmed et al, 2017). this study struggles to solve the perplexity in the evaluation of the effects of drought on the price fluctuation of agricultural products by building a partial equilibrium model that describes the balancing process of supply and demand quantitatively. we formulated a database for the iaeee model just like other computable equilibrium models such as the enormous regional model (term), the global trade analysis project (gtap) model, and the european car emissions (hertel 1997; denis and koop man 1998; horridge, madden, and wittwer 2005). applying the iaeee model for drought, we estimate the effects of drought in north china on national market prices of agricultural products under the three designated scenarios— mild drought, moderate drought, and severe drought. the results announced that the price fluctuations of agricultural products differ from scenario to scenario. (lin et al., 2013). studies focus on property break and less so on higher-order, and intangible (non-market, environmental, and social) impacts. the available literature on macroeconomic effects of natural disasters studied mainly on the rapid onset, typically geophysical hazards. slow onset hazards such as drought requires a different methodology. in europe, the only existing large-scale study bases on a survey conducted by the directorate general (dg) environment in 2006-2007. the economic impacts of droughts for the past 30 years have been predicted to top 100 billion eur. in the most recent years, the annual costs escalated to over 6.2 billion euros (markandya & mysiak, 2010). this study, therefore, was arranged to reduce the information gap that exists on the impact of climate change on livestock production at the mpolonjeni area development program. the study was both qualitative and quantitative in that it used peoples’ perceptions and empirical data to create the impact of climate change on livestock production. shows the number of households that own livestock. as shown by the results, 12.1% of the households own only cattle, 22.0% own goats only, and 32.2% own both cattle and goats. thirty-four percent (33.7%) of the households had no livestock ( nkondze et al., 2013). 3. methodology the main purpose of the study was to check the relationship between the impact of drought and agriculture production in jowhar farmers in somalia. this study was organized quantitative design and correlation design. the correlation is research in which the researcher determined to an extent an association exists between two or paired variables (oso&onen, 2008). the researcher selected this design because he investigated the relationship between two variables. the target population of this study is jowhar society, the accessible population is the society of agricultural production bases such as jowhar where drought happened. after the end of the research, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 42 | p a g e we believe that this study applied to all other areas in which drought was enacted homogeneously. to assure the impact of drought on agricultural production, the target population of this study was 100 of jowhar society, (ahmed, 2014). this study had drought victims who consist of the 100 and error can be 0.1 so, we used the following formula known as slovene’s formula that has written as: 120000 1 + 120000(0.1)2 = 100 data were collected from both primary and secondary sources. primary data was obtained (100) farmers. secondary data was acquired through reviewing related literature such as published books, magazines, journals, and internet sources 3.1: data source and analysis to get data from the respondents through the above instruments, the researcher visited the personally and administered the questionnaires to the sample larger farmers and small farmers. they were thoroughly briefed about the procedure of filling the questionnaire. the numbers of the sample large farmers were noted and the results of the small farmers were taken from the controller the owners of farmers. this study was applying quantitative methods for analyzing the data. tables and percentages charts were used to present and analyze the data in an appropriate way. the data was made using microsoft excel and statistical package for social science (spss) as a tool for analyzing the data. for determining the validity of questionnaires item analysis to total person product–moment coefficient of correlation (r) was computed. the validity coefficients of the questionnaire the same package was used to analyze by computing relative frequencies, means, standard deviations, and other relevant statistics at the unit variety level, and among others. table 1: data interpretation mean range respondents mode interpretation 1.00 up to 1.80 strongly agree excellence 1.80 up to 2.60 agree very good 2.60 up to 3.40 neutral normal 3.40 up to 4.20 disagree poor 4.20 up to 5.00 strongly disagree very poor 4. findings the first objective of this study was to identify the impact of drought on farming in jowhar farmers in somalia. the respondents were required to indicate the extent of agreement with each of the items by writing the number that best describes their perceptions. to achieve that objective, the respondents were asked several statements related to drought on farming to know their views or opinion. the results are summarized in the following mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 43 | p a g e table 2: impact of drought on farming in jowhar somalia farming mean std. deviation farming in somalia is a major employment activity and is the largest economic sector in the country. 1.94 1.221 there is a strong negative relation between farming production and drought. 2.11 1.043 the result of farming production and livestock production shows an effect that they have a positive and significant effect on economic development in somalia. 2.19 1.293 farming is an important economic activity in somalia not only in terms of meeting the food needs of the population but also in terms of generating income through crops. 2.16 1.245 the quantities of goods produced on farms have, in contrast, risen dramatically. 2.95 1.344 total mean & std. deviation 2.27 1.22 source primary data 2022 the above table presented that to identify the impact of drought on farming in jowhar farmers in somalia. was scored average mean 2.27overall, these results show to identify the impact of drought on farming in jowhar farmers in somalia. is mostly very good and this is indicated by the total average mean. respondents were asked whether they know farming in somalia is a major employment activity and is the largest economic sector in the country. the mean score of 1.94 and standard deviation of 1.221, indicates that most of the farmers agree that crop production is an important part of their internal environment of the farmers. also, were asked whether there is a strong negative relation between farming production and drought. the mean scored of 2.11 and the standard deviation was 1.043 this indicates that the respondents agree that drought affects farms. respondents were also asked the result of farming production and livestock production shows an effect that they have a positive and significant effect on economic development in somalia the mean score of 2.19 and standard deviation of. 1.293 so it tells us that respondents agree that economic development depends on farming. it asked farming is an important economic activity in somalia not only in terms of meeting the food needs of the population but also in terms of generating income through crops. the mean score of 2.16 and standard deviation of 1.245 indicates agree. if the quantities of goods produced on farms have, in contras risen dramatically. the mean score is 2.95 and the standard deviation is 1.344. this indicates that q5 is agreed. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 44 | p a g e table 3: impact of drought on livestock in jowhar somalia livestock mean std. deviation livestock is a very important livelihood asset for the people in both rural and urban. 1.79 1.122 literature is pointing to the fact that climate change does affect livestock production and livestock systems. 2.43 1.075 livestock has also been affected by the critical shortage of water and pasture. 2.26 1.228 estimation of livestock numbers and past growth rates, somalia has about 3.69 million camels, 0.80 million head of cattle, 13.4 million goats, and 11.75 million sheep. 2.75 1.274 livestock is the backbone of the country’s economy and supports the largest production community of the somali people. 2.20 1.371 total mean & std. deviation 2.28 1.21 source primary data 2022 the above table presented that the impact of drought on livestock in jowhar somalia was scored average mean 2.28overall, these results indicate that the employees of farmers in jowhar so the result indicate to identify the impact of drought on livestock in jowhar farmers in middle shebelle somalia. respondents were asked livestock is a very important livelihood asset for the people in both rural and urban this question has different information according to the data; the mean value indicates 1.75 and std. deviation 1.122 they told us that respondents strongly agree that livestock is important. also, were asked that literature is pointing to the fact that climate change does affect livestock production and livestock systems. the mean score shows 2.43 and a standard deviation of 1.075 this indicates that they agree. respondents were asked livestock have also been affected by the critical shortage of water and pasture. the mean score of 2.26 and standard deviation of 1.228 indicate that respondents agree that livestock needs water. they were asked estimation of livestock numbers and past growth rates, somalia has about 3.69 million camels, 0.80 million head of cattle, 13.4 million goats, and 11.75 million sheep. mean indicates 2.75 and st. deviation 1.274 shows us that they agree somalia has a lot of livestock. they were asked livestock is the backbone of the country’s economy and supports the largest production community of the somali people. the mean value is 2.20 and the std deviation is 1.371 this identifies agree that somali people depend on livestock. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 45 | p a g e table 4: impact of drought on socio-economic in jowhar somalia socio-economic mean std. deviation when the shortage of water exists and agricultural production was declines, it creates an imbalance between demand and supply. 1.77 .930 the harm of agriculture production can increase the mortality rate of farmers because they depend upon their production. 2.45 1.175 if the agriculture production mitigates it may cause an increase in the unemployment rate of farmers. 2.55 1.242 socioeconomic drought occurs when the demand for water exceeds the supply 2.42 1.249 small businessman (retailer) who take the outcomes of the farmers they also suffer a decrease in their business. 2.62 1.324 total mean & std. deviation 2.3 1.184 source primary data 2022 the above table examined the impact of socio-economic effects of drought in jowhar somalia was scored average 2.3overall. respondents were asked when the shortage of water exists and agriculture production was a decline, it creates an imbalance between demand and supply. the mean score of 1.77 and the standard deviation of .930. this means the majority had strongly agreed with this idea. they were also asked that the harm of agriculture production can increase the mortality rate of farmers because they depend upon their production. mean score of 2.45 and standard deviation of 1.175. this indicates that they agree that agriculture production will cause high mortality of the farmers or their children. and were asked if agriculture production mitigate it may cause an increase in the unemployment rate of the farmers. they strongly agreed with a mean score of 2.55 and a standard deviation of 1.242 this shows agree because if agriculture production mitigates it may cause unemployment. respondents were asked if whether a socioeconomic drought occurs when the water demand exceeds the supply. the mean score of 2.42 and the standard deviation of 1.249. q4 agrees that this occurs when there is a shortage of rain. respondents were asked if that small businessman (retailers) who take the outcomes of the farmers they also suffer a decrease in their business. the mean score of 2.62 and the standard deviation of 1.324. the majority of respondents who supported this idea are neutral. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 46 | p a g e table 5: impact of drought on agricultural production in jowhar somalia. drought mean std. deviation drought is africa's principal type of natural disaster. 1.65 .626 definition of drought is an unrealistic expectation. 1.99 .718 the extent and intensity of drought impacts are determined prevailing economic conditions 2.14 .888 drought can be classified under four broad categories physical, social, economic, and environmental. 2.07 .879 drought affects agricultural production, livestock, and socioeconomic. 1.72 .642 total mean & std. deviation 1.9 3.753 source primary data 2022 the above table presented that to identify the impact of drought on agriculture production in jowhar somalia, was scored average mean 1.9 overall, the result indicates to identify the impact of socioeconomic drought on agriculture production in jowhar farmers in somalia. this is indicated by the total average of 1.9. respondents were asked that drought is africa's principal type of natural disaster. respondents strongly agree with a mean score of 1.65 and a standard deviation of .626. they indicated that natural disaster affects economic development. they were asked that the definition of drought is an unrealistic expectation. respondents agreed with a mean score of 1.99 and a standard deviation of .718 most of them had supported those farmers feel disappointed for their production when during drought. they were asked that the extent and intensity of drought impacts are determined by prevailing economic conditions. they agreed with a mean score of 2.14 and a standard deviation of .888. because agriculture usually plays a vital role in the economy of every nation that exists. they were asked drought can be classified under four broad categories physical, social, economic, and environmental. they agreed with a mean score of 2.07 and a standard deviation of.879. respondents were asked drought affects agricultural production, livestock, and socio-economic. respondents strongly agreed with a mean score of 1.72 and a standard deviation of .642 4.1: correlation analysis the first objective of this study was to identify the relationship between drought and farming in jowhar somalia. the correlation between drought and farming as table 6 shows is 0.447 it tells us that a onelevel increase of drought leads to 0.447 lower farming. the probability of this correlation coefficient occurring by chance is .000. this coefficient shows that there is a statistically weak relationship between drought on farming (r = 0.447, p < .01). thus, hypothesis 1 is accepted. the second objective of this study was to know the impact of drought on livestock in jowhar somalia. the correlation between drought and livestock as table 6 shows is 0.697. it tells us that a one-level increase of drought leads to 0.358 lower livestock. the probability of this correlation coefficient occurring by chance is .000. this coefficient shows that there is a weak relationship between drought and livestock (r = 0.358, p < .01). thus, hypothesis 2 is accepted. the third objective was to examine the relationship between drought and socio-economic in jowhar, somalia. the correlation between drought and socio-economic as table mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 47 | p a g e 6 shows is 0.352. the probability of this correlation coefficient occurring by chance is .000. this coefficient shows that there is a weak relationship between drought on socio-economic (r = 0.352, p < .01). thus, hypothesis 3 is accepted. table 6: correlations between drought, farming, and socioeconomic correlations drought farming livestock socio-economy pearson correlation 1 .447** .358** .352** sig. (2-tailed) .000 .000 .000 n 100 100 100 100 **. correlation is significant at the 0.01 level (2-tailed). 4. discussion and conclusion the purpose of this study was to investigate the impact of drought on agricultural production by using the simple correlation analytical technique analysis and collecting data through questionnaire, with a sample size of 100 jowhar residence. the problem that researchers wanted to realize is the impact of drought on agricultural production in jowhar farmers in somalia, as well as to examine the drought is applicable in somalia. after analyzing the data collected from jowhar residence the researcher reached the following results: the correlation between the relationship between drought on farming (r= .447, p<.01) indicated that there is a negative relationship between drought and farming however; also we found that there is a strong negative relationship between drought and livestock (r=.358, p<0.01); and finally there is a weak relationship between drought and agricultural production which was (r=.352<0.01) these findings supported by the previous study made by ((nagar, 2017) which was examined the relationship between drought and agricultural production. finally, the study revealed a weak relationship between drought and agricultural production. drought is one problem that influences numerous parts like social, natural, and affordable, besides; horticulture creation can have an indispensable impact for each country particularly in the creating and under-creating region. reference wilhite, d. a. ,2014. managing drought risk in a changing climate : the role of national drought policy. weather and climate extremes, 3, 13. dellal, i. ,2010. the economic impacts of drought on agriculture : the case of turkey i – introduction. 174, 169. ryan, g. ,2018. on-farm irrigated maize production in the somali gu season. african journal of agricultural research, 13, 96. zhou, s. ,2017. drought risk assessment using remote sensing and gis: a case study of gujarat. international journal of disaster risk science, 4, 38. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 48 | p a g e dorward, a. ,2011. the malawi agricultural inputs subsidy programme. world bank, 9, 38. undp. ,2016. somalia drought impact and needs assessment. 1, 18. markandya, a. ,2010. the economic costs of droughts. options mediterranean’s a no. 95, 131, 138. lin, y. x. ,2013. economic effects of drought on agriculture in north china. 4, 59. nagar, b. ,2017. maharashtra council of agricultural education and research , pune an iso 9001 :. paper, w. ,2011. impact of migration on economic and social development a review of evidence and emerging issues. africana, u. ,2011. african union pledging conference on drought and famine in the horn of africa addis ababa , ethiopia overview of the drought situation in the horn of africa. devereux, s. ,2007. the impact of droughts and floods on food security and policy options to alleviate negative effects. zhongzheng, l. ,2015. status and prospect of agricultural remote sensing. 5. wilhite, d. a. ,2000. concepts and definitions drought as a natural hazard. concepts and definitions drought as a natural hazard, 13. cafer, a. m. ,2011. a survey of agricultural productivity and nutritional status in rural south wollo , ethiopia. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 1 | p a g e from energy to ecology: navigating environmental consequences in nigeria's economic landscape 1chijioke emmanuel okonkwo, 2ngozi chioma nwachukwu 1,2department of economics, alvan ikoku university of education, owerri imo state, nigeria doi: https://doi.org/10.5281/zenodo.10619098 abstract: energy commodities, spanning a spectrum from nuclear and chemical to mechanical, thermal, radiation, and electrical forms, play a pivotal role in fostering economic growth through heightened productivity and increased employment opportunities. despite the diversity of these energy manifestations—liquids, solids, and gases—their environmental ramifications present a complex landscape. notably, the combustion of fossil fuels, a primary source of energy, is implicated in contributing to the global warming phenomenon. this study delves into the multifaceted dimensions of energy production, transportation, and consumption, unraveling the intricate web of environmental consequences that invariably result from these processes. acknowledging the indispensable role of energy in economic development, the research explores the nexus between energy commodities and their environmental impact. fossil fuel combustion, a major driver of energy generation, is scrutinized for its substantial role in climate change. the study investigates the interplay of various energy forms, analyzing their distinct environmental footprints and the broader implications for sustainable development. by comprehensively examining the production, transportation, and consumption of energy commodities, this research aims to provide a nuanced understanding of the environmental challenges posed by these essential components of modern economies. keywords: energy commodities, environmental consequences, fossil fuel combustion, sustainable development, economic growth introduction energy commodities, encompassing nuclear, chemical, mechanical, thermal, radiation, and electrical energy, contribute to economic growth by enhancing productivity and employment. they exist in various forms—liquids, solids, and gases—yet their environmental impact is intricate, particularly with the combustion of fossil fuels contributing to global warming. the production, transportation, and consumption of energy almost invariably result in significant environmental consequences. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 2 | p a g e the consumption of fossil fuels can lead to localized air pollution and climate change (han et al., 2019). recent research by the wef (2022) indicates that certain pollutants related to fossil fuels actually have a cooling effect. according to bölük and mert (2015), natural gas is less aggressive than oil, accounting for only half of the co₂ emissions compared to coal. on average, the combustion of oil (in the form of petroleum) releases approximately 33% less carbon dioxide (co₂) per unit of energy produced compared to the combustion of coal. figure 1. carbon dioxide emissions, energy consumption and economic growth. in many emerging nations like nigeria, fossil fuels remain the primary source of energy (sugiawan and managi, 2019). despite their numerous benefits, such as providing thermal power plants with more precise operational control and monitoring (vincent and ezaal, 2022), these systems face various challenges that have been extensively studied. robinson et al. (2007) note that nigeria is not an exception to the escalating environmental concerns. okafor and joe-uzoegbu (2010) emphasize the environmental impact of urbanization in nigeria, where rural communities rely on traditional biomass for energy, resulting in greenhouse gas emissions. this imbalance contributes to global warming and environmental degradation, with nigeria experiencing some of the highest co₂ emissions worldwide. elevated carbon dioxide emissions are primarily associated with economic growth, as proposed by the environmental kuznets (1955) curve (ekc) hypothesis and supported by studies such as those conducted by han et al. (2018), acheampong (2018), abbas et al. (2019), and esmaeili et al. (2023). the ekc theory posits that income contributes to environmental degradation in the early stages of development but diminishes once certain income levels are reached. however, the ekc exhibits diverse shapes, suggesting different policy implications. the validity of this hypothesis is debated due to mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 3 | p a g e variations in methodology, independent variables, examined sectors, and modeling. few empirical studies focus on nigeria, and no recent dataset has been employed to analyze nigerian co₂ emissions, unlike the studies by chuku (2011), ogundipe (2013), alege and ogundipe (2013), and okon (2021). to our knowledge, as of the time of writing, no paper concentrating on nigerian co₂ emissions has utilized a more recent dataset. nigeria's economy remains susceptible to the risks associated with climate change due to the country's escalating energy consumption and the ensuing co₂ pollution. figure 1 illustrates the shift in energy consumption from negative to positive after 1995, resulting in a 7.4% increase in co₂ emissions in 1996 compared to the negative rates of 24.1% and 6.7% in 1994 and 1995, respectively. concurrently, due to the rising energy consumption, gdp per capita rose from 18.9% in 1995 to 27.03% in 1996, and the overall economy expanded from -0.1% in 1995 to 4.2% in 1996. the year 2010 marked the most significant change in co₂ emissions (46%) and the highest gdp per capita (19.3%) during the research period, with an 8% expansion in the economy. conversely, the lowest changes occurred in 1989, with a -0.35% change in energy consumption and a -41.7% change in co₂ emissions. although both co₂ emissions and gdp deviated from their 1981 values, the growth rate of co₂ emissions exceeded that of gdp. this suggests limited evidence of absolute decarbonization, indicating that the nation's co₂ emissions were not proportional to economic growth. figure 1 demonstrates that from 1981 to 2021, nigeria's economy did not follow a low-carbon trajectory. policymakers need to comprehend the directional and causal relationship between energy commodities, economic growth, and the environment. the increase in co₂ emissions over the past 70 years is also attributed to the expansion of the human population. a growing population results in increased demands for commodities, energy, and food, leading to higher emissions from transportation, industry, and agriculture. however, to minimize emissions per person, additional measures such as enhancing energy efficiency, transitioning to renewable sources, and altering consumption habits must be implemented alongside population policies (the conversation, 2023). globally, co₂ emissions are distributed unevenly, with highand upper-middle-income countries, housing slightly less than half of the world's population, responsible for over 80% of global co₂ emissions. according to our world in data (2023), the average person in high-income countries emits over ten times as much co₂ as the average person in lowincome countries. this study addresses several gaps in existing literature. firstly, it focuses on nigeria from 1981 to 2021, as data before the 1980s are incomplete. secondly, it employs the vector error correction model (vecm) to explore longitudinal cointegration and causal links between the environment, energy commodities, and economic growth, providing fresh empirical data for the ongoing discussion about their relationship. literature review mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 4 | p a g e the links between energy consumption, co₂ emissions, and economic growth are the subject of three broad genres of literature. the first discusses whether the relationship between economic growth and co₂ emissions is consistent with the environmental kuznets curve (ekc) theory. according to this theory, some pollutants and percapita income have an inverted u-shaped connection (grossman and krueger, 1995). the environmental kuznets curve (ekc) is a relationship between income change and environmental quality, based on kuznets' work. it suggests that rapid industrialization leads to increased pollution and resource use, putting pressure on the environment. as income increases, people value the environment more, leading to a decline in pollution levels. the ekc hypothesis reveals how environmental quality changes as a country's fortunes change, with an inverted u-shaped curve when pollution indicators are plotted against income per capita (dinda, 2004). richer consumers put more pressure on lawmakers to enact environmental laws and regulations, in addition to being prepared to spend more money on eco-friendly goods. the majority of the examples where emissions have decreased while income has increased can be attributed to institutional reforms at the local and national levels, including environmental laws and market-based incentives aimed at halting environmental degradation. in their study, özokcu and özdemir (2017) verified the "inverted u shape theory." however, friedl and getzner (2003) hypothesize a long-term link that takes the form of an n or another shape rather than an inverted u between co₂ emissions and per-capita income. although he and richard (2010) and agras and chapman (1999) maintain that there is no correlation between co₂ emissions and economic growth in their non-existence theory, the primary issue with these early investigations on the ekc hypothesis is that they may be biased by missing variables. this happens when one or more independent variables that correlate with one or more of the included independent variables and have an impact on the dependent variable are excluded from a statistical model (tong et al., 2020). recently, the granger causality test, an econometric technique particularly well-suited for time series and panel data analyses, was proposed to examine the connection between economic growth and carbon emissions. for example, hossain (2012) discovered that in newly industrialized nations, there was unidirectional short-run causality between economic growth and carbon dioxide emissions, as well as between urbanization and economic growth. wang et al. (2016) discovered that economic growth was a granger cause of co₂ emissions in china between 1995 and 2012, and hamit-haggar (2012) found a unidirectional causality relationship between the economy and greenhouse gas emissions in both the short and long runs in their investigation of the canadian industrial sector. in contrast to omri (2013), who discovered only a one-way granger causation linking co₂ emissions to economic growth in some european, central asian, latin american, and caribbean countries, salahuddin and gow (2014) showed a two-way granger causal association between the two components. abubakar and cudjoe (2021) estimate the short-run and long-run impacts of energy consumption on nigeria's environment through total co₂ emissions using error correction models and normalized mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 5 | p a g e estimations. results show that gdp has a significant long-run tendency to reduce total co₂ emissions in nigeria, confirming the kuznets curve hypothesis for climate. the research also supports the suggestion that environmental destruction increases with per capita income during early economic development stages and decreases with an increase after reaching a plateau. rafindadi (2016) modeled the relationships between economic development, energy use, and emissions. the model had collinearity issues because the study takes into account co₂ emissions as a function of income, income squared, and income cubed in addition to other explanatory variables like energy consumption. in his paper, okon (2021) used the auto-regressive distributed lag approach to investigate the applicability of the environmental kuznets curve in nigeria from 1970 to 2018. according to the bounds test, there exists an equilibrium relationship over a long period of time between the gross domestic product per capita, the square of the gdp per capita, waste, combustible renewable energy, alternative and nuclear energy, adjusted savings, or net forest depletion. however, neither short-run nor long-run results are consistent with the environmental kuznets curve hypothesis, nor there is no evidence of an inverse u-shaped link between growth and fluorinated greenhouse gas emissions in nigeria. omisakin (2009) tested the environmental kuznets curve (ekc) hypothesis in nigeria finding no long-term causal relationship between carbon emissions and income. the regression line shows an "u-shaped" pattern, suggesting that income increases carbon emissions before rising again. other studies have shown a long-term relationship between environmental pollution indicators, per capita income, institutional variables, and trade. alege and ogundipe (2013) found no ekc in nigeria due to its early development stages. egbetokun et al.'s (2020) study found that spm and co₂ have an ekc, while other environmental contamination measures did not significantly affect economic development. mailto:contact@americaserial.com mailto:contact@americaserial.com ihugba et al. 6 american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 6 | p a g e table 1. variables measurement and sources of data. s/n variable measurement expected sign sources of data 1 carbon dioxid e co₂ emissi ons per capital annual co₂ emissions per capital measures how much nigeria emits from fossil fuels and industry divided by its population in a given year https://data.worldbank.org/ indicator/en.atm.co₂e.p c?locations=ng 2 gross domest ic product per capita (gdppc) it analyzes nigeria's gdp per capita and gauges the prosperity of nigerians by looking at our gdp growth. it is computed by dividing the nation's gdp by its total population. we expect a positive relationship between the variables + https://data.worldbank.org/ indicator/ny.gdp.pcap. kn?locations=ng 3 gross fixed capital formation measure capital stock, this study employed the gross fixed capital formation, which is essential to any country’s economic growth. we expect a positive relationship between the variables + central bank of nigeria (cbn) statistical bulletin volume 32, december 2021 4 fossil fuel energy consumption (% of total) it refers to the use of petroleum, natural gas, and coal as sources of energy. we expect a positive relationship between the variables + https://data.worldbank.org/ indicator/eg.use.comm. fo.zs?locations=ng 5 population the total population of nigeria during the different study years, expressed in millions. an increase in population will result in more land being cleared for agriculture, business, or other uses, as well as more energy use (fossil fuel). global co₂ emissions are greatly increased by these activities. therefore, a positive correlation between the variables is what we anticipate + https://data.worldbank.org/ indicator/sp.pop.totl?v iew=chartandlocations=n g mailto:contact@americaserial.com american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 7 | p a g e source: researcher’s compilation, 2023. methodology granger causality, a linear regression model, and cointegration tests will all be used to examine the collected data. using the unit root test, the initial step will be to determine the stationarity and order of integration among the study variables. using cointegration tests, the second phase will look at the longterm relationship between the research variables. in the third, regression analysis will be used to examine how the independent study variables affect co₂ emissions. the granger causality test will be used in the fourth step to determine the causal relationship between the research variables. data and sources the central bank of nigeria's (cbn) statistical bulletins and the world bank 2023 development indicators (wdi) provided the data used in the study's empirical analysis. table 1 lists the variables' names, meanings, and measurements. model specification based on the empirical literature in energy economics, it makes sense to write the long-term relationship between co₂ emissions, energy commodities, and economic growth in the form of a linear logarithmic quadratic. this will allow us to test the ekc hypothesis in the following way (equation 1): co2 = (ffc, gdppc, gfcf, pop) (1) in this case, pop stands for population, gfcf for gross fixed capital formation, gdppc for gross domestic product per capita, ffc for fossil fuel energy consumption, and c02 for carbon dioxide emissions per capita. equation 2 can be expressed as follows in the natural log form for c02, gdppc, gfcf, and pop as well as in the econometric model: lco2𝑡� = 𝛽�0 + 𝛽�1ffc𝑡� + 𝛽�2lgdppc𝑡� + 𝛽�3lgfcf𝑡� + 𝛽�4lpop𝑡� + 𝜀�𝑡� (2) stationarity test since it can affect a series' behavior, stationarity is a significant phenomenon. regressing x on y in equation (3) will result in spurious or gibberish regression if x and y are two non-stationary series (yule, 1926). 𝑌�𝑡� = 𝛽�0 + 𝛽�1𝑋�𝑡� + 𝜀�𝑡� (3) the series is considered non-stationary if it has a unit root. the series is stationary if it doesn't have a unit root. the purpose of the stationarity test is to determine if an autoregressive model has a unit root or not. to ascertain the sequence of the variables' integration, the unit root test is helpful. to verify if the provided series is stationary, the augmented dickey-fuller test (adf) and phillipsperron test (pp) have been employed. co-integration test to determine whether there is a co-integration relationship between the two variables' non-stationary series, the johansen-juselius test is used. we can determine whether there is co-integration between two non-stationary series using the johansen-juselius co-integration procedure. this indicates that 0<rank (π) = r <n, which is the maximum rank that the matrix π can have. in terms of the vector or matrix of adjustment parameters 𝛼� and the vector or matrix of cointegrating vectors 𝛽�′, π can be expressed as =𝛼�𝛽�′, where (r) is the number of co-integration vectors and (n) is the number of variables. based on a likelihood ratio test (lr), this procedure uses the trace test and the maximum eigenvalues test (λ𝑚�𝑎�𝑥�) to calculate the number of co-integration vectors between variables. the definition of a trace test is: n ˆ ) mailto:contact@americaserial.com american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 8 | p a g e trace(r) =−t i=r+1log(1− i in contrast to the alternative hypothesis, which states that there are r co-integration vectors, the null hypothesis states that there are ≤r co-integration vectors. the maximum eigenvalues test ( max )is defined as: max (r,r+1) =−t log(1− r+1) the null hypothesis that the number of co integration vectors = r against the alternative those they r+1. granger-causality the results of the stationarity and co-integration tests will determine the granger-causality test's application in the following ways: the following vector auto-regression (var) should be estimated in order to perform the conventional granger-causality test to determine whether the series (ffc), (lgdppc), (lgfcf), (lpop), and (lco₂) are stationary. 𝑚� 𝑚� 𝐹�𝐹�𝐶�𝑡� = 𝛼� + ∑ 𝛽�1𝑖�𝐹�𝐹�𝐶�𝑡�−1 + ∑ 𝛽�2𝑖�𝐿�𝐶�𝑂�2𝑡�−𝑖� + 𝜀� (4) 𝑖�=1 𝑖�=1 𝑚� 𝑚� 𝐿�𝐶�𝑂�2𝑡� = 𝛼� + ∑ 𝛽�3𝑖�𝐿�𝐶�𝑂�2𝑡�−1 + ∑ 𝛽�4𝑖�𝐹�𝐹�𝐶�𝑡�−𝑖� + 𝜀� (5) 𝑖�=1 𝑖�=1 𝑚� 𝑚� 𝐿�𝐺�𝐷�𝑃�𝑃�𝐶�𝑡� = 𝛼� + ∑ 𝛽�5𝑖�𝐿�𝐺�𝐷�𝑃�𝑃�𝐶�𝑡�−1 + ∑ 𝛽�6𝑖�𝐿�𝐶�𝑂�2𝑡�−𝑖� + 𝜀� (6) 𝑖�=1 𝑖�=1 𝑚� 𝑚� 𝐿�𝐶�𝑂�2𝑡� = 𝛼� + ∑ 𝛽�7𝑖�𝐿�𝐶�𝑂�2𝑡�−1 + ∑ 𝛽�8𝑖�𝐿�𝐺�𝐷�𝑃�𝑃�𝐶�𝑡�−𝑖� + 𝜀� (7) 𝑖�=1 𝑖�=1 𝑚� 𝑚� 𝐿�𝐺�𝐹�𝐶�𝐹�𝑡� = 𝛼� + ∑ 𝛽�9𝑖�𝐿�𝐺�𝐹�𝐶�𝐹�𝑡�−1 + ∑ 𝛽�10𝑖�𝐿�𝐶�𝑂�2𝑡�−𝑖� + 𝜀� (8) 𝑖�=1 𝑖�=1 𝑚� 𝑚� 𝐿�𝐶�𝑂�2𝑡� = 𝛼� + ∑ 𝛽�11𝑖�𝐿�𝐶�𝑂�2𝑡�−1 + ∑ 𝛽�12𝑖�𝐿�𝐺�𝐹�𝐶�𝐹�𝑡�−𝑖� + 𝜀� (9) 𝑖�=1 𝑖�=1 𝑚� 𝑚� 𝐿�𝑃�𝑂�𝑃�𝑡� = 𝛼� + ∑ 𝛽�13𝑖�𝐿�𝑃�𝑂�𝑃�𝑡�−1 + ∑ 𝛽�14𝑖�𝐿�𝐶�𝑂�2𝑡�−𝑖� + 𝜀� (10) 𝑖�=1 𝑖�=1 𝑚� 𝑚� 𝐿�𝐶�𝑂�2𝑡� = 𝛼� + ∑ 𝛽�15𝑖�𝐿�𝐶�𝑂�2𝑡�−1 + ∑ 𝛽�16𝑖�𝐿�𝑃�𝑂�𝑃�𝑡�−𝑖� + 𝜀� (11) 𝑖�=1 𝑖�=1 in models (equations 4 and 11), the subscripts denote time periods and 𝜀� is a white noise error. the constant parameter 𝛼� represents the constant growth rate of ffct in equation 4; lco2t in equation 5; lgdppct in equation 6; lgfcft in equation 8 and popt in equation 10. we can obtain eight tests from this analysis: the first examines the null hypothesis that the ffct does not grangercause lco2t and the second test examine the null hypothesis that the lco2t does not granger-cause ffct . the third mailto:contact@americaserial.com american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 9 | p a g e examines the null hypothesis that the lgdppct does not granger-cause lco2t and the fourth test examines the null hypothesis that the lco2t does not granger-cause lgdppct . the fifth examines the null hypothesis that the lgfcft does not granger-cause lco2t and the sixth test examines the null hypothesis that the lco2t does not granger-cause lgfcft . the seventh examines the null hypothesis that the lpopt does not granger-cause lco2t and the eight test examines the null hypothesis that the lco2t does not granger-cause popt. vector error correction model (vecm) the conventional vecm is written compactly as (equation 12): 𝑘�−1 𝑘�−1 𝑘�−1 𝛥�𝑌� = 𝛼� + ∑ 𝛾�𝛥�𝑌�𝑡�−1 + ∑ 𝜂�𝛥�𝑋� + ∑ 𝜑�𝛥�𝑅� + 𝜆�𝐸�𝐶�𝑇� + 𝜇� (12) 𝑖�=1 𝑖�=1 1=𝑖� where ectt−1= ols residual with a lag derived from the long-run cointegrating formula (equation 13): 𝑌�𝑡� = 𝜎� + 𝜂�𝑗�𝑋�𝑡� + 𝜉�𝑚�𝑅�𝑡� + 𝜇�𝑡� (13) and express as (equation 14): 𝐸�𝐶�𝑇�𝑡�−1 = [𝑌�𝑡�−1 − 𝜂�𝑗�𝑋�𝑡�−1 − 𝜉�𝑚�𝑅�𝑡�−1] (14) = coefficient of the ect and the speed at which changes to x and r cause y to stabilize. the specific vecm for this study is as follows (equations 15 to 19): 𝑘� 𝑘� 𝑘� 𝑘� 𝑘� 𝛥�𝐿�𝐶�𝑂�𝛼�𝑖�𝛥�𝐿�𝐶�𝑂�𝜑�𝑚�𝛥�𝐹�𝐹�𝐶�𝑡�𝜂�𝑛�𝛥�𝐿�𝐺�𝐷�𝑃�𝑃�𝐶�𝑡�𝜙�𝑝�𝛥� 𝐿�𝐺�𝐹�𝐶�𝐹�𝑡�𝜉�𝑞�𝛥�𝐿�𝑃�𝑂�𝑃�𝑡�−1 + 𝜆�𝐸�𝐶�𝑇� + 𝜇� (15) 𝑖� 𝑚� 𝑛� 𝑝� 𝑞� 𝑘� 𝑘� 𝑘� 𝑘� 𝑘� 𝛥�𝐹�𝐹�𝐶�𝑡�𝛼�𝑖�𝛥�𝐿�𝐶�𝑂�𝜑�𝑚�𝛥�𝐹�𝐹�𝐶�𝑡�𝜂�𝑛�𝛥�𝐿�𝐺�𝐷�𝑃�𝑃�𝐶�𝑡�𝜙�𝑝�𝛥� 𝐿�𝐺�𝐹�𝐶�𝐹�𝑡�𝜉�𝑞�𝛥�𝐿�𝑃�𝑂�𝑃�𝑡�−1 + 𝜆�𝐸�𝐶�𝑇� + 𝜇� (16) 𝑖� 𝑚� 𝑛� 𝑝� 𝑞� 𝑘� 𝑘� 𝑘� 𝑘� 𝑘� 𝛥�𝐿�𝐺�𝐷�𝑃�𝑃�𝐶�𝑡�𝛼�𝑖�𝛥�𝐿�𝐶�𝑂�𝜑�𝑚�𝛥�𝐿�𝐺�𝐷�𝑃�𝑃�𝐶�𝑡�𝜂�𝑛�𝛥�𝐹�𝐹�𝐶�𝑡�𝜙�𝑝�𝛥� 𝐿�𝐺�𝐹�𝐶�𝐹�𝑡�𝜉�𝑞�𝛥�𝐿�𝑃�𝑂�𝑃�𝑡�−1 + 𝜆�𝐸�𝐶�𝑇� + 𝜇� (17) 𝑖� 𝑚� 𝑛� 𝑝� 𝑞� 𝑘� 𝑘� 𝑘� 𝑘� 𝑘� 𝛥�𝐿�𝐺�𝐹�𝐶�𝐹�𝑡�𝛼�𝑖�𝛥�𝐿�𝐶�𝑂�𝜑�𝑚�𝛥�𝐿�𝐺�𝐹�𝐶�𝐹�𝑡�𝜂�𝑛�𝛥�𝐿�𝐺�𝐷�𝑃�𝑃�𝐶�𝑡�𝜙�𝑝�𝛥� 𝐹�𝐹�𝐶�𝑡�𝜉�𝑞�𝛥�𝐿�𝑃�𝑂�𝑃�𝑡�−1 + 𝜆�𝐸�𝐶�𝑇� + 𝜇� (18) 𝑖� 𝑚� 𝑛� 𝑝� 𝑞� 𝑘� 𝑘� 𝑘� 𝑘� 𝑘� 𝛥�𝐿�𝑃�𝑂�𝑃�𝑡�𝛼�𝑖�𝛥�𝐿�𝐶�𝑂�𝜑�𝑚�𝛥�𝐿�𝑃�𝑂�𝑃�𝑡�𝜂�𝑛�𝛥�𝐹�𝐹�𝐶�𝑡�𝜙�𝑝�𝛥� 𝐿�𝐺�𝐷�𝑃�𝑃�𝐶�𝑡�𝜉�𝑞�𝛥�𝐿�𝐺�𝐹�𝐶�𝐹�𝑡�−1 + 𝜆�𝐸�𝐶�𝑇� + 𝜇� (19) 𝑖� 𝑚� 𝑛� 𝑝� 𝑞� table 2. adf and pp unit root test results. variable adf test statistic pp test statistic constant constant and trend none first difference constant constant and trend none first difference lco₂ -1.04 -2.14 0.56 -6.59* -1.03 -2.11 0.62 -6.61* mailto:contact@americaserial.com american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 10 | p a g e = -2.94); p-value= probability value, * signifies stationarity. source: researcher’s calculations from eviews 10, 2023. this model was selected because empirical studies show that when economic variables show individual cointegration, or a strong longterm relationship, the vecm performs well for model estimation. another advantage is its capacity to integrate the short-run dynamic and long-run equilibrium models into a single, efficient system. it also guarantees accuracy, conceptual rigor, and data integrity (abubakar and cudjoe, 2021). results and finding the empirical estimation result and a suitable justification are presented in this section to support the study's argument. stationarity test the study initiated by examining the stationarity of relevant variables using tests detailed in the methodology section. the augmented dickey-fuller (adf) and phillips and perron (pp) unit root tests were employed to determine if the variables are stationary. table 2 presents compelling evidence that all our variables are integrated at order one (that is, i(1)). the data reveals that for each variable, at least one of the tests does not reject the null hypothesis of the unit root at levels, indicating nonstationarity. in contrast, it is found that every variable in the first difference is stationary. the subsequent step involves confirming whether our variables of interest exhibit a long-run relationship since all the variables in our model are integrated of order one, according to at least one of the tests employed. endogeneity analysis in order to ascertain whether variables are exogenous or endogenous, endogeneity analysis is necessary. to verify it, apply the paired granger causality test. table 3 displays the outcomes of the pairwise granger causality tests. the null hypothesis is rejected at f-statistic critical values of 1, 5, and 10%. first, the study indicates that fossil fuel consumption does not granger-cause co₂ emissions in nigeria based on the pairwise granger causality test. *indicates lag order selected by the criterion. source: researcher’s calculations from eviews 10, 2023. secondly, co₂ emissions in nigeria, a proxy for the environment, do not have any feedback from gross domestic product per capita, a proxy for economic growth, and instead granger-cause it. third, gross fixed capital formation is a proxy for investment without feedback and population growth, grangercause co₂ emissions in ffc -2.82 -3.23 -0.41 -6.55* -2.85 -3.32 -0.60 -8.08* lgdppc -1.20 -1.88 1.72 -4.00* -0.48 -3.06 0.66 -4.00* lgfcf -0.75 -2.01 1.29 -4.96* -0.87 -0.74 2.37 -4.94* lpop -1.64 0.33 2.73 -3.18* -1.64 0.33 12.88 -3.18* adf: test critical values at 5% (at level: constant = -2.94, constant and trend = -3.54, none = -1.95 while at first difference = -2.95); p-value= probability value, * signifies stationarity. pp: test critical values at 5% (at level: constant = -2.94, constant and trend = -3.53, none = -1.95 while at first difference mailto:contact@americaserial.com american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 11 | p a g e table 3. pairwise granger causality test (lags: 3). null hypothesis: obs f-statistic prob. ffc does not granger cause lco₂ 38 1.5097 0.2314 lco₂ does not granger cause ffc 1.37356 0.2691 lgdppc does not granger cause lco₂ 38 0.55583 0.6481 lco₂ does not granger cause lgdppc 3.17565 0.0378** lgfcf does not granger cause lco₂ 38 2.0334 0.1296 lco₂ does not granger cause lgfcf 1.4502 0.2472 lpop does not granger cause lco₂ 38 3.28918 0.0336** lco₂ does not granger cause lpop 0.51413 0.6756 lgdppc does not granger cause ffc 38 2.00407 0.1339 ffc does not granger cause lgdppc 0.75542 0.5277 lgfcf does not granger cause ffc 38 1.96521 0.1397 ffc does not granger cause lgfcf 1.04618 0.386 lpop does not granger cause ffc 38 1.68859 0.1898 ffc does not granger cause lpop 0.11114 0.9529 lgfcf does not granger cause lgdppc 38 1.5466 0.2221 lgdppc does not granger cause lgfcf 5.68459 0.0032* lpop does not granger cause lgdppc 38 0.44513 0.7225 lgdppc does not granger cause lpop 0.62673 0.6032 lpop does not granger cause lgfcf 38 15.0869 0.00* lgfcf does not granger cause lpop 1.36982 0.2703 *causality at 1 % critical level; ** causality at 5 % critical level. source: researcher’s calculations from eviews 9, 2023. table 4. var lag order selection criteria. lag logl lr fpe aic sc hq 0 36.54388 na 1.31e-07 -1.660204 -1.444732 -1.583541 1 246.0650 352.8776 8.03e-12 -11.37184 -10.07901* -10.91186* 2 267.2214 30.06440 1.06e-11 -11.16955 -8.799356 -10.32625 3 308.1256 47.36277* 5.55e-12* -12.00661* -8.559060 -10.78000 mailto:contact@americaserial.com american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 12 | p a g e nigeria. fourth, gross fixed capital formation, a stand-in for investment that lacks feedback, grangercauses gross domestic product per capita (a proxy for economic growth). lag selection the vector error correction model (vecm), the phillips and perron (pp), the augmented dickeyfuller (adf), and the co-integration tests are sensitive to the number of lags when they are run. thus, the schwarz information criterion (sic) and akaike information criterion (aic) were used to determine the actual amount of lags used. table 4 displays the proper lag length for each variable. table 4 shows that the aic value at lag 3 is the lowest and is likewise lower than the sic value at lag 1. to estimate equation (1), the model (lag 3) is selected as a result. below is the cointegration result. cointegration test the relevant hypothesis is that there is no long-run relationship in order to ascertain whether the variables are cointegrated over the long term, such as: hypothesis: λ1 = λ2 = λ3 = λ4 = 0 (no long-term association exists). hypothesis 1: λ1 ≠ λ2 ≠ λ3 ≠ λ4 ≠ 0 (a long-term relationship exists) the next step is to run a cointegration test after confirming that all variables are integrated to order one and that i(1) cannot be refused. johansen (1988) and johansen and juselius (1990) suggested the multivariate cointegration technique, which is used with multivariate time series to find stable longterm links between carbon dioxide emissions, gdp per capita, gross fixed capital formation, energy use from fossil fuels, and population. because the cointegration vectors will be used for the subsequent vector error correction model (vecm), it should be emphasized that the cointegration test is conducted before the vecm. table 5. cointegration results. hypothesiz ed trace 0.05 hypothesized maxeigen 0.05 prob.** no. of ce(s) statistic critical value prob.** no. of ce(s) statistic critica l value none * 115.2717 69.8188 9 0.0000 none * 46.24334 33.876 87 0.0011 at most 1 * 69.02839 47.8561 3 0.0002 at most 1 * 31.44267 27.584 34 0.0151 at most 2 * 37.58572 29.7970 7 0.0052 at most 2 * 22.25237 21.131 62 0.0347 at most 3 15.33335 15.4947 1 0.0529 at most 3 12.49434 14.264 60 0.0934 at most 4 2.839018 3.84146 6 0.0920 at most 4 2.839018 3.8414 66 0.0920 source: researcher’s calculations from eviews 9, 2023. * denotes rejection of the null hypothesis at the 0.05 level. mailto:contact@americaserial.com american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 13 | p a g e the johansen test, for instance, rejects the existence of one or fewer cointegrating relations but fails to reject the existence of at most two in model 1. this suggests that there are two cointegrating equations in model 1. using trace test statistics, the null hypothesis is rejected because the probability value is less than 5% (p-value = 0.00) and the trace statistic value is greater than the critical value (115.2717>69.81889). this suggests the existence of at least one cointegrating vector. a second evaluation states that since the trace statistic value is higher than the essential values, we reject the null hypothesis for asterisks ranked one through two. every associated probability value is less than five percent. in summary, the results indicate that two equations are cointegrated to order one (1) at the 0.05 critical level, and there is at least one cointegrating vector. based on the max-eigen results, the null hypothesis that there are no cointegrating equations is likewise rejected. this is because the probability value is less than 5% (pvalue = 0.00) and the max-eigen statistic is bigger than the important value (46.24334>33.87687). this suggests the existence of at least one cointegrating vector. based on the trace statistical test and the max-eigen test, the series are cointegrated to the same order (1), as seen in table 5. this study also takes advantage of a series that has a long-standing relationship. this study will estimate the vecm using trace value statistics since it offers a more accurate alternative hypothesis that specifies the number of cointegrating vectors. consequently, one may contend that there is a long-term relationship between the variables and that both their shortand long-term dynamics can be found using the vecm model. vector error correction model (vecm) estimation using the same variables, two distinct vector autoregression models (var and vec) were made to determine which one more accurately captured the relationship between nigeria's economic growth, energy commodities, and environmental factors in the real world. despite not being as structural as the var, the vec model functioned well as a limited substitute. meanwhile, as table 5 illustrates, the cointegration relationship between the variables made the var ineffective. the optimum model to apply in this situation is the vector error correction model (vecm). table 6 displays the outcomes of the vector error correction model (vecm) for the cointegrated series' first, second, and third differences. it also includes the error-correction terms from equation 20. the results are displayed in two sections: the first section displays the cointegrating equations, and the second section displays the outcomes of the vector error correction models. table 7 displays the regression's result. the target equations d(lco₂), d(ffc), and d(lgfcf) have error correction terms that are negative (-0.26), 0.62), and (-0.29), respectively, according to table 6 above, but d(lgdppc) and d(lpop) have positive (0.01) and (0.01) error correction terms, respectively. you can see that the vec model can explain about 69% of the changes in the variables that you can depend on, 43% of the changes in the target variable d(lco₂), and 48% of the changes in the d(ffc), d(lgdppc), d(lgfcf), and d(lpop) equations. this suggests that all five models fit the data. using the vecm approach, var generated and computed a simultaneous equation in table 6. on the other hand, the simultaneous equation computed under var using the vecm technique only yields coefficients, standard errors, and t-statistics; probability values are absent. therefore, in order to evaluate the relationship between the environment, energy commodities, and economic growth in nigeria, the simultaneous equation must be evaluated. this is due to the fact that within-group designs and two samples are the ideal settings for the tstatistic's application. this makes the mailto:contact@americaserial.com american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 14 | p a g e simultaneous model of t-statistic-based result interpretation insufficient. second, t-statistics are inappropriate for sample sizes greater than or equal to 30 (n ≥ 30). the independent variables are not homogeneous; they have variations for both groups (engle and granger, 1987). the impact of the explanatory factors on nigeria's carbon dioxide emission is estimated using the simultaneous equation in the study using ordinary least squares (ols). the error correction term (ect) in table 7 indicates the table 8. breusch-godfrey serial correlation lm test. source: researcher’s calculations from eviews 9, 2023. figure 2. normality test. rate of correction of the disequilibrium between the longrun and short-run estimations. the value indicates that only about 26% of errors generated in the previous period are corrected in the current period for the equation. with a p-value of 0.06 at a 5% confidence level and a standard error of 0.133009, this value is significant. model checking the null hypothesis (h0) is accepted if the probability is more than 5%, indicating no serial correlation in the longrun model in table 8. the normality test shows a kurtosis of 2.81 and skewness of 0.36, indicating normal figure 3. plot of cusum. distribution. the heteroscedasticity test shows continuous variance, indicating continuous variance. the stability test shows the cusum of squares plots do not pass the 5% critical line, indicating the model is stable and suitable for economic study. autocorrelation residual lm test test for normality a normal model is indicated by residual skewness and kurtosis, and confirmed by jb test (figure 2). test for stability figure 4. plot of cusumsq. the figures 3 and 4 show the results of the stability tests ihugba et al. table 9. breusch-pagan-godfrey tests for heteroscedasticity. f-statistic 0.892884 prob. f (20,16) 0.6001 f-statistic obs*r-squared 0.205142 1.292661 prob. f (3,17) 0.8914 prob. chi-square (3) 0.7309 mailto:contact@americaserial.com american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 15 | p a g e obs*r-squared 19.51504 prob. chi-square (20) 0.4886 scaled explained ss 4.024741 prob. chi-square (20) 1.0000 source: researcher’s calculations from eviews 9, 2023. table 10. arch tests for heteroscedasticity. f-statistic obs*r-squared 0.318784 1.047440 prob. f (3,31) 0.8117 prob. chi-square (3) 0.7898 source: researcher’s calculations from eviews 9, 2023. table 11. wald tests and short-run test. dependent variable: dlco₂ variables chi-square test prob. relationship d(ffc) 11.58 0.00 short-run causality d(lgdppc) 5.84 0.05 short-run causality d(lgfcf) 5.20 0.07 no short-run causality d(lpop) 6.77 0.03 short-run causality all 25.41 0.00 short-run causality source: researcher’s calculations from eviews 9, 2023. (cusum and cusumsq). they show that the estimates, variance, residuals, and square residual are stable because they are all within the 5% critical boundaries for both the cusum and the cusumsq. both the cusum and cusumsq tests accept parameter stability as one of their null assumptions (tables 9 and 10). simultaneous equation short-run simulation and analysis the results of the short-run test are presented in table 11. the chi-square joint statistics probability values show that, aside from lgfcf, there is a short-run relationship between the explanatory variables and the independent variable according to our findings in table 11. if the p-value of the chi-square test for (ffc) fossil fuel energy consumption, (lgdppc) gross domestic product per capita, and (lpop) annual total population is less than 0.05, the null hypotheses (𝐻�0): β5=0 will be rejected, therefore they cause lco₂ in the short run, while (lgfcf) gross fixed capital formation as a proxy for investment does not cause lco₂ in the short run. the vecm systems granger causality tests results dos not conform to the pairwise granger causality tests except for lgdppc and mailto:contact@americaserial.com american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 16 | p a g e lpop. the next step is to conduct exante forecasting involving impulse response and variance decomposition tests. impulse response function according to table 12, nigeria's carbon dioxide emissions forecast are on the positive side, with sporadic variations brought on by innovations and shocks. the findings demonstrate that (ffc) fossil fuel energy consumption, (lgdppc) gross domestic product per capita, and (lgfcf) gross fixed capital formation will all contribute to explaining the country's increased carbon dioxide emissions. a one-standard deviation positive own shock will result in a short-term change from 0.14 to 0.07 and a long-term increase at a decreasing rate to 0.037. second, projections indicate that the energy consumption of fossil fuels (ffc) has a short-term negative impact on carbon dioxide emissions (-0.01) and a long-term positive impact (0.01). this indicates that ffc has a long-term beneficial effect on carbon dioxide emissions. third, the simulation shows that in the short run, carbon dioxide emissions will rise by 0.015 in response to a onepositive standard deviation shock from (lgdppc) gross domestic product per capita. the shocks will ultimately be negative (-0.021). fourth, innovations for (lgfcf) gross fixed capital formation result in higher carbon dioxide emissions over a five-year period. simulations show that carbon dioxide emissions rise by 0.034 in the short term and 0.032 in the long term for every standard deviation increase in lgfcf. accordingly, the amount invested has a significant impact on carbon dioxide emissions. fifth, projections indicate that, despite both shortand long-term declines, nigeria's annual population will not be a cause for concern when it comes to carbon dioxide emissions. variance decomposition to predict the error variance effects for each endogenous variable in a system, variance decomposition is used. any change in time in a simple linear equation corresponds to a change in the dependent table 12. impulse response analysis. response of lco₂ period lco₂ ffc lgdppc lgfcf lpop 1 0.143419 0 0 0 0 2 0.065792 -0.01005 0.014749 0.033842 -0.0955 3 0.03158 -0.02308 -0.04123 0.050493 0.15446 4 0.049118 0.001002 -0.03575 0.008647 0.09152 5 0.037665 0.011291 -0.02109 0.031796 0.08607 source: researcher’s calculations from eviews (2023). table 13. variance decomposition of lco₂. period lco₂ ffc lgdppc lgfcf lpop short-run 85.1 0.1 0.3 1.6 12.9 medium-term 105.0 0.6 1.8 4.5 38.2 long-run 140.2 1.5 5.9 9.6 92.7 source: researcher’s calculations from eviews (2023). mailto:contact@americaserial.com american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 17 | p a g e variable (wickremasinghe 2011). this study's forecast consists of three time periods: short-term (two years), medium-term (five years), and long-term (ten years), all based on the monte carlo method and cholesky's ordering. lco₂, ffc, lgdppc, lgfcf, and lpop are the outcomes of the variance decomposition forecast for endogenous variables. in the short run, impulses, innovations, or shocks to carbon dioxide emissions account for 85.1% of fluctuations in carbon dioxide emissions. however, carbon dioxide emissions own shock fluctuations continuously increase to 140.2% in the long run. meanwhile, shocks to fossil fuel energy consumption account for 0.1% of fluctuations in carbon dioxide emissions in the short run. the fluctuations in carbon dioxide emissions due to fossil fuel energy consumption increase in the long run to 1.5%. in the short run, shocks to gross domestic product per capita account for 0.3%, gross fixed capital formation accounts for 1.6%, and annual population accounts for 12.9%. in the long run, shocks to gross domestic product per capita increase to 5.9%, gross fixed capital formation increases to 9.6%, and the annual population accounts for 92.7%. shocks to carbon dioxide emissions will account for the highest fluctuations in nigeria’s carbon dioxide emissions, followed by its own shock (table 13). discussion the primary objective of this paper was to investigate the relationship between co₂ emissions, energy commodities, and economic growth between 1981 and 2021 in nigeria. the vector error correction model (vecm) method was utilized to estimate equation 2 using annual data. both the phillips and perron (1988) and dickey and fuller (1981) augmented dickey-fuller (adf) unit root-testing methods are used to check the time series properties of the variables in equation 1. in equation 1, all the series seem to have a unit root in their levels, but their first differences show that they are stationary. the analysis of the data collected has revealed some notable findings that make this study a significant contribution to knowledge in the area of carbon dioxide emissions in nigeria. firstly, the findings does not support the kuznets curve (ekc) hypothesis for climate change by demonstrating that economic growth as measured by gdp per capita has a significant negative long-run tendency to reduce total co₂ emissions in nigeria. the adjustment term (-2.11356) in the second year from the estimated result in table 7 is statistically significant. the findings indicate that when income rises, emissions fall, and vice versa. the world bank (2018), divides nigeria's income distribution into five quintiles. in 2018, the second 20% of the population held an income share of 11.60%, while the third 20% of the population held an income share of 16.20 percent. 22.70 percent of the population, or the fourth 20%, had an income share. the richest 20% of the population owned 42.40% of the total income. nigeria's 2022 gini coefficient for nations with high levels of wealth inequality was 35.1%. nigeria is ranked 100th out of 163 countries worldwide and 11th in west africa with this score (harmon, 2023). this can be as a result of changes in consumption patterns, energy efficiency, technology, or income inequality. the findings can also be attributed to institutional reforms at the local and national levels, including environmental laws and market-based incentives aimed at halting environmental degradation not necessarily increase in income. the finding of the negative effect of income on co₂ emissions agrees with the findings of friedl and getzner (2003), he and richard (2010), agras and chapman (1999) and alege and ogundipe (2013) but disagrees with the findings of dinda (2004), özokcu and özdemir (2017), abubakar and cudjoe (2021) and okon (2021). the pairwise granger causality test also indicates that co₂ emissions in nigeria, a proxy for the environment, do not have any feedback from gross domestic product per capita, a proxy for economic growth, and instead mailto:contact@americaserial.com american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 18 | p a g e granger-cause it. this finding is line with the study of omisakin (2009), omri (2013) and wang et al. (2016). salahuddin and gow (2014) findings do not agree with our pairwise granger causality test result. secondly, this study found that, in the long run, fossil fuel consumption had a negative effect on co₂ emissions. the results show that fossil fuel use and carbon dioxide emissions are inversely correlated; a decrease in fossil fuel use corresponds to a decrease in atmospheric carbon dioxide emissions. even when it is the biggest cause of air pollution in developed countries, it impacts positively in the current year but negatively after a year of fossil fuel consumption. the findings suggest that the quantity of fossil fuel used for energy production, transport, or industrial processes is still low in the country. in 2014, the nation's share of global energy consumption from fossil fuels was 18.9%, lower than the 79.4% global average for the same year. the pairwise granger causality test indicates that fossil fuel consumption does not cause co₂ emissions in nigeria. the findings of the negative effect of fossil fuel consumption on co₂ emissions do not agree with the findings of abubakar and cudjoe (2021). thirdly, investments proxied by gross fixed capital formation have the long-term possibility of reducing total co₂ emissions if increased, and finally, the total annual population has a significant positive effect on total co₂ emissions in the long run. this signifies that an increase in total annual population has a possibility of rising nigerian total co₂ emissions in the future. also, the implication of the finding is that increasing total annual population threatening nigeria’s effort to meet the global goal for o2 emission reduction as outlined in the 2015 paris climate change conference. this finding agrees that the increase in co₂ emissions during the past 70 years has also been attributed to the expansion of the human population. conclusion this paper empirically analyzes the dynamic relationships between co₂ emissions, energy commodities, and economic growth in nigeria, using co₂ emissions as a proxy for the environment. the long-run relationship, with co₂ emissions as the dependent variable, is examined to test the shortrun and long-run elasticities of co₂ emissions with respect to explanatory variables. contrary to the typical positive correlation between income and emissions, indicating higher emissions per capita in wealthier nations, our findings reveal the opposite trend. however, this relationship is not constant, suggesting that emissions rise at varying rates based on income levels. in high-income countries, consumptionbased emissions tend to exceed production-based emissions, while the reverse is observed in low-income countries. this implies that high-income countries are net importers of emissions, while low-income countries are net exporters. the significant impact of fossil fuel usage on the environment is acknowledged in our study. surprisingly, our findings indicate a significantly negative impact on the environment of nigeria, as fossil fuel usage influences the amount of co₂ emissions. this relationship mirrors the social and economic development of the nation. given the high prices and limited supply of fossil energy in nigeria, insufficient to meet the demands of its over 200 million inhabitants and expanding economy, there is a pressing need for a substantial increase in energy efficiency. additionally, the creation of new energy consumption structures, particularly those based on affordable renewable sources like solar energy, is essential for sustainable growth over time. mailto:contact@americaserial.com american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 19 | p a g e furthermore, our empirical results challenge the environmental kuznets curve (ekc) theory of climate change, which posits that higher income can lower a nation's environmental pollution once a certain threshold is reached. recommendations and policy consequences the study's conclusions lead to the recommendation that, to mitigate environmental degradation in nigeria, governments should support initiatives educating and training rural residents to use fewer non-renewable energy sources. despite nonrenewable resources being widely utilized for fuel, industrial production, and residential energy consumption in nigeria without currently causing substantial environmental harm, the suggestion is for the nation to prioritize energy sources causing minimal environmental damage. policymakers, serious about preventing long-term environmental damage, should enact policies promoting the use of environmentally friendly machinery, vehicles, utilities, and equipment. considering fossil fuel consumption has not yet reached a point where co₂ emissions are increasing, nigerian policymakers should focus more on adopting renewable energy sources to reduce emissions from other sources. all energy-related investments and developments in the country should prioritize renewable energy and include it as a key performance indicator in investment appraisal considerations. while concerns about economic growth are valid, this study suggests a bi-directional causal relationship between gdppc and co₂ in nigeria. policymakers should consider both factors when making decisions, emphasizing the need for a comprehensive strategy to boost renewable energy investments. this includes creating a stable policy environment, setting ambitious targets for renewable energy capacity, providing financial incentives, and implementing feed-in tariffs. the government should invest in research and development, workforce development, and public-private partnerships, encouraging private sector participation. risk mitigation instruments should be introduced to reduce perceived risks associated with renewable energy projects. infrastructure development should incorporate grid integration and energy storage. sustainable finance initiatives, such as green bonds, public investment, community engagement, and awareness campaigns, should be established. international support can be leveraged through climate finance, technology transfer, and streamlined permitting processes. performance monitoring should be instituted to ensure projects meet their objectives, attracting investors and accelerating project development. the study's general conclusions propose that, to reduce poverty and lower co₂ emissions in nigeria, the government should directly deliver goods and services, including free medical services, subsidized housing, and education. implementing negative income taxes to supplement the earnings of the poor and providing a guaranteed income are additional measures suggested. conflict of interests the authors have not declared any conflict of interests. references abbas m, dalia s, fausto c, nanthakumar l, masoumeh k (2019). carbon dioxide (co2) emissions and economic growth: a systematic review of two decades of research from 1995 to 2017. the science of the total environment. 649(1):31-49. mailto:contact@americaserial.com american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 20 | p a g e abubakar si, cudjoe d (2021). the environmental impact of energy consumption in nigeria: evidence from co₂ emissions. retrieved from https://www.researchsquare.com/article/rs420727/v1 acheampong ao (2018). economic growth, co2 emissions and energy consumption: what causes what and where? energy economics 74:677-692. agras j, chapman d (1999). a dynamic approach to the environmental kuznets curve hypothesis. ecological economics 28(2):267-277. alege po, ogundipe aa (2013). environmental quality and economic growth in nigeria: a fractional co-integration analysis. international journal of development and sustainability 2(2):20-29. bölük g, mert m (2015). the renewable energy, growth and environmental kuznets curve in turkey: an ardl approach. renewable and sustainable energy reviews 52:587-595. chuku ac (2011). economic development and environmental quality in nigeria: is there an environmental kuznets curve? mpra paper no. 30195, posted 18 apr 2011 11:38 utc pp. 83-98. https://mpra.ub.unimuenchen.de/30195/cooperation dickey d, fuller w (1981). likelihood ratio statistics for autoregressive time series with a unit root. econometrica 49:1057-1072. dinda s (2004). environmental kuznets curve hypothesis: a survey. ecological economics 49(4):431455. egbetokun s, osabuohien e, akinbobola t, onanuga ot, gershon o, okafor v (2020). environmental pollution, economic growth and institutional quality: exploring the nexus in nigeria. management of environmental quality 31(1)18-31. engle r, granger w (1987). co-integration and error correction:representation, estimation, and testing. econometrica 55:251-276. friedl b, getzner m (2003). determinants of co₂ emissions in a small open economy. ecological economics 45(1):133-148. grossman gm, krueger ab (1995). economic growth and the environment. quarterly journal of economics 60(2):353-375. http://www.jstor.org/stable/2118443 hamit-haggar m (2012). greenhouse gas emissions, energy consumption and economic growth: a panel cointegration analysis from canadian industrial sector perspective. energy economics 34(1):358-364. han j, tianyi d, chao z, xuepeng q (2018). correlation analysis of co₂ emissions, material stocks and economic growth nexus: evidence from chinese provinces. journal of cleaner production 180:395-406. mailto:contact@americaserial.com https://www.researchsquare.com/article/rs-420727/v1 https://www.researchsquare.com/article/rs-420727/v1 https://www.researchsquare.com/article/rs-420727/v1 https://www.researchsquare.com/article/rs-420727/v1 http://www.jstor.org/stable/2118443 http://www.jstor.org/stable/2118443 american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 21 | p a g e han s, lin c, zhang b, farnoosh a (2019). projections and recommendations for energy structure and industrial structure development in china through 2030: a system dynamics model. sustainability 11(18):1-20. harmon c (2023). gini coefficient shows progress in nigeria’s wealth distribution under democracy. accessed from https://nairametrics.com/2023/03/21/gini-coefficient-shows-progressin-nigerias-wealthdistribution-under-democracy. he j, richard p (2010). environmental kuznets curve for co₂ in canada, ecological economics 69(5):1083-1093. hossain s (2012). an econometric analysis for co₂ emissions, energy consumption, economic growth, foreign trade and urbanization of japan. low carbon economy 3(3a):92-105. johansen s, juselius k (1990). maximum likelihood estimation and inference on cointegration — with applications to the demand for money. oxford bulletin of economics and statistics 52(2):169210. johansen s (1988). statistical analysis of cointegrating vectors. journal of economic dynamics and control 12(2/3):231-54. kuznets s (1955). economic growth and income inequality. american economic review 45(1):1-28. okafor ecn, joe-uzoegbu cka (2010). challenges to development of renewable energy for electric power sector in nigeria. international journal of academic research 2(2):211-216. okon eo (2021). nigeria: is there an environmental kuznets curve for fluorinated gases?, open economics, issn 2451-3458, de gruyter, warsaw 4(1):57-71. omisakin oa (2009). economic growth and environmental quality in nigeria: does environmental kuznets curve hypothesis hold? environmental research journal 3(1):14-18. omri a (2013). co₂ emissions, energy consumption and economic growth nexus in mena countries: evidence from simultaneous equations models. energy economics 40:657-664. özokcu s, özdemir ö (2017). economic growth, energy, and environmental kuznets curve. renewable and sustainable energy reviews 72:639-647. phillips pc, perron p (1988). testing for a unit root in time series regression. biometrika, 75(2):335346. rafindadi aa (2016). revisiting the concept of environmental kuznets curve in period of energy disaster and deteriorating income: empirical evidence from japan. energy policy 94:274-284. mailto:contact@americaserial.com american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 22 | p a g e robinson p, shaheen ei, shaheen ei (2007). environmental pollution control. in ‘practical advances in petroleum processing’ pp. 395-447. salahuddin m, gow j (2014). economic growth, energy consumption and co₂ emissions in gulf cooperation council countries. energy 73:4458. sugiawan y, managi s (2019). new evidence of energy-growth nexus from inclusive wealth. renewable and sustainable energy reviews 103:40-48. tong t, ortiz j, xu c, li f (2020). economic growth, energy consumption, and carbon dioxide emissions in the e7 countries: a bootstrap ardl bound test. energy, sustainability and society 10(1):1-17. vincent m, ezaal o (2022). fossil fuel consumption, economic growth, and environmental degradation: is the 'energy consumptiongrowth' nexus sustainable in nigeria? iosr journal of economics and finance 13(2):51-68. wang s, zhou c, li g, feng k (2016). co₂, economic growth, and energy consumption in china's provinces: investigating the spatiotemporal and econometric characteristics of china's co₂ emissions. ecological indicators 69:184-195. wickremasinghe g (2011). the sri lankan stock market and the macro economy: an empirical investigation. studies in economics and finance 28(3):179-195. yule u (1926). why do we sometimes get non-sense correlations between time-series? a study in sampling and the nature of timeseries. journal of the royal statistical society 89(1):1-63. mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 1 | p a g e asset securitization: transforming abstract properties into financial guarantees 1dr. mohammad hassesi, 2dr. saeed rohollah 1dba candidate necmettin erbakan university turkey 2ph.d. candidate, islamic azad university iran abstract: the financial landscape witnessed a significant transformation in the 1980s with the emergence of a groundbreaking innovation known as the securitization of assets. this innovation fundamentally reshaped the role of financial intermediaries within the capital market. securitization involves the process through which financial intermediaries, such as investment banks, package and sell property assets from owners to investors in the form of securities. during this process, the property assets are detached from the owner's balance sheet, and funds are raised directly from investors who acquire tradable instruments representing a claim on the underlying debt, independent of the original owner. the concept of asset securitization originated in the united states during the 1970s and has since become a pivotal and highly valued financial product in global capital markets. keywords: asset securitization, financial innovation, capital market transformation, investment banks, securitization process 1. introduction the most important financial innovation in 1980’s which strongly affected the role of financial intermediaries in capital market, was changing properties into securities. this is a process in which financial intermediarie ssuch as investment banks sell properties of the owners through securities, directly to investors. in this process, properties of the owner is separated from its balance sheet, and instead providing funds is being done by investors who buy an exchangeable tool which is an index of above-mentioned debt, without referring to the first owner. concept of changing properties into securities was first created and acquired in the u.s. in 1970s. this technique was accepted as a very important and valuable product in capital market during the past decades. 2. abstract fundamentals& background review 2-1. concept of securitization: the first recorded case of changing properties into securities, was done by national institute of governmental mortgage loans in the u.s. in 1970. the institute expanded "pass-through security" which was a kind of securities based on mortgage loans and runs war soldiers' affairs, guaranteed by mortgage loans of federal inhabitancy office (greenbaum &thakor 1995).pass-through security based on loans are symbols of direct possession in a mortgage loan basket which are the same, concerning due date, profit rate, andthe same features. in this process, a portfolio is being sold to a warrantor, and possessive certifications are directly being sold to investors: in a way that each mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 2 | p a g e certification shows a debt against all properties. regarding concept of pass-through security, professionals have presented some definitions, however all suggest that above-mentioned certificate is a document symbolizing "having the right of exact immediate profit of future cash flows of a property" (mojtahed [et al],2011). consequently, a person who buys securities, has certainly the access to that part of properties which has already bought, based on the definition of possessions on its future cash flows benefits, and though until he has not sold those securities, he has the right to the future benefits of the property. however such rights is necessarily goes to the owner and the certificate of its holder. 2-2. definition of securitization: before 1980’s, the concept of securitization used to be applied to define process of replacing securities' issuance in order to raise finance from banks, though loan is the borrowers commitment to those lenders. economists have called it (providing financial resources) disintermediation (kendal & fishman, 2000). today securitization has more particular definition according to what has been mentioned by lampkain (1999). recently, the expression of structured financing has been used in raising finance. structured financing is a process in which all sold properties are recollected and regained. securities' profit presents cash flows income and interests issue done loans for third party investors.fabbozi, davis, &chadhori (2006) pointed out that this expression covers a wide range of financial market activities. here is their applicable definition for structured financing: "…these techniques used when necessary for publisher of property holder, whether related to financing, risk transferring, or any other needs cannot be prepared as a product or an accessible tool. so, in order to meet this demand all available products and techniques should be designed as a customized product or process. therefore, a structured financing is a flexible financial engineering instrument". according to this definition, structured financing includes not only securitization, but also structured credits. the following definition is published by international liquidation bank in relation to structured financing in 2005: "structured financing instruments can be defined through three main features: 1. aggregating capital (based on cash funds) 2. scanning debts to be supported by properties (this feature distinguishes between structured financing & traditional securitization instruments) 3. cutting credit risk connection of deposited properties from promoter credit risk which is normally done through a mediator organization spv that is independent and has a limited life. (quoted by rah neshin & riahi, 1393, p.20). 32.general process of changing properties to securitization: in this process, a company or an institute which needs finance, establishes a company having a special purpose and sells a part of its properties to a spv (special purpose vehicle) which has future cashin flows. spv issues debt securities (abs = asset backed securities) in order to provide necessary fund to buy above-mentioned financial properties and then presents it to investors. then spv pays money which has received from selling debt securities to main company in order to buy financial properties. investors who have bought such instruments may take restitution received from future cash-inflows came from spv financial properties. this process is shown in mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 3 | p a g e from the issuers’ point of view, target property or cash flow would be paid separately due to balance sheet separation and from the investor's point of view; separation of property and future cash-inflow would be to secure exchange against potential bankruptcy of securities' issuers and credit risk of property. so investors prefer minimum risk to properties risk or debts of securities' issuers. 42.general process of changing properties to securitization: in below table the advantages of securitization based on various beneficiaries are presented. finance applicants banks & financial institutes government 1. balance sheet separation and cash equivalent replacements 1. more investor accessibility 1. more effective finance methods 2. making new receivables by securities publisher 2. roe increase, more balance sheet items allocation to other needs 2. better risk management and consequently improving financial policies and facilitating new financial market creation 3. reducing investment costs for publisher compared to traditional securities 3.better alm 3.variaty of financial properties and focus on optimized usage of resources 4. roe increase , through using less capital 4. credit risk, liquidity and interest rate decrease figure 1. credit promotion commission securities received commission received commission cash cash cash cash flow commission figure 1: benefit bonds credit special purpose vehicle (spv) investors company improbable to bankruptcy bank ) ( promoter cash flow mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 4 | p a g e 5. increasing & diversification of financing methods 5. economy of scale 6. roa increase, through reducing finance costs 7. decreasing credit risk facing through minimizing some of high risk properties out of company balance sheet and or replacing them with low risk properties 8. adjusting financial resources of some properties through reinforcing financing methods with longer due dates compared to other markets table 1: advantages of securitization on various beneficiaries 52.value of published bonds in iran & throughout the world: there is no exact estimation of debt securities graph 1: amount of issued debt securities from 1990 to 2015 in the u.s numbers in billion dollars (statista as seen, within 25 years 13,710 billion dollars debt securities have been totally issued in the u.s. compared to total amount of published bonds (13,710 billion dollars), amount of issued bonds in first ten years of mentioned period (77 billion dollars) has been about 0.05% of total bonds. this increase shows approval, acceptance, & application of securitization for financing. in iran, the first bond has been issued in 2005, first ijarah sukuk in 2010, first murabaha sukuk in 2012, and finally a listed company has issued istisna & a bank published the first mortgage – backed securities (mbs) in 2015 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 5 | p a g e through the securities & exchange organization permit. in table 2, value of issued bonds in iran shown from 2005 to 2016. type of securities number of issued bonds total amount of issued bonds buyers having nonbank guarantee having bank & nonbank syndicate guarantee having guarantee bank government 28 92,431 59,131 7 1 20 ijarah 32 85,055 77,251 9 2 21 murabaha 10 28,565 26,564 3 0 7 mbs 1 3,000 3,000 0 0 1 istisna 1 1,629 1,629 1 0 0 total 72 210,680 167,575 20 3 49 table 2: value of issued bonds in iran capital market (billion rials), source: the securities & exchange organization (2017) 3. brand and its different types: according to definition, brand or trade mark is sign, mark, design, or a combination of these, which are used to identify products or services of seller or a group of sellers and to distinguish between these products or competitors services. trade mark (brand) is to identify and distinguish seller or producer. actually, the trade mark (brand) is a seller permanent commitment to present a collection of special features, advantages, and services to buyers. trade mark can be a symbol of some more complicated cases such as product identity, product character, and culture of how to use a product as well as personality of product user. brands are invisible properties of companies which increase final value of product in costumers' point of view and also will result in added value for investors and consequently increase company income. brand are various, which some of its famous ones are as follows: 1. trade sign (brand): it is a name, an expression, a symbol, a design or a combination of them that tends to identify product and services of a seller or a group of sellers and also to distinguish between these and other competitors. 2. brand name: that part of a sign which can be stated verbally. for instance, fiat car, sony tv, bata shoes, etc. 3. brand mark: part of a brand name that can be recognized but cannot be imitated. for instance, a symbol, a design, or color of a particular letter. 31.value of top brands in the world: based onlatest estimations in forbs & interbrand sites, value of 100 top global brands in 2017 has been about 1.948 billion usd according to various industries which is summarized in table 3. based on above-mentioned table, 42% of all top brands' value (approximately 810.7 billion dollars) belong to telecommunication & information technology and related industries. services and entertainment industry goes to second class having 14% of total value of top famous brands in the world. if services are considered as technology and other welfare & financial services, then total value of top brands in this field reaches to 63% of all brand values. these companies such as apple, google, & microsoft have mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 6 | p a g e respectively the highest brand value as 184, 140, & 87 billion dollars, each one has 20% of 100 top global brands' value. brand income brand value industry bilion dollar bilion dollar 1589,2 810,7 technology&information industry&telecommunication 394,8 278,3 services(entertainment,restaurant,transportation,packing,…) 979,4 197,8 automobil & related industries 729,9 150,4 financial services 1011,5 119,5 retail 614,5 393,6 other industries 5337,6 1948,3 total sum of industries table 3.value & income of 100 top companies of the world in 2017 by forbes according to the estimations, regarding amount of incomes made through brands, we can say total income via 100 top global brands in 2017,were 5,337.6 billion usd. this number shows that income gained by brand has been 2.7 times more than the value of top global brands. so, we conclude that 2.7 units of income have been made for each unit of brand dollar. table of value and grade of top global brands is presented below. interbrand valuations of top global brands (p.9) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 7 | p a g e 3-2. top brands in iran: no exact and valid estimation has been formally published yet regarding brands and their values and also income gained through brand in iran. according to what has been mentioned in 10th national festival of champions of iran industry, tadbir smart study group, has selected 300 top brands of iran to be evaluated and classified in 3 groups of a, b, & c which estimated their approximate value as 300 thousand billion rials. however, according to some informal assessment, some of top and known iranian brands (as in table 4) are considered as pricing basis (at the time of assignment). no company’s name value (billion irr) announcer source valuation year 1 iran air 15000 private organization 2011 2 iran khudro 4000 iran khudro 2014 3 persepolis sports club 2900 private organization 2014 4 esteghlal sports club 2900 private organization 2014 5 iran saderat bank 5035 benker tractate 2014 6 iran melli bank 4293 benker tractate 2014 table 4: brand value of some top companies according to latest assessments. irr means iranian rials( 1 usd =43,295 irr) 3-3. necessity to use brand in financing human capital-based companies: in securitization process, promoter for financing issues new bonds based on his properties, which are mostly claims and mortgage loans. nowadays, knowledge-based companies have an important role one conomy, and technology-based companies specially play an important role in this area. as it was mentioned in table 3, 63% of global brands' value belongs to technology and services sector. an outstanding point is the dependency to human and knowledge based companies which results in gaining more profits and create and promote values. the value of brand might be the reflection of the role of human capitals in such companies. in fact, the value of brand can reflect the ability and capability to provide future income gained through its effects on the market. leading companies do not usually depend on their physical properties but on their human capitals. ongoing companies are not able to have an access to financial resources to meet their demands, so they may face with some limitations. therefore,we suggest that these companies use their most important and valuable property (brand), for financing. by expanding these kinds of activities and making more values to the companies, the value of brand will be strengthened. benefit bonds: benefit can be considered as continuous earnings derived from particular property or the right to use services or other transferable rights which can the basis to issue benefit bonds. benefit bond (manfaat sukuk) is a kind of securities that shows in-common possession of its holder for specified amount of future benefits derived from properties or presents particular services and any specified transferable mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 8 | p a g e rights in a certain period of time. these bonds are exchangeable in stock exchange or other markets out of it. in these bonds, the investors are the owner of benefit derived from a special property which is a basis to issued bonds. based on earnings received from this specified property, the investors' profit or loss would be defined. benefit bonds are one of various securities which are based on rent contract and are exchangeable in secondary market. benefit bonds are being used in different ways: these bonds can be used as assignment of other future benefits received from property or long-lasting property. benefit bonds also include a wide range of services and public facilities which enjoy future benefits of such services. these services may contain the following: 1. services related to affairs such as power (electricity, gas), cleaning garbage, and post services, 2. phone, radio, air lines & bridges, 3. intercity and suburban railway services 4. ports and roads services 5. hotels, restaurants, & public health and training services. one of these services or benefits that can be trusted to issue benefit bonds is benefit received from brand name of well-known and international companies. in figure 1, operational type of bonds is presented. 5 commission contract figure 1: securitization process benefit bonds are classified in 3 groups: 1. in this type such as highway bond, bond holder has to wait till the due date of bonds to gain all future benefits derived from the property. 2. in this type such as hotel bond, bond holder does not have to wait till the due date of bonds to gain all future benefits derived from the property. 3. in this type, the right to use services or other transferable rights would be the basis to publish such as the right to use certain type of media for instance in tv commercial breaks. 1 publishing benefit bonds 3 rent contract collecting funds 4 pay money 2 pay in 6 part payment during bonds life investors intermediator promoter ( agent ) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 9 | p a g e 3-5. elements of benefit bonds: these elements include promoter (or issuers who issue bonds), warrantor (legal entity who warrants paying related amounts of the bonds), trustee (reliable auditor institute of stock exchange which is responsible for ensuring precision and accuracy of promoter operation against made benefits), selling agent (legal entity who sells benefit bonds on behalf of mediator), & paying agent (central depositary company of securities and funds liquidation). promoter may be one of below explained ones having related specifications: a. joint stock corporations or a non-governmental organization or an institute: * being the holder of bonds should have been already deserved to the bond’s rights. * auditor and his promoter's observations regarding financial statements within last two fiscal years should not be adverse or disclaimer. b. governmental organizations or municipalities. 3-6. economy analysis of benefit bonds from companies' points of view: a.since some companies can receive needed capital to expand their activities through these bonds, this instrument may have a positive effect on growing some parts of economy. b. if primary and secondary markets of benefit bonds move toward a clear and vivid competition, restitution rate of bonds will move toward real added value and will help producers to enjoy a fair distribution of their benefits. moreover, this instrument can influence profit rate to a real restitution rates of capital as an agent of economic added value. c. these companies having a brand can use brand benefit bonds. using such bonds may motivate companies to try more in order to develop their services and to promote quality of services and branding. 3-7. secondary market of benefit bonds: benefit bonds holders deserve the right to use properties' benefits or services of service companies directly in their specified due dates or they can assign them to benefits & services' applicants till their due dates. so these bonds have a lot of advantages for their holders, first they are a kind of reserving benefits and services in a specified time based on which a person can make his plans, second, using services and benefits through these bonds would be in lower cost, and third, whenever the bonds holder needs cash flow or disregards using services and benefits, he can assign bonds to another person. above-mentioned advantages cause supply and demand and then to be formed for benefit bonds. if benefit bonds present clearer services and benefits and if bonds issuer respects more to bonds holders' rights, secondary market will be booming more. price of these bonds and profits derived from their transactions depend largely on many factors such as property holder and service companies' credit, face value of services and benefits, restitution rate of similar financial tools, place and time of presenting services and benefits. 3-8. requirements of benefit bonds: *promoter is responsible for all costs related to issuing of benefit bonds. *buyers through buying bonds assign an irrevocable power of attorney to spv to take any steps concluding necessary contracts with promoter in order to enjoy benefits of bonds and collect funds received from them. subject of bonds issuance should be mentioned in documents which buying bonds means acceptance of spvassignment and they would be valid and irrevocable till due date final liquidation of bonds. *promoter should take necessary steps in order to use properties which make benefits of bonds, to present services and to take mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 10 | p a g e advantage of other transferable rights of benefit subject. promoter is responsible for using benefits of bonds, presenting services, & taking advantage of other transferable rights, receiving earnings resulted from benefits and paying them to spv. *before issuing bonds, promoter is obliged to design his financial and accounting system in a way that recording and reporting detailed operation would be easily and clearly possible, regardless of other operation and activity of promoter. 4. brand benefit securities it is essential that there exists an asset in securitization, and as this kind of securitization is our model, in the first step, the brand must be registered and evaluated as an asset of the issuer. due to the general method of securitization, the structure of brand benefit securities, bbs, would be suggested as shown in figure 2. according to the suggested structure, spv is needed who is responsible for bbs payment at the due date, to the owner of the asset (main owner of the asset that the bbs must be returned to, at due date). after registering the designated brand in intellectual property market and evaluation of it, the owner should transfer the brand right (under a specific contract) in reference with the transferring brand right, the promoter (agent) would pay spv benefit for the periodic usage of brand benefit, and the spv will distribute it among investors as a profit, on behalf of the promoter (agent). in order the assurance of conforming the conditions of brand right transferring contract, a designated organization thatis in charge of inspection the quality and quantity of products which produced under the designated brand will be appointed that subsequently reports the results of the inspection to trustee. as of due date of bbs, the designated brand would be returned to the issuer and the initial investment would be returned to investors as well. if the issuer do not fulfil its commitment during the bbs period and at the due date, in order to protect investors’ rights, the benefit of the brand will be transferred to others via intellectual property market based on the above mentioned contract. 4.1 the roles and responsibilities of auditing in bbs as explained before, brand is one of intangible assets which has been formed in public minds as a result of reputation derived indirectly from some specific aspects of products among consumers, customers and local and international markets. the value of a brand is largely dependent on the quality of the to a spv. then the spv should issue bbs based on the brand and can sell it to potential investors. spv investors promoter ) agent ( brand cash brand benefit securities cash inspecting unit trustee audition report payments of brand benefit investors benefit mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 11 | p a g e reputable products, providing aftersales services and continuity of its maintenance, and perseverance of its market share related to the designated products. decline in the quality of product and services and also new brands penetrated into market, as rivals due to which the market share of the brand might decrease, are considered as operational risks to which bbs owner are exposed to. hence, in order to manage (minimizing) these risks, the existence of an auditing unit who is in charge of assuring that the value of brand is being protected till bbs due date and promoter (agent) fulfil all its commitments in usage of brand and reassuring financial regulations. the auditing institution tasks are as follows: 1assuring the compliance of quality of the products and bbs issuer services in accordance with transferring brand right contract; 2assuring that the amount of products is in accordance with the scheduled plan and transferring brand right contract; 3monitoring the brand reputation among consumers and customers; 4reporting to investors and trustee; 5monitoring, acquiring plan of action and amendments to preventing and adjusting the brand’s seat and the related investors as well. 4.2 the scope of bbs application according to its special aspects, bbs applications explained as follows: 1financing for the companies holding a reputable brand; 2financing for knowledge based companies, which are rely on their human based capital, not on physical assets, for instance, companies in it, ict and high-tech; 3financing for companies based on their employees skills, like sport clubs. 4.3 the benefits of bbs bbs has a wide variety of benefits from the point of view of issuer, promoter (agent) and the market, which has been shown below: 1application of intangible assets of companies (in this case brand) in order to raise fund and to develop companies, specifically the ones which based on human resources (knowledge and skills); 2decreasing financial costs of human capital based companies; 3using the capacity of social reputation of brand to raise fund, especially using social potential of advocates of sport clubs; 4protecting brand seat in the market and facilitating the act of developing brands; 5evaluating and updating the brand regularly and permanently; 6creating the possibility if developing a brand and its intellectual assets in the related market. 4.4 the risks of bbs related risks to bbs are as follows: 1the value of bbs is highly depended on the value of brand itself, its volatility and the possibility of loss or failure in brand value. 2the value of brand is strongly related to the issuer management. 3market share of the products or services on which bbs is issued can easily affect the value of bbs. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 12 | p a g e 4the dependency of bbs value on the life cycle of the product when it’s not revised and modified after maturity stage. 4.5 to ols and ways of bbs risk management due to the fact that bbs is a new structured finance method, it is necessary that some new measurements defined and designed in order to protect diversified stakeholders’ rights so investors’ fears of their capital decreasing, minimized and bbs applications developed. the tools and risk management methods of bbs arestated in table 5 below. general risks special risks risk management methods tools operational risk producing goods and services not based on the schedule inspecting and auditing unit contractual regulations, periodical reports on the quantity of products quality volatility of products and services technical inspection periodical reports on the quality of products and services providing services to the client technical inspection periodical and annual reports on the quality of products and services credit risk dishonoring basic capital trustee and guarantor contractual regulations on transferring the brand benefit through intellectual property market lack of commitment to pay benefit to investors trustee and profit guarantor contractual regulations on transferring the brand benefit through intellectual property market dishonoring basic capital by promoter (agent) guarantor contractual regulations on transferring the brand benefit through intellectual property market market risk volatility of brand value trustee and auditing unit monitoring the quality, quantity, market share, brand reputation and reporting of these items. 5. conclusion and suggestions in this paper, we only focus on a new model on securitization based on the benefits of brand for financing, but the followings are urgently needed to issue the bbs: 1reviewing and evaluating the laws and regulations, social and economic effects of bbs; 2reviewing the bbs execution in those companies holding the brand; 3reviewing the bbs execution in sport clubs; 4reviewing the bbs issuing by venture capitals, ingenious investments and knowledge-based organizations; 5reviewing the bbs facilitating through capital markets. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 13 | p a g e references: jafarpisheh, khalil, the secrets of branding, 2012, first edition, isfahan, amookhteh publication; tehran stock organization annual report, 2017; tehran stock organization, islamic survey and development department, 12th bulletin; iranian privatization organization, 2012, iran airline evaluation; fabuzzi & chadhori (2006), translated by rahneshin, ali & tajlirriahi, hamed, 2014, securitization, tehran, termeh publication; feisal ahmad monjo, translated by karimi, mojtaba, 2009, asset securitization: important execution for islamic banks; ravand quarterly, 55th bulletin, page 185; greenbaum, and thakor, a. (1995). contemporary financial intermediation. new york: the dryden press; kendall, fishman, j. (2000)," a primer on securitization", usa, the mit press; (mojtahed& colleagues, 2011); www.iraneconomist.com; www.statista.com; www.forbes.com; www.interbrand.com mailto:contact@americaserial.com mailto:contact@americaserial.com http://www.statista.com/ http://www.forbes.com/ american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 26 | p a g e analyzing financial business risks: a case study of cali's dynamics 1dr. maria e. gomez rios2 and dr. carlos a. rodriguez gaviria 1research professor, department of administration and economics, university autonoma of manizales, colombia 2research professor, department of management and economics, university autonomy of manizales, colombia abstract: small and medium enterprises (smes) play a pivotal role in economies worldwide, comprising a significant majority of business networks. in colombia, for instance, smes constitute approximately 94% of the enterprise system, driving economic activity. however, despite their importance, these enterprises often lack the necessary support to thrive. recent governmental policies have sought to address this issue by promoting sme development through loans and assistance programs. this research addresses the pressing need to understand the risks faced by smes, a topic that has received limited attention. additionally, many smes lack dedicated financial departments, making it challenging to monitor risk indicators effectively and make informed decisions to mitigate risks. our study aims to provide evidence-based insights to help smes internalize processes for balancing risk indicators and achieving better risk control. the study also recognizes the impact of globalization, financial volatility, and uncertainty on smes, emphasizing the importance of continuous improvement in various sectors of the economy. furthermore, it highlights the role of consultants in diagnosing organizational issues and optimizing indicators, potentially leading to product/service diversification and enhanced profitability. keywords: small and medium enterprises (smes), risk management, financial indicators, globalization, value creation. introduction around the world, small and medium enterprises make up most of the network business in numerical terms "in colombia, about 94% of the enterprise system is made up of smes, which being the engine of the economy do not have the importance or enough support to survive over time "(aguirre ortiz, et al, 2006), although this image has begun to change, considering that during “the last governments some policies have been established in order to promote the development of these enterprises through loans and other kinds of aids, because of the large percentage that these companies represent, a concern arises for investigating and knowing the risks they are exposed to, with the intention to create tools that allow them to act timely, since there are few studies in this field, and nonexistent in the case we similarly, the interest also arises because small and medium-sized enterprises often do not have (a priori hypothesis) with a financial department to conduct a full and proper monitoring of the various mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 27 | p a g e risk indicators and from this, take the relevant decisions and implement strategies conducive to mitigating the risks that are embedded as indicated by miller (1994). this work aims to provide evidence to allow businesses to internalize the processes that serve to balance the results of the calculated indicators and have a controllable risk. according to st. martin et rodriguez (2011) the current crisis has highlighted the close relationship among three circumstantial aspects to the development of financial markets in recent decades: the globalization process, the volatility of financial figures and uncertainty. in this sense the subsectors of the economy in the geographical scope of this study should be prepared for a continuous improvement, so that it helps them to achieve national and international economic growth, according to the negotiations that are taking place in this context of globalization. however, it is important to note that companies also need consultants in other fields in order to make a diagnosis versus what is going wrong in the organization, which means their indicators could beat inadequate levels. this means that in many cases you might find that the company should diversify its products and services to supply a demand that is being ignored and this will generate greater profitability or value creation. the intention is making the financial area assist the company in the creation of value. smes often have some adaptive advantage to quickly change its production structure in case of changing market needs, which is often more difficult in a large company. thus, toro (2009 and 2012) mentions the following:  small businesses have more difficulty finding funding in an appropriate cost and term, because of their increased risk and in order to solve this difficulty, they resort to financial institutions.  they are companies with greater labor rigidity and difficulty in finding skilled labor, so the employee prior training is essential for them.  because of the small volume of profits presented by these companies, they cannot dedicate funds to research, however, in many cases they have innovative processes and products.  for their size, they have a small customer base. other disadvantages of this type of organizations, according beltran (2004), are as follows:  smes have great structural weakness for several main reasons:  they lack strategy and planning, which becomes a limiting factor for inclusion in an international context and jeopardizes their continuity in the domestic market.  the access to credit lines is difficult and therefore the investment in technology, working capital and knowledge is not possible  administrative, financial, accounting and operational management is very informal and intuitive. taking into account what was mentioned previously in smes and knowing their high degree of vulnerability facing the international market, they were considered as an object of study, in order to contribute to their permanence in time. to contrast the hypotheses, the sample of smes indicated above was taken with regard to observe what the behavior is of the financial risk of smes in the cityof cali during the years 2012, 2013 and 2014.to this end, a number of primary and secondary objectives were established as: • characterize the financial risk in companies in the city of cali. • debugging the financial statements of the companies under study. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 28 | p a g e • determine liquidity ratios, debt and portfolio recovery that are influencing the financial risk of a group of companies in cali. • establish the risk condition possessed by the companies under study. • analyzing financial risk according to the productive sectors for companies under study. similarly, before developing the work, research about studies that were related to the main objective was done. one might mention at this point the study by ávila bustos (2005), in the city of bogotá, called measurement and control of financial risks of companies in the real sector. the author believes that there are three types of financial risks in organizations known as market risks, credit risks and liquidity risks, and he develops for each asides on management, administration and measurement, being these risks classically described by authors such as markowitz, miller and sharpe (1990), also retaken by tudela and young (2005) ie not articulated for an integral analysis, but for an individual perspective of them. an important aspect of this study is that it recognizes the need for risk measurement in organizations; moreover it deepens the research on management and administration of the same one; to the extent that is considered to be a complementary element to the development of the corporate purpose of the organizations. in this context, zorrilla (2003) also conducted a study in the city of veracruz (mexico) on financial risk management of exportation smes in contributions to the economy, which aims to provide guidance and show the entrepreneurs the importance of using derivative financial instruments such as “forwards", "futures", options, “swaps", to achieve the reduction in market risks. this work focuses on these derivative financial instruments, for their ability to mitigate or reduce the risks faced by smes. another study, is the one made by navarro and lopez (2009) from the university of sevilla, this is a proposal for simplified model risk detection in companies: empirical study applied to the construction sector (smes). its purpose is to identify the variables or more significant ratios of corporate solvency in construction companies by analyzing the annual accounts of a sample of societies, some of them without continuity problems in their activities (a sound and profitable enterprise) and others that are in situation of bankruptcy or receivership (failed or unsuccessful companies), with the ultimate aim of proposing a simplified method for detecting in advance possible risks situations. the author uses information about sound and profitable companies and failed companies, taking into account the economic and financial data of all companies for the preceding four years before the business failure. the statistical technique used to reduce the variables that finally are integrated into the system is them ultivariate analysis. according ballesteros, the usefulness of the discriminant method is its ability to provide a comprehensive analysis model, comprising a combination of ratios correlated with each other, which summarizes the financial economic information in a more assimilative way to the user. discriminant analysis also applies for predictive purposes. the main issue in the predictive application of discriminant analysis is to determine early enough business crisis situations. the idea is cataloging in advance a company as sound and profitable or failed depending on the values of its ratios in the precedent years of the crisis, by applying built discriminant functions. hincapie (2007) in his study of financial risk analysis for micro, small and medium enterprises in the metallurgical sector of the city of manizales makes a theoretical study with an analysis unit similar to the object of this work, albeit with a different methodological model. this study proposes the use of the z2 index, which is an econometric mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 29 | p a g e model that is constructed from financial ratios. such ratios are linearly combined with a specific weight to each, to obtain a final result score (z-score) that discriminates companies that breach their commitments. the model was created by altman (1968)for predicting bankruptcy. altman´s model uses discriminant analysis as a multivariate statistical technique that is a sequential process in which the analyst excludes those financial reasons that are not statistically significant and include those that are considered meaningful. the author considered that the model above, required to have risk measurement, since the factors of independent variables will enter as numeric variables that will qualify each observation according to the company, the sector effect, me so economic environment and the overall environment. consequently, the dependent variable of corporate performance to be used will be the calculation of altman z model, known as the probability of bankruptcy. therefore, the concept of risk is articulated in this perspective, with those factors that at the moment of doing an internal or external evaluation can affect the company negatively. the positive impact transforms them into successful factors as alvarez and garcia said in 1996. under these proposals, the performance of this work has been considered appropriate, since companies can generate agreements based on the results presented by them, agreements by which companies can design necessary tools, so they can anticipate unfavorable situations for the company that perhaps can seriously affect or compromise in a short or medium term the enterprise. therefore, those signals are the ones that will allow the company to take appropriate decisions and act at the right time. the aim is to provide support criteria for decision-making, this being the cause that led to the search for new and better alternative solutions to organizational problems of smes, in order to respond to their needs. one element that brings the design of this tool within its methodology is the integral analysis of the financial indicators that will be calculated, as they always are analyzed and evaluated individually in some organizations. finance and financial risk in 1973 after the first oil shock until today, scientific studies on financial management of the company have expanded and deepened considerably. new lines of research emerged as the option pricing theory, arbitrage pricing theory and agency theory. in the eighties and nineties, the theoretical and methodological investigation of the aspects above was brilliant, as well as the diversity of empirical validations, with sophisticated valuation models and mathematical techniques and widespread use of information technology. in addition, it is deepened in research streams as the agency theory and methodology provided by the theory of fuzzy sets applied to the financial subsystem in an atmosphere of uncertainty with significant results. interest is bolstered by the internationalization of phenomena and financial decisions, leading to many studies on issues such as political risk and the risk of variability in the exchange rate of the currencies in which international finance management operates. also, to overcome some criticism of the capm the ecapm has emerged "porgue" in which initial work in an international context referred to pipeline companies, and expanded later by litzenberg, ramaswamy and sosin (1980). risk management, evidence on risk hedges. hull (1980 2002); and later diez de castro & mascareñas (1994), izquierdo (2004). regarding, financial structure, de angelo and masulis (1980) admit the existence of an optimal financial structure contemplating the effects of taxation, amortization and private investments of each company. ross (1985) adopts a position in the same direction in risk conditions and perfect market. regarding dividend policy, the work of jalilvand and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 30 | p a g e harris (1984) is remarkable, they conclude that market imperfections may involve interdependencies among investment decisions, financing and dividends. on the fiscal impact on the dividend policy poterba and summers (1984) conclude a higher taxation of dividends versus capital gains. moreover, sarig and scott (1985) are positioned in a similar line to dim, lewellen and mcconnell, reaffirming the phenomenon of different segments or clienteles about the apt, new researches continue being added such as roll and ross (1980, 1984 ) using the multivariate analysis, this last one subjected to criticisms as dhrymes, friend and gultekin (1984). it is also remarkable that during these years many studies among supporters of capm have been conducted, as tinic and west (1984.1986), and on apt, gultekin and gultekin (1987, 1989) without reaching definitive conclusions about which of the two models is better, both in national and in the international version. titman and wesseles (1989) verify the apt and conduct empirical research on capital structure, in which they draw conclusions such as that transaction costs can be an important determinant in the choice of the capital structure, especially in small businesses by issuing long-term financial instruments. leland (1994)5in the search of the optimal financial structure finds that the value of debt and optical indebtedness are explicitly connected with the risk of the company, taxes, bankruptcy costs, the free rate risk and payout ratios. fama and french in 1992 revealed important findings in this regard and concluded that in the american market for non-financial firms there is a weak positive relationship between the average and beta profitability. these same authors in 1995 try to detect whether the behavior of asset prices in relation to the previous ratio, reflects the behavior of the benefits. however, definitive and satisfactory conclusions were not drawn, making necessary other researches. daniel and titman(1997) reexamined the fama and french model. they argue that the characteristics rather than the betas determine the expected benefits. specifically, they found that stocks with low market-to-book ratios, but higher betas with respect to market-to-book portfolio factor, tend to have similar benefits to other low market-to-book stocks. enrique sentana has published over the years numerous works related to factor models of conditioned heteroskedasticity applicable to atp and other models as (pricing options on assets with predictable white noise returns) or quadratic predictions and mean-variance analysis in models with conditioned heteroskedasticity and garch models. in recent years there have been numerous articles and research conducted about the great existence of smes and their role in today's society. one example is the work done by lopez revuelta and sanchez (1998)6in which they pretend to show, in a synthetic and global manner, the specific problems that these family businesses can suffer. from this work, interesting conclusions were drawn such as that due to the family structure of the company; the maximizing criterion of the market value may not be the most suitable in some cases. in other works it has deepened in the study of human resource management in smes, funding, or direct investment in developing countries. the companies valuation theory seemed to be bogged down, at least since the seventies and only recently it has gained a significant boost under the influence of authors as cornell (1993), copeland, koller and murrin (1995) and damodaran(1996). o fernandez (1999) and amat (1999) in spain. in the nineties, the theory and practice of business valuation was centered on very classic and somewhat obsolete methods such as static approaches or balances and mixed models such as the german and anglo saxon. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 31 | p a g e these methods have been overcome nowadays, even admitting their virtuality and usefulness for small business valuation. currently, the methodology based on discounted cash flows seems indisputable and is the most consistent and solid in terms of its theoretical foundations. by this line some authors have tried to advance such as martín marín and trujillo ponce (2000) in their book "manual of business valuation." regarding the issue of new economy or internet-related virtual economy companies, these authors in their own words prefer waiting a period of time before tackling such a thorny issue. these companies seem to escape the logic of the so far developed valuation models. high volatility and soaring prices seem to prevail in the shares listed on the north american nasdaq. associated with the previous idea, it is important to take into account the increasing value acquired by the information and communication technologies within the company, factors that enable organizations to create value through the integrated management of the physical and virtual chain value. something like what ordiz and pérezbustamante (2000) believe when they say that "these technologies can bring benefits to the company, such as reductions in costs or increases in value, but for that, it should be assumed that investment in information and communication technologies is not a business decision, but acquires the category of strategic investment for the business, given the impact it may mean for the future of the business. leland, hayne and goldstein, robert. an ebit based model of dynamic capital structure. the journal of business. university of chicago, 2001, vol. 74, no. 4. 6 sanchez p., josé and revuelta b., daniel. desafíos de las pymes familiares (challenges of family smes). issn 02121867, no. 99, 1998. pag. 159 173 in recent years theories on risk management have been considered as an interactive process based on knowledge, assessment and management of risks and their possible impacts, whose fundamental purpose is to improve decision-making in organizations. thus, on the basis of the studies on the cost of capital made by modigliani and miller (1958), then the valuation models and risk regulation by lopez, j. (1996) and marshall, c. siegel, m. (1996), stochastic models of risk assessment developed by berkowitz, j. (1999) are presented as a process applicable to any situation where a desired or unexpected outcome could be obtained, which at the same time could be significant or may bring an impact to the organization, izquierdo (2005). risk management ensures that financial resources have been properly assigned to the corresponding functions, favoring the maximization of the value of shareholders partners, including third parties. ("financial risk management, 2006). some benefits to the organization are related to achieving the goals and objectives; hence the decision-making turns out to be an important element to observe, within risk management in the company. added value of smes in colombia micro, small and medium colombian enterprises (msme), as in most countries, are the engine of the economy. they generate more than 50% of national employment, they represent 36% of industrial added value, 92% of commercial establishments and 40% of total production of the country, demonstrating its importance and great potential for growth (comparing its participation in the gdp and the number of establishments) but, unlike the fundamentals that have been a relevant actor in the remarkable growth of the countries of south east asia and europe like italy and spain due to their outstanding participation in foreign trade, the contribution of smes to the country 's trade balance has been very poor. while exports (us $ 12,547 million) of smes in taiwan correspond to 56% of total mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 32 | p a g e exports of the island, in korea we talk of (us $ 18,241 million) 40% and italy (us $ 110,552 million) 53% , the colombian smes correspond to no more than 20% of total exports from colombia. with the aim of doubling and diversifying exports of non traditional products, the government developed the strategic export plan, which included the expopyme program, designed and coordinated by proexport colombia, aimed at promoting the successful and permanent position in exports of smes and their adaptation to the demands of the global economy. at the end of 2001 proexport had invested more than $ 6000 million in its development and 1650 msmes had participated, of which more than 600 made exports of us $ 110,700,029 in that year. however, colombia continues representing only 0.2% of total world merchandise exports, with a per capita export income of us $ 270 in 2000 compared to the world average of us $ 600 in that year. as for smes, in 2000, exports as a percentage of gross sales (measured in pesos) only reached 14%, being the packaging and cardboard boxes sector with 37.6% the highest export coefficient and the furniture sector with 10.5% the lowest coefficient, which shows that our smes have been born and raised considering basically the local market and demonstrating that only when domestic demand has shrunk have they looked for the world market. in view of the above, one of the greatest difficulties faced by the colombian pyme's is their low administrative capacity to be linked to the external sector, the lack of information on opportunities for competitive and sustainable exports, with high levels of local added value as a result of a minimal training and management in the international arena and their limited access to technologies, especially those related to foreign trade, because as shown by the recent work developed at the university of the andes about this topic. the biggest obstacles to the export process of domestic smes are referred to factors related to marketing such as the suitability of the product to the requirements of the external market, lack of markets information (knowledge), access to adequate distribution channels and lack of training in international marketing. without overcoming these shortcomings, it will be difficult for colombian smes to take advantage of the great opportunities offered by the global market, particularly those occurring as a result of the integration agreements and preference systems such as can, alide, atpa and sgpa, signed and granted to colombia. in this regard, it is important to highlight the recent approval given by the us congress to atpa, which opens great possibilities to expand the participation of colombian smes in the market of manufactures of that country (a trillion dollars were their purchases to countries around the world in 2001) given that, with the expansion of the number of products benefiting from the relief, it is estimated that 75% of the national export supply may enter without paying tariffs, opening up new sources of employment and generation currency, becoming a crucial support in the process of reviving local production and the recovery of the us market. also, it should be noted that the ftaa (free trade area of the americas) from 2005 will change the fate of their member countries and in particular of the smes, which should face the expanded market (800 million people) by using international strategies and new and multiple competitors and therefore the msme's entrepreneurs must be prepared to be competitive with those of other countries. it is necessary therefore to provide them with high quality support in these areas if we want to consolidate this business sector as an emerging possibility for colombia to take risks outside its borders. because of all this, a government program that helps them to solve in part these weaknesses, giving them the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 33 | p a g e required management tools and business knowledge to start and successfully develop an optimal process of internationalization of its products and services, supporting them in their use, becomes of paramount importance when there is a marked decrease in domestic demand and weakness in our major trading partners (the united states and venezuela). methodology the emphasis of a case study is to describe or measure two or more features or units of analysis in order to determine how it is or how the phenomenon occurs. in this sense this study is aimed to observe and characterize a reality of some companies of cali, where the financial statements of some companies were analyzed during 2012, 2013 and 2014, to then proceed to perform calculations and analysis of financial liquidity indicators, debt and portfolio turnover and description of their behavior in risk for each one. initially liquidity ratios, debt and portfolio management will be calculated, based on the historical series of financial statements selected from the database of the super intendencia de sociedades de colombia (colombian superintendence of corporations). in order to obtain the liquidity the index ratio or current ratio calculation was used. this tries to verify the availability of the company, in the short term to meet its commitments, also in a long term. the formula is current ratio = current asset / current liabilities for the indebtedness, the rate or level of indebtedness was used: this indicator provides the percentage of participation of creditors in the company. the formula is: indebtedness level = total liabilities to third parties / total assets in the case of the portfolio turnover, the portfolio turnover rate was used which shows how many times the accounts receivable or portfolio are converted into cash or are recovered during this period, this period may be month or year: among the risks described by the literature that may affect companies, there is the operational or business risk treated as the derivative of decisions that are taken daily within the company, either in relation to production, distribution, prices, etc. on the other hand jorion (2001) defines financial risk as the risk of not being able to cover the financial costs of a company. among the main financial risks described in the literature there are: market risk, credit risk, liquidity risk, operational risk, legal risk and transaction risk, but as we can see the theory shows and describes how they are calculated and analyzed independently, which is why this study aims to show a model for risk assessment of companies that have no market prices (unlisted) more holistically, based on operational risks (management or recovery portfolio) and financial risks (liquidity risk and debt or credit risk), which affect in a short and medium-level the operation of enterprises and even more so in countries with emerging economies. this work was based on the database of the superintendence of corporations of colombia, excluding those that are in liquidation process where companies were classified by sub-sectors, which according to the studied companies were: construction of residential construction, construction of civil works, adequacy of construction works, trade of vehicles and related activities, trade of fuels, lubricants and wholesale. subsequently, with the results of the companies under study, every financial indicator was calculated, in addition descriptive statistics was applied in order to obtain simplified information mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 34 | p a g e to be analyzed and interpreted in a more comfortable and quick way. this information was obtained with the intention of being used effectively for the purpose of this work. specifically, measures of central tendency were used, which served as landmarks to interpret and corroborate the results obtained through indicators. after calculating each index (liquidity, debt and portfolio turnover), this result will be converted in terms of risk as a dichotomous variable as follows: 1 if the financial index has risk 0 if the financial index has no risk a "dummy" or dichotomous variable is a numeric variable used in the linear regression analysis to represent subsets of the sample in study. in the research design, a "dummy" variable is often used to distinguish different groups of variables. in the simplest case, with values0 and 1.the "dummy" variables are useful because they allow the use of a single regression equation to represent multiple groups. finally, after having the results of each indicator, a conditional probability formula was applied to determine whether the company owned any risk, according to the three indicators calculated. the formula consisted in whether the sum of the three indicators was less or higher than 2, then the company had risk, as the analysis described above was aimed at only determining the risk indicator. this means, the analysis in this part of the work was done holistically. once this data is obtained, a risk table is generated in order to determine individually per industry and sector its financial risk through the following criteria: the company that owns 2 or 3 of the indicators at risk condition (1) shall possess financial risk. the company that owns 2 or 3 of the no risk indicators (0), has no financial risk. once the financial risk for businesses is calculated the next procedure is to make a descriptive analysis of risk behavior by company type (small or medium), by productive sectors as conglomerates done through cluster analysis. this model will be applied to each company and with these results a classification table is constructed including levels, and risk scale intervals, being the amount of variables odd number (3). after debugging the financial statements of the series 2012, 2013 and 2014 supplied by the colombian superintendence of corporations, calculating the dichotomous variables of "risk" and "no risk" for each indicator (liquidity, debt and portfolio management) as well as determining the risk by enterprise and sector, it was proceeded to run the logit model using the spss software. in order to do the above mentioned process, figures were taken as a basis calculation of average data previously performed on the pilot test in 50 and the references were established as follows: the analysis of the logistic regression results, whose statistical technique aims to express the probability of an event as a function of certain variables, is considered potentially influential. the logistic regression, like other multivariate statistical techniques, gives the possibility to evaluate the influence of each of the independent variables on the response variable and control the effect of the rest. the analytical way in which the probability object of interest is linked to the explanatory variables is as follows. this expression is known as logistic function; where "e" denotes the exponential function and b0, b1, b2... bkare the parameters of the model. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 35 | p a g e if the exponential function produces values greater than 0 for any arguments, p will take only values between 0 and 1. if the betas are positive (greater than 0) then the function is increasing and decreasing in the opposite case. a positive coefficient indicates that p increases as the variable grows. for the interpretation of the beta coefficients, it is necessary to refer to the concept of relative risk. the relative risk of an event is defined as the ratio of the probability that this event occurs (p) and the probability of not occurring (1-p). the exponential of bi is known as the relative risk, which means, it is a measure of the influence of variable x ion the risk that the event occurs and assuming that all the other variables of the model remain constant. a confidence interval for the exponential b containing 1 indicates that the variable has no significant influence on the occurrence of the event and, conversely, values further from this indicate a greater influence of the variable. once the values of the parameters or coefficients b are estimated, we can determine the probability of the event for different values of xi. to run the model data for the third series, the results of some indices were softened, in the same way it was done for the previous series. in the debt ratio, indices or outliers much higher than the maximum debt ratios (100%) were replaced, given that in real life a company that surpasses its capital adequacy comes to be operated by entities of the state or shall enter into liquidation laws or concordat. for portfolio management index, all high outliers or extreme values were taken and replaced by 360 days, being these, the maximum rotation days, because all periods higher that this are understood as delinquent accounts and are punished as lost in the income statement for the following period. the model was run for the time series in 2012, 2013 and 2014, trying to strengthen the model, the analysis and besides to see the consistency of the same. next, the result of the logistic regression is shown. the dependent variable (risk), which is dichotomous (0 when there is no risk and 1 when there is a risk) and one or more independent variables, for our case (liquidity, debt and portfolio). in analyzing the results for the risk variable, it can be seen that all coefficients are positive indicating a direct relationship with risk, except for liquidity which shows an inverse relationship with a negative coefficient. as shown in the table, all the coefficients are statistically significant at 0.05 except by indebtedness which is significant at 0.1. the previous table also contains five ways to evaluate the benefits of the 2 2 model optimization: omnibus test -2 log likelihood, r of cox and snell, r of nagelkerke. omnibus model coefficients or chi-square test is highly significant, reflecting good model fit to the data, additionally; a high percentage of correctly classified observations (80.6%) is noticed. results and sector analysis the analysis of detailed results of financial variables liquidity, debt and portfolio recovery was conducted to determine the financial risk between 2012 until 2014 in the city of cali in order to make decisions that favor business development and business support. financial risk analysis in companies of the city of cali year 2012 the analysis was conducted in 924 companies in cali during 2012. the companies were registered and they correspond to several business subsectors. 11 companies related to computer activities, 6 to tourism activities, 97 companies related to various investment activities and financial services, 87 related to estate activities, 21 to livestock activities and hunting companies, 22 companies related to construction sector, 41 to agricultural companies especially exporter, 4 companies to storage and other activities related to transport sector, 8 housing companies, 1 coal derivatives, 135 wholesale companies, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 36 | p a g e 94 retail companies, 15 fuels and lubricants trading companies, 49 vehicle trading companies and related activities, 51 construction of civil works, 20 companies of construction of residential activities, 2 mailing companies, 1 company of oil derivatives and gas, 15 publishing and printing companies without regular publications, 6 educational institutions, 9 distribution of food and beverage companies, 8 manufacture of machinery and equipment companies, 6 companies of manufacture of other textile materials, 4 companies of papermaking, cardboard and derivatives, 20 clothing manufacture, manufacturing of cement, concrete, plaster and lime, 2 manufacturing companies of fabrics and related activities,1 production company of motor vehicles and parts, 9 metalworking derivative industries, 1 company of basic metal, 6 manufacture of footwear companies and related products, 22 companies of community and social services, 73 companies with other business activities, 6 other manufacture industries, 5 companies of agricultural sectors, 5 companies of other systems passenger, 1 company for fishing, fish farming and related activities,18 companies of food products, 1 company of rubber products, 14 companies of plastic products, 8 companies of chemicals, 1 company of periodicals, 2 companies of radio and television, 2 companies of social services and health, 10 companies of telephoning and networks, and 3 land freight transportation companies. the analysis show that subsectors of wholesale marketing and retailing, entertaining activities and real estate services join most of the companies and the ones which the economic and social development of the city move around. source: self made the graph shows the status of companies in cali in 2012 about the risk of indebtedness, liquidity and portfolio. and the next graph refers the risk of indebtedness. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 1, january-march 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 37 | p a g e graph 2 source: selfauthorship it is observed that 17% of the companies under study are at risk of indebtedness. from an accounting point of view, the graph shows a good percentage of debt capacity when comparing financial structure and financial capacity; therefore these companies do not need to be financed with suppliers, labor and / or financial institutions to operate. for this financial year, cali showed good financial paramount and this is shown in analyzing how companies did not have to fall into debt to make their proposed activities. graph 3 source: selfauthorship regarding liquidity risk, most of the companies, 80% had no such risk due to the type of companies and sectors that mostly composed the population under study. mailto:contact@americaserial.com mailto:contact@americaserial.com toro, arango & serna 38 american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 38 | p a g e the marketing wholesale and retail companies, entertainment activities and real estate services are the subsectors that gather most companies in cali in 2012. these subsectors represent more companies and require minimal funding for suppliers due to the lack of liquidity risk, without bearing in mind that the other companies joined in other subsectors. they were not so representative and were not taken into account to draw the percentages that were represented in the previous graph. graph 4 source: self-authorship the analysis showed lower risk of portfolio, as the graph shows the indicators percentages corresponding to 26% portfolio risk and 74% no portfolio risk. it reveals that credit sales are lower, and it is inferred that the companies were having good turnover in cash sales and profits since it cannot have invested too much time or working capital in loan recovery. regarding the portfolio there is always risk and uncertainty, however the resources can be used in the best way as it happens within most of the companies under study, and more specifically to portfolio risk in this case with a minimum percentage. graph 5 source: self-authorship the analysis on the previous graphs showed that from 924 companies analyzed in 2012 in cali, 79% did not have financial risk and this situation makes them feasible to obtain credits. it was concluded that in that year, the companies had a good financial viability, since as discussed above it showed how companies that used risk analysis had lower percentages 60% in comparison to debt risk, liquidity and portfolio. multiple factors are involved in the activity of a company, the financial risk management is paramount in order to be prepared for disaster situations and this is achieved through financial risk mailto:contact@americaserial.com toro, arango & serna 39 american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 39 | p a g e management preventing possible events that may affect the normal running of the company. however, the companies studied in the city showed positive results, only 21% of them had chance of financial risk. financial risk analysis in companies in cali in 2013 the study reveals which sectors were most active that year and the ones that contribute the most according to the participation within the economy of this city. the table shows that wholesale trade has the highest participation, 127 of companies were dedicated to this activity and it represents 14.16% of the companies. in addition, diverse investment activities, property business and retail trade sectors have an average of 92 to 96 companies each that represent between 10.2% and 10.7% of all companies. 179 companies of the city represent between 1% and 2% and the sum of their percentages constitutes the minority with 19.96%. other economic sectors are agriculture with export predominance, 49 companies that represent 5.46%, trade in vehicles and related activities with 45 companies, 5.02%; construction of civil works 48 companies that correspond to 5,35% and finally other business activities, 64 companies that represent 7,13%. this information is shown in the following table. table 1 companies total diverse activities investment and financial percentage services 92 10.26% real estate activities 96 10.70% livestock and hunting activities companies 18 2.01% adaptation of construction works 16 1,78% agricultural export dominance with 49 5.46% wholesale trade 127 14.16% retail trade 92 10.26% fuels and lubricants trade 12 1.34% vehicles trade and related activities 45 5.02% construction of civil works 48 5,35% residential construction works 23 2.56% other community, social and personal 18 2.01% other activities with less than 1% of involvement 179 19.96% other business activities 64 7.13% source: self-authorship mailto:contact@americaserial.com toro, arango & serna 40 american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 40 | p a g e graph no 6 source: self-authorship regarding the liquidity risk, after comparing the current assets over current liabilities to get the current ratio, it was observed that 897 companies in cali, 80 % showed high liquidity risk and only 183, 20% did not show this risk. this result probably corresponds to the type of companies under study, since most companies belong to the service sector, such as trading and construction because they are leveraged by their suppliers. liquidity risk. when the index is less than 1.1 when the result is> 1 there is liquidity, and when the index is <1 there is no liquidity. graph 7 source: selfauthorship traditionally, it has been used to assess the ability of future indebtedness of the company and shows the proportion of assets belonging to creditors: indebtedness level: this indicator provides the percentage of participation of creditors in the company. the risk of debt of 464 of the companies under study that correspond to 52% did not show risk but 48% that correspond to 433 of the companies showed indebtedness risk. although there were a higher percentage of companies without indebtedness risk, the indicators show that this issue should be monitored in order to be aware of the sector debt and help to keep the balance within their financial structures while still use the leverage provided by external entities (suppliers, labor or financial institutions) that provide important resources. indebtedness risk: when the index is higher than 50%. if the debt is more than 50% there is a risk or if it is less than 50% there is no risk. mailto:contact@americaserial.com toro, arango & serna 41 american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 41 | p a g e graph 8 source: selfauthorship the graph shows the times receivable accounts or portfolio are converted into cash during the period: the number of days that is determined by dividing 360 days (accounting period) into this turnover. the turnover is determined by the collection policies of the company but it is also influenced by the economic situation of the region of the company and contract of clients or the political credit of the company. the results of portfolio risk reveal that in this city, the credit sales are very common and the 76% that corresponds to 678 companies are at risk and only 24% in other words, 219 companies are not. this indicator reflects the slow portfolio recovery in the city due to the credit sale is very common especially in trading companies. action must be taken in the management and loan recovery in order to improve cash flow and provide solutions to portfolio recovery that may be above 60 days (difficult portfolio recovery). this situation allows companies to improve cash flow, reduce inventory, rotate goods and balance finance. risk in portfolio management. if the result of the index is higher than 60 days there is risk and if the result of the index is lower than 60 days there is no risk. graph 9 source: selfauthorship based on the three indicators the financial risk was evaluated in 897 companies registered, 58% (524) showed financial risk while 42%, (323) companies did not show financial risk. there is a close relationship between liquidity ratios and portfolio turnover, both are present at high risk in most companies, the receivable account as a current asset, makes part of the analysis of two indicators mentioned, since it reduces the cash incomes. studies should be conducted to create strategies for companies that allow implementing corrective action plans designed according to their needs in order to achieve their sustainability over time and generate higher revenues.in addition, it is necessary to focus efforts on the recovery of portfolio in order to obtain higher liquidity and although the risk of indebtedness is not so high, working on these two indicators, most certainly cover the payment of mailto:contact@americaserial.com toro, arango & serna 42 american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 42 | p a g e obligations and thus it may initially realize a balance and subsequently get higher profits and a sustainable economy for the city. financial risk analysis in companies of the city of cali 2014 table 2 sectors main sectors sectors a wholesale and retail trade 388 b agriculture, livestock, forestry and fishing 216 c financial and insurance activities 198 d manufacturing industries 181 e property activities 163 source: self-authorship source: self-authorship it is important to note that from 1586 companies surveyed most of them are concentrated into wholesale and retail trade, repair of motor vehicles and motorcycles,388 companies; agriculture, livestock, forestry and fishing 216 companies; financial and insurance activities 198; and to a lesser extent manufacturing companies and real estate activities, indicating that this experimental model prototype applies to all productive sectors of the economy in general and it helps to clearly determine if there is financial risk in the company to take decisions that favor economic and financial development of the company. studies in colombia determine approximately between 90% and 95% of companies in the country are classified as smes. there variables, debt, liquidity and recovery of receivables were deeply analyzed based on the analysis of the context and a database of such companies in valle del cauca. an experimental model was used to assess financial risk and be able to deliver a clearer financial picture. the aforementioned risk indicators were studied to determine the sector of the country, the behavior of each of these variables and to clear arguments to make decisions. a company should have as priority and necessity to measure the risk in order to be more competitive and effective in the globalized world. a concrete judgment of the variables for supporting decisionmaking of the analyzed variables a particular view of the aforementioned variables and studied a sample of smes in the department of valle del cauca. grafica no 10 mailto:contact@americaserial.com toro, arango & serna 43 american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 43 | p a g e grafica no 11 source: self-authorship after analyzing the financial risk as a dichotomous variable, 1,135 companies are at risk of debt, it corresponds to 71.6 over 100%. on the other hand, 451 companies of this same overall trend do not show risk of debt, in other words 28.4% of all companies. most of the companies have a tendency towards indebtedness. it demonstrates that companies in colombia and especially of valle del cauca perform practices that eventually become operational risk to stability. average indebtedness in companies in this sector represents three-quarters. this situation often limited operational and functional capacity. in addition, the companies that have no debt risk manage their financial and operational capacity better. it is not promising that 28% of the companies correspond to this group. in the study of liquidity and financial risk, 61% of companies are under liquidity risk it corresponds to 961 of the companies meanwhile, 39% of the companies that correspond to 625 of the companies did not show risk of liquidity. graph 12 source: self-authorship this liquidity indicator result showed that 61% of companies are at risk. a further assessment revealed that the total numbers of companies have delayed recovering their portfolio; it is often up to 60 days. this situation directly affects liquidity and cash flow that businesses can have. however, only 39% of companies did not reveal liquidity risk, the portfolio recovery is much faster or they possibly have few accounts receivable. it means, they have higher liquidity, higher cash flow, and greater financial autonomy. perhaps the most disturbing trend variable in the risk, 1,235 companies are at risk of receivables out of 1,586, this correspond to 78% of all companies under study. on the other hand, only 22% of the companies have no risk in the portfolio recovery, it corresponds to 351 companies on a sample of 1,586 companies. mailto:contact@americaserial.com toro, arango & serna 44 american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 44 | p a g e graph 13 source: self-authorship this phenomenon showed a trend of the risk of recovery of receivables as totally daunting for the businesses field. this trend can basically have two explanations: firstly, the needs of businesses have a committed department when there is no one person or department in charge of accounts receivable payments times dilate and portfolio recovery takes longer each time. the second cause of delay recovery or receivables portfolio responds to the inability of debtors to repay their debts and in many cases not only inability but the repeated failure. financial risk a final assessment of financial risk demonstrated that 1,182 out of 1,586 companies under study are at risk in these types of variables. on the other hand, 404 companies have no financial risk meaning only 25% of the companies. grafica no 14 source: self-authorship finally, 75% of companies surveyed in valle del cauca perform practices that favor financial risk, 1,182 companies do not perform good practices in their variables debt, liquidity and recovery of portfolio. it was shown that on average three-quarters of companies have financial risk and are under the experimental model. it is essential that companies have a clear picture of their financial risk to make assertions and timely decisions, therefore, reverse bad decisions previously taken and correct timely errors. in the latter part of the investigation a comprehensive analysis of the three variables above was performed, it was determined that companies with two of these three variables prone to risk will be classified as company in financial risk. the companies should make analysis studies, implementation action plans and continuous improvement to be sustained within the market and hence to be competitive. references altman, edward (2002). the z-score formula for predicting bankruptcy was published in 1968 by edward i. altman, who was, at the time, an assistant professor of finance at new york university bankruptcy, credit risk and high yield ‘junk’ bonds: a compendium of writings. oxford, england and malden, massachusetts: blackwell publishing. mailto:contact@americaserial.com toro, arango & serna 45 american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 45 | p a g e ávila bustos, juan carlos ávila (2005). medición y control de riesgos financieros en empresas del sector real. bogotá. ballesteros navarro, juan andrés y lopez, herrera diego (2009). propuesta de un modelo simplificado de detección del riesgo empresarial: estudio empírico aplicado al sector de la construcción (pymes). revista iberoamericana de contabilidad y gestión. pág. 1-27. españa. hincapié piñeres, javier eduardo (2007). análisis de riesgo financiero para la micro, pequeña y mediana empresa del sector metalmecánico. manizales. jorion, phillipe (2001). valor en riesgo. ed. mc graw hill, 2ª ed. miller, merton h.(1994) financial innovations and market volatility. journal of applied economics, nueva york,número 4 (vol.1 1), p6gs. 205 a 210 san-martín-albizuri, n. & rodríguez-castellanos, a. (2011). la imprevisibilidad de las crisis: un análisis empírico sobre los índices de riesgo país. innovar, 21(39), 161-178. toro d., jairo (2012). "las decisiones financieras en las gerencias de las pymes. estudio de caso san juan pasto colombia ", revista digital observatorio de la economia latinoamericana, nº 163, indexada en ideas-repec, recuperado de http://www.eumed.net/cursecon/ecolat/co/ toro d., jairo (2009). financial decisions of managers of pymes in manizales. journal international of busisness and finance, vol. 4 (no. 2), p. 804-809. recuperado de http://www.theibfr.com/archive/issn-1941-9589-v4-n2-2009.pdf tudela& g. young (2005). "a merton-model approach to assessing the default risk of uk public companies, "international journal of theoretical and applied finance (ijtaf), world scientific publishing co. pte. ltd., vol. 8(06), pp 737-761. wolf, martin. why globalization works, yale university press, isbn 0 – 300 – 10252 6. zorrilla salgado, juan pablo (2003). la administración de riesgos financieros en las pymes de exportación en contribuciones a la economía. veracruz mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 23 | p a g e market resilience: a garch-midas exploration of global economic policy uncertainty and oil shocks in sadc 1ibrahim sory konaté, 2fatoumata binta diop 1,2department of economics, ufr social sciences, université peleforo gon coulibaly,cote d’ivoire doi: https://doi.org/10.5281/zenodo.10619108 abstract: the advent of the covid-19 pandemic has prompted a reevaluation of its impact on the southern african development community (sadc) markets. this study delves into the nexus between global economic policy uncertainty (gepu) and stock market volatility within the specific context of sadc. grounded in baker et al.'s (2016) seminal definition, gepu encompasses uncertainty emanating from fiscal, monetary, or regulatory policies. the epu index, derived by assessing the relative frequency of terms related to economics, politics, and uncertainty, serves as a critical metric for evaluating the economic policy landscape. a comprehensive literature review reveals an extensive body of research examining the correlation between economic policy uncertainty (epu) and stock markets globally. researchers such as sharif et al. (2020) and yu et al. (2021) have explored this relationship, employing diverse methodologies. building on this foundation, practitioners including ko and lee (2015), wu et al. (2015), christou et al. (2017a), cheng (2017), phan et al. (2018), mei et al. (2018), xiong et al. (2018), and yu et al. (2018) contribute relevant insights to this discourse. the initial segment of the literature concentrates on assessing the impacts of economic policy uncertainty on stock markets. notably, wu et al. (2016) employ a panel granger causality method to analyze the influence of epu on stock markets across eight oecd nations. furthermore, christou et al. (2017b) utilize a bayesian panel vector autoregression model to investigate the impact of us epu shock on the stock market returns of pacific basin countries, extending their analysis to other financial markets. this study extends the existing body of knowledge by focusing specifically on the sadc markets, evaluating the correlation between gepu and stock market volatility within this regional context. employing a multidimensional approach, the research aims to unravel the nuanced dynamics that characterize the relationship between economic policy uncertainty and stock market fluctuations in the sadc region. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 24 | p a g e keywords: economic policy uncertainty (epu), stock market volatility, southern african development community (sadc), global economic policy uncertainty (gepu), covid-19 pandemic impact introduction the covid-19 pandemic has raised questions about its community (sadc) markets. the seminal paper by impact on the correlation between global economic policy baker et al. (2016) defines economic policy uncertainty uncertainty (gepu) and the volatility of stock market (epu) as uncertainty arising from fiscal, monetary, or returns within specific southern african development regulatory policy, with their epu index calculated by assessing the relative frequency of terms pertaining to economics (e), politics (p), and uncertainty (u). subsequently, numerous studies have investigated the correlation between epu and the stock market (sharif et al., 2020; yu et al., 2021). consequently, numerous studies have explored the correlation between these two variables from various perspectives and employing a range of methodologies. practitioners such as ko and lee (2015), wu et al. (2015), christou et al. (2017a), cheng (2017), phan et al. (2018), mei et al. (2018), xiong et al. (2018), and yu et al. (2018) showcase pertinent research in this regard. the initial segment of the literature concentrates on the impacts of economic policy uncertainty on stock markets. more specifically, wu et al. (2016) employ a panel granger causality method to evaluate the influence of epu on stock markets across eight oecd nations, comprising india, italy, spain, the uk, canada, france, germany, the united states, and china. christou et al. (2017b) employ a bayesian panel vector autoregression model to investigate the impact of us epu shock on the stock market returns of pacific basin countries, such as australia, canada, china, japan, korea, and the us. additionally, their research explores the effects of epu on other financial markets. for instance, fang et al. (2018) conducted research on the futures market, while demir and ersan (2017) focused on the currency market, and reboredo and naifar (2017) examined the bond market. krol (2014) and beckmann and czudaj (2017) centered their study on foreign exchange markets. the second part of the empirical literature explores the correlation between these two variables. bekiros et al. (2016) and caggiano et al. (2017) investigate the correlation between the united states' epu and the american stock market. xiong and yu (2018) employ a dynamic conditional correlation multivariate generalized autoregressive conditionally heteroskedastic model to examine the correlation between china's epu and its stock market. previous literature has also explored the correlation between epu and various markets, including the stock-bond correlation (fang et al., 2017) and goldstock correlation (gao and zhang, 2016). however, previous studies have some limitations. firstly, the short-term volatility component in stock returns is linked to its own past information, while the long-term component of volatility is associated mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 25 | p a g e with macroeconomic fundamentals (asgharian et al., 2013; engle et al., 2013). given this observation, it is fitting to deploy a model that distinguishes between the overall volatility of stocks into its long-term and short-term components by incorporating the gepu variable in the former. this model is known as the generalized autoregressive conditional heteroskedasticity extended mixed data sampling (garchmidas) model. these studies examine the relationship between the variables, factoring in global financial crises. further research shows that covid-19 significantly affects the correlation between gepu and stock market returns' volatility. notably, sharif et al. (2020), yang and yang (2021), ahmed and sarkodie (2021), youssef et al. (2021), and apostolakis et al. (2021) have reported such findings. previous research has given greater attention to developed countries and less to emerging ones. therefore, our study focuses on the sadc, a market that has received limited examination and integration. thus, a major query arises from our reflections: has the covid-19 outbreak changed the dynamics of the link between gepu and the instability of stock market returns in particular sadc markets? the aim of this study is to investigate the effects of global economic policy uncertainty and oil shocks on stock market volatility in botswana, mauritius, and south africa both before and during the covid-19 pandemic. the study has two specific objectives as follows: to investigate the effects of gepu and shocks in oil consumption demand on stock volatility in the sadc nations prior to and following the covid-19 outbreak, and to demonstrate the dynamic connection between the pandemic, gepu, and stock market return volatility in these same regions. to achieve our objective, we examine the following hypotheses in our study: i) the impact of gepu and oil consumption demand shocks on stock volatility in sadc countries is positive and significant; ii) the relationship between the covid-19 pandemic, gepu, and stock market volatility is ever-changing. this study’s choice of the sadc is underlined by its status as one of the major players in the exploration and export of crude oil, and that its main trading and investment partner (europe) is suffering from the devastating covid-19 pandemic (mckibbin and fernando, 2021). subsequently, this development constrains them to certain policies in favor of intraregional trade and investment, which should have an impact on its stock market. furthermore, we find the impact of health responses taken by some of the sadc countries, on the stock market to be worth studying. indeed, the tanzanian government officially declared the virus to be over and stopped recording cases towards the end of april 2020. similarly, madagascar has also become a center of attention with its claim to have discovered a cure for the deadly covid-19 pandemic (mthembu, 2020). there is agreement that these events may have an impact on the link between oil and stock prices in the region, which necessitates the present study. two important contributions can be drawn from this study. first, we take into account the covid-19 health crisis in the analysis of the relationship between gepu and the returns of certain southern african development community (sadc) countries' stock exchanges. the analysis of this study is relevant insofar as this pandemic has had very costly repercussions on the stock market returns of these mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 26 | p a g e places. second, in this article, we employ a model that is underutilized in the literature, namely the garch-midas model of engle et al. (2013). review of literature epu may impact stock prices. although many studies have investigated the impact of epu on numerous macroeconomic variables, research into the link between epu and stock prices or returns only emerged after the 2008 global financial crisis (li et al., 2016). baker et al. (2016) made a significant contribution by developing epu or gepu indexes, which have been utilized in various recent empirical studies. the epu index calculates the average of three main indicators of uncertainty: major news on the epu, the expiry of tax provisions, and forecasters’ disagreements about government purchases and inflation. recently, investors, policymakers, and academics have shown a great deal of interest in the effects of epu on the stock market (jin et al., 2019). it is conceivable that the uncertainty of a country may affect the stock prices in another country. mensi et al. (2014) conducted a thorough analysis of quantile regressions for the brics nations, encompassing brazil, russia, india, china, and south africa, using data spanning from september 1997 to september 2013. the study concluded that us epu did not have any impact on the brics stock markets. momin and masih (2015) carried out a study on the impact of us epu on the stock returns of brics countries, employing an autoregressive distributed lag model for the period between january 2000 and march 2015. they ascertained that solely the indian stock market was affected by the us epu. dakhlaoui and aloui (2016) investigated the impact of the us epu on stock returns of brics countries, using daily data from july 4, 1997 to july 27, 2011. the study discovered a negative correlation between brics stock indices and epu in the us, with volatility distribution varying between negative and positive values. moreover, the link between uncertainty and stock returns was inconsistent during periods of global economic crisis. aydin et al. (2022) posited that political volatility within a nation could affect its stock prices and yields. ozoguz (2009) utilized markov switching and intertemporal capital asset pricing models to examine the relationships between the aforementioned variables in the us during the period of january 1961 to december 2001. it was observed that there existed a negative correlation between insecurity and stock prices. sum (2012) conducted an analysis using ordinary least squares (ols) methodology to examine data from february 1993 to april 2012. the results showed that epu has an adverse impact on stock market returns in various countries, including the european union, turkey, ukraine, switzerland, russia, and norway. the findings indicate a negative association between the two variables. antonakakis et al. (2013) applied a dynamic conditional correlation model to investigate the relationship between s&p500 returns and epu in the united states from january 1985 to january 2013. bijsterbosch and guérin (2013) employed a markov regime-switching model on us variables ranging from january 1986 to january 2012, and ascertained that high episodes of epu cause a reduction in stock prices and bond yields. as per kang and ratti's (2013) analysis, which was conducted through a vector autoregression (var) model, a favorable oil demand shock against the us oil demand mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 27 | p a g e led to an increase in apprehension regarding future oil supply and concomitantly, induced epu that ultimately impacted stock proceeds in a negative manner. brogaard and detzel’s (2015) research indicated that epu had a significant impact on stock returns in europe and canada. the authors employed the generalized method of moments to investigate the relationship between share market returns and epu in the usa, using monthly data ranging from may 1985 to december 2012. they observed a negative association between the fluctuations of epu and stock market returns that was contemporaneous. chang et al. (2015) conducted a panel causality test using bootstrap methods on seven nations of the organization for economic cooperation and development from january 2001 to april 2013. their findings indicate that government policy uncertainty was provoked by stock price volatility in the usa and the uk, while stock price indices influenced government policy uncertainty in italy and spain. however, no causal relationship was detected between the factors in canada, germany, and france. ko and lee (2015) utilized wavelet analysis to examine eleven countries in asia, europe, and north america, from january 1998 to december 2012. their findings indicate that stock prices decrease after an upsurge in epu. the study follows a conventional academic structure, employing clear, concise language, and technical terms where necessary. there is no biased or ornamental language within the text, and any abbreviations are adequately explained at first use. adequate spelling, grammar, and punctuation are observed, adhering to the standards for british english. xiong et al. (2018) conducted a study on the impact of epu on the stock returns of companies in the tourism industry. the study utilized multiple regression approaches to analyze data from january 2002 to december 2013. xiong et al. (2018) conducted a study on the impact of economic policy uncertainty (epu) on the stock returns of companies in the tourism industry. xiong et al. (2018) conducted a study on the impact of epu on the stock returns of companies in the tourism industry. findings revealed that changes in epu negatively affected the stock returns of turkish tourism firms. the researchers implemented the dynamic conditional correlation-bivariate generalized autoregressive conditional heteroskedasticity model spanning january 1995 to december 2016. the findings revealed that the epu's absolute held greater impact on shanghai stock market returns as opposed to shenzhen's. moreover, the study unveiled increased volatility of stock returns in periods of financial crises. guo et al. (2018) conducted a quantitative regression analysis to investigate the correlation between epu and stock yields in g7 and brics countries from february 1985 to august 2015. the study yielded important findings highlighting asymmetrical association between epu and stock markets of the usa and italy. in contrast, epu had a detrimental impact on stock markets of germany, japan, india, and china. furthermore, there was moderate impact of uncertainty on the canadian and russian stock exchanges, whereas no association between epu and stock prices was observed in the uk and france. chiang (2019) examined the correlation between epu, risk and additional stock returns in g7 countries from january 1997 to june 2016, using a generalized mistake distribution garch model. the outcomes revealed that an increase in epu contributes to a reduction in excess stock returns. gao et al. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 28 | p a g e (2019) investigated the associations among stock prices, economic policy uncertainty, and global oil prices in china from january 2005 to december 2017. they used a rolling window toda-yamamoto causality test to determine that the bidirectional causality between the variables was mainly associated with the 1997 asian crisis, the 2008 financial crisis, and china's economic structural reforms. in the present global economic landscape, the rise of globalization has bolstered the connections among nations and heightened their reciprocal impact. this is especially evident in the instance of developing countries, which possess vast populations and offer significant prospects for economic expansion. it is crucial to investigate the impact of global economic policy uncertainty on the stock markets of these countries. this becomes particularly relevant considering the limited research conducted on these markets in comparison to those of developed countries. several recent studies have highlighted the volatility of oil prices. two sets of research studies use different methods to examine the reasons for instability in the oil market. the first set applies garchclass models and cites examples including chan and grant (2016), nomikos and pouliasis (2011), wang and wu (2012), wang et al. (2016), and sadorsky (2006). the second set of papers relies on recognized volatility models, including haugom et al. (2014) and sevi (2014). both sets of models gather insightful data from recorded unpredictability or costs. the efficient market hypothesis of fama (1970) justifies the predictive power of fundamental variables, while commodity markets are not as efficient as more developed financial markets (chen et al., 2010). furthermore, several studies have suggested inefficient weak-form markets for crude oil (tabak and cajueiro, 2007; wang and liu, 2010), meaning that the current oil price does not encompass all of the fundamental information available. it may be inferred that the current unpredictability in oil prices does not encompass all previous information pertaining to macroeconomic instability. there have been many attempts to understand and forecast fluctuations in oil prices based on supply and demand fundamentals (baumeister and kilian, 2012; boffelli et al., 2016). however, to our knowledge, the financial origins of price volatility have not been fully considered in scholarly literature, except for significant contributions from conrad et al. (2014) and pan et al. (2017). conrad et al. (2014) analyzed the effect of macroeconomic factors on oil price volatility from a sample-based approach. other scholars have re-evaluated this issue through an outof-sample outlook by testing whether the incorporation of macroeconomic elements into volatility models can produce more precise forecasts. concentrating on daily volatility which is of significant interest to option market traders, the study observed that objective evaluations of the data are imperative for accurate predictions. including macroeconomic data in a garch or realized volatility model is challenging due to the incompatible data frequencies of the oil price and its fundamental factors. to clarify, while oil price data is available daily, data on oil output and demand is obtained monthly or even less frequently. fortunately, the garch-midas class specifications recommended by engle et al. (2013) effectively resolve the mixed-frequency problem in volatility modelling. this model divides daily mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 29 | p a g e conditional volatility into two parts: a short-term volatility element that adheres to the standard daily garch process (bollerslev, 1986) and a long-term component that considers mixed-frequency data sampling (midas) regression with monthly, quarterly, or even lower frequency variables (ghysels et al., 2004). in recent times, garch-midas models have gained popularity for identifying links between high-frequency volatility and low-frequency macroeconomic variables (conrad et al., 2014; conrad and loch, 2015a, b). yu et al. (2018) and yu and huang (2021) deployed the garch-midas approach to demonstrate that gepu increases chinese stock market volatility and has predictive capabilities. li et al. (2020) examined the impact of gepu on the volatility of china's stock market by analyzing the directional effects (up and down) and found that both up and down gepu positively affect chinese stock market volatility. moreover, li et al. (2020) established that the gepu index can anticipate shifts in chinese stock market volatility. wang et al. (2021) used a garch-midas model with a skew student’s t-distribution to examine the impact of domestic and foreign epu on china's financial stocks. in a recent study, li et al. (2019) analyzed the effects of epu on chinese stock market volatility through a predictive regression method. the results indicated that the epu index had a significantly negative influence on the future volatility of the chinese stock market. empirical methodologies the study adopts two major empirical methodologies. firstly, it employs the generalized autoregressive conditional heteroscedasticity model with mixed data sampling. secondly, it employs loss functions. specifically, the study uses a novel component, the generalized autoregressive conditional heteroskedasticity (garch) model based on mixed data sampling (midas) regression. the new component garch model is known as midas-garch, wherein macroeconomic variables are directly incorporated into the longterm component's specifications. the midas regression models, introduced by ghysels et al. (2006), provide a framework for integrating macroeconomic variables sampled at varying frequencies with the financial series. additionally, forsberg and ghysels (2006) demonstrate that midas has a relative advantage over anderson et al. (2007) proposed heterogeneous autoregressive realized volatility (har-rv) model, as shown through simulation. to explore the correlation between gepu/oil consumption shock and stock markets in sadc nations, the garch-midas model proposed by engle et al. (2013) is utilized. monthly frequency data for gepu and oil consumption shocks, along with daily frequency data for stock returns, are utilized in this model (appendix figures 1, 2 and 3). the model assumes that stock returns on specific days, i within a given month,t follow a specific equation process. ri t, t gi t,i t, i1,...,nt (1) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 30 | p a g e where ri t, is the logarithmic return on a specific day i within a given montht . the total volatility of daily returns can be defined as ( i t2, = i gi t, ) which is the sum of two components: t is the long-term component that is believed to reveal the source of stock market volatility, and the short-term component that accounts for short-lived daily fluctuations (engle et al., 2013; yu et al., 2021). the value of nt represents the number of trading days in the montht , and i−1,t represents the information set available up (i−1)th to the given day of the periodt . the conditional variance gi t, of the short-term component follows a daily garch (1, 1) process (bollerslev, 1986): (ri−1,t − )2 gi t, = − − +(1 ) gi−1,t (2) t low-frequency variables, such as realized volatility or macro variables, can describe the long-term component t . two different specifications for the long-term component without changes in the shortterm equation exist. the first specification examines the effect of realized volatility on the long-term component of the total volatility. smoothed realized volatility is defined as the variable in the spirit of midas regression. the following t is the specification for the midas filtering. k t = +m rv k ( )w rv1t k− (3) k−1 monthly smoothed realized volatility is denoted by nt (rvt ri t2, ) with a fixed span of time representing the number i=1 of periods k used to smooth the realized volatility. the second specification involves directly inserting macroeconomic variables into the long-term component. t = +m rv k ( )w rv1t k− gepu k ( )w gepu1 t k− k=1 k=1 (4) the log difference of geput k− denotes the level of change rate of monthly global economic policy uncertainty. equation 4, as used by yu et al. (2021), captures information explained by both the realized volatility and economic policy uncertainty and is compared to a basic model in which the long-term component does not involve gepu information. the weightage method utilized in both equations 3 and 4 is explained using a beta lag polynomial as: k (w1) = k(k k/ )w1−1 (5) ( j k/ )w1−1 j=1 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 31 | p a g e where the coefficients in equation 5 equate to 1, we examine how gepu affects stock volatility. we utilize the estimated daily total variance i t2, as a measure of the total variance's accuracy. the realized total volatility is denoted ri t2, as the variable. the garch midas-rv+gepu model, developed using equations 1, 2, 4, and 5, is assessed against the conventional garch-midas-rv model that is constructed by equations 1, 2, 3, and 5, to determine its predictive capability. comparison is also made with a simplistic garch (1, 1) model (bollerslev, 1986), shown. rt t (6) where t = t zt , , and the conditional variance process, t2 , has the form: t2 = +k t2−1 + t2−1 (7) secondly, in order to assess the predictability of volatility in a particular model, we utilize various loss functions that compare the estimated predicted variance to the realized volatility. the six loss functions employed in this study are presented in the following equations. mse= 1 t ( ˆt2 − t2 2) (8) t i=1 rmse= t1 it=1 ( ˆt2 − t2 2) (9) 90 j. econ. int. finance the data three stock markets in sadc countries, namely, botswana, mauritius and south africa were considered. the countries were selected based on data availability. the authors use daily data from the http://www.investing.com/ database for the period from 01/05/2008 to 24/04/2022. their data are divided into two periods. the first period (before covid-19 pandemic) goes from 01/05/2008 to 04/03/2020, the second period (during covid-19) goes from 05/03/2020 to 24/04/2022. they opt for the monthly gepu index computed by baker et al. (2016), which is deemed a reputable proxy for real-world economic policy uncertainty. it can be obtained from their website (http://www.policyuncertainty.com/). additionally, we incorporate the monthly oil consumption shock, available on baumeister and hamilton's (2019) website. the analysis encompasses gepu and oil consumption shocks that occurred from may 2008 to april 2022, including the financial crisis around june 2009, the european sovereign debt crises, us-china trade tensions, brexit, and the new context of covid-19 as a global pandemic. the study utilized a total of 3,258 observations. results and discussion table 1 displays the descriptive statistics for three data series of stock indices and the gepu index. the sample size for each selected sadc stock market's stock index series is 3258, while the gepu index and mailto:contact@americaserial.com mailto:contact@americaserial.com http://www.investing.com/ http://www.investing.com/ american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 32 | p a g e oil consumption each have 168 observations. the stock index has a daily data frequency, whereas the gepu index has a monthly frequency. table 2 presents the descriptive statistics for the stock returns of the sadc markets examined, along with the logarithms of the gepu change rate and oil consumption. the table includes 3257 stock return observations for each country, 167 gepu observations and 93 oil consumption observations. tables 1 and 2 indicate that the kurtosis values of both the stock index and return series are positive. however, the south africa stock index series and logarithm of oil consumption exhibit negative skewness, while the remaining stock index and return series for all sadc stock markets have positive skewness. statistical properties of the variables in our study are presented in table 3. based on the results from the augmented dickey-fuller (adf), phillipsperron (pp), and vratio (vr) tests, all statistics significantly reject the null hypothesis of a unit root at the 1% level. this confirms that all of our series are stationary. additionally, the jarque-bera (jb) test of all stock returns, gepu, and oil consumption indicates that all of their distributions deviate significantly from normality at the 1% level. furthermore, the autoregressive conditional heteroscedasticity (arch) test statistics for each individual stock return exceeded 100 according to engle's (1982) analysis, with critical values of the arch test at the 1% level of 6.6635. this implies noteworthy heteroskedastic effects. notably, the descriptive statistics obtained over the study period take precedence for both in-sample (before covid19) and out-of-sample (during covid-19) data. furthermore, the estimated parameters of the impact that gepu and oil consumption demand shock (ocds) have on stock market volatility in three sadc countries are presented. tables 4 and 5 display the findings from the garch and garch-midas models, which include the entire sample (01/05/2008 to 24/04/2022) divided into subsamples. the study consists of two datasets: insample data (01/05/2008 to 04/03/2020), representing the pre-covid-19 period, and out-of-sample data (05/03/2020 to 24/04/2022), representing the duringcovid-19 period. the garch (1, 1) model parameters are significant at the 1% level in all cases, except for in south africa, where they are significant at the 5% level, and for k, which is non-significant in botswana. these findings suggest that the garch (1, 1) model is a good fit for the daily data. the garch-midas model, , , rv , and mshows positive and significant coefficients, confirming its suitability for the mixed data sampling model. the importance lies in examining the statistical significance of the coefficient rv to understand if ocds or gepu impact the long-term volatility of sadc countries. additionally, the sum of arch and garch terms and is less than one( 1) , inferring that ocds does not have a permanent effect on stock market returns. the empirical results from table 5 for the garch-midas-rv+ocds model demonstrate significant coefficients rv for botswana, mauritius, and south africa at 1%, indicating a positive response in stock returns to changes in oil consumption demand shocks. the estimated coefficients for botswana, mauritius, and south africa were 0.076, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 33 | p a g e 0.001, and 0.119, respectively. this contradicts the findings of salisu and gupta (2021), who reported a negative response for south africa. the impact of gepu on stock market returns is not permanent. in the garch-midas-rv+gepu model, the estimated coefficients for botswana, mauritius, and south africa are 0.056, 4.052e-04, and 0.033, respectively. these outcomes indicate that gepu has a significant and positive effect on sadc stock markets for the insample data. this conclusion aligns with the findings of yu et al. (2021). the same positive impact of ocds and gepu on stock markets is obtained for all three countries in the full sample (table 6). the estimated coefficient rv , which is realized volatilities, is 0.117 for botswana, 0.170 for mauritius, and 0.119 for south africa in for ocds. for gepu case, rv is 0.016, 0.099, and 0.014 for botswana, mauritius, and south africa respectively. in all cases (full sample and in-sample), the coefficient of the unconditional mean for stock returns is not significant, except for south africa. to assess efficacy of the models garch and garch-midas-rv+ocds/garch-midasrv+gepu, we employed the optimal log-likelihood function (log-l), the akaike information criterion (aic), and the bayesian information criterion (bic). table 7 presents the insample results. upon comparison of the traditional garch (1, 1) model with garch-midas-rv+ocds based on criterion information and log-likelihood function selection, the garch-midas-rv+ocds model outperformed garch (1, 1). comparing the fitness of garch (1,1) and garchmidas-rv+gepu models shows that the latter has superior fitness for the given countries. heteroscedasticity 5. in-sample estimates of the garch-midas model for three stock returns. oil consumption demand shock botswa na -1.586e-06 (3.466e-05) 0.179*** (0.007) 0.317*** (0.014) 0.076*** (0.002) 6.744*** (1.169) 0.001*** (1.078e-05) mauriti us 3.449e-06 (2.903e-05) 0.251*** (0.019) 0.444*** (0.039) 0.001*** (4.147e-04) 2.096*** (0.501) 0.001*** (2.958e-05) south africa -1.991e-04** (8.980e-05) 0.083*** (0.010) 0.881*** (0.018) 0.119*** (0.037) 8.639 (10.173) 0.004*** (5.735e-04) gepu variable rv w mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 34 | p a g e table 1. descriptive statistics of the gepu index, stock index series and oil consumption. variable obs. freq. mean median min max std. skew. kurt. botswana 3258 daily 8.074 7.599 6.074 11.097 1.205 0.610 2.292 mauritius 3258 daily 617.048 1.916 1.001 9986.00 7641.027 12.347 153.547 south af. 3258 daily 2.766 3.085 1.086 4.226 0.784 -0.407 1.820 gepuindex 168 month 171.899 151.220 79.848 437.144 70.618 1.179 4.003 oilcons 168 month 0.139 0.629 -2.420 8.732 4.210 -0.929 6.354 source: author calculations using the data of the regression (www.investing.com and www.policyuncertainty.com). gepu = global economic policy uncertainty; oilcons = oil consumption. table 2. descriptive statistics of the gepu change rate, stock return series and oil consumption. variable botswana obs. 3257 freq. daily mean -6.46e-05 median 0.000 min 1.897 max 2.074 std. 0.151 skew. 0.852 kurt. 63.024 mauritius 3257 daily -0.003 -0.002 -499.51 499.934 17.496 0.003 814.215 south af 3257 daily -0.011 -0.018 -3.970 4.115 0.565 0.405 9.209 urgepu 167 monthly 5.073 5.019 4.380 6.080 0.376 0.462 2.376 oilcons 93 monthly 0.751 0.913 -2.859 2.167 0.928 -0.869 4.260 source: author calculations using the data of the regression (www.investing.com and www.policyuncertainty.com). gepu=global economic policy uncertainty; oilcons=oil consumption; urgepu=gepu change rate. table 3. statistical properties of gepu, stock return series and oil consumption. variable adf pp vr jb arch botswana -15.302*** -63.621*** 4.819*** 489629.5*** 188.165*** mauritius -12.903*** -57.140*** 11.977*** 89360408*** 365.836*** south af -42.784*** -57.647*** 13.072*** 5324.812*** 687.59*** urgepu -4.711*** -4.563*** 3.019** 8.705** 0.308 oilcons 0.360** -9.015*** 3.188*** 17.853*** 0.110 *** and ** denote significance at 1 and 5% levels, respectively. adf=augmented dickey-fuller; pp=phillipsperron; vr=vratio; jb=jarque-bera; gepu=global economic policy uncertainty; oilcons=oil consumption; urgepu=gepu change rate. mailto:contact@americaserial.com mailto:contact@americaserial.com http://www.investing.com/ http://www.investing.com/ http://www.policyuncertainty.com/ http://www.policyuncertainty.com/ http://www.policyuncertainty.com/ american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 35 | p a g e botswa na -1.020e-05 (3.861e-05) 0.050*** (0.003) 0.900*** (0.004) 0.056** (0.025) 6.22 (1.620e+1 6) 0.044** (0.0192) mauriti us 8.396e-06 (2.943e-05) 0.265*** (0.020) 0.362*** (0.045) 0.001*** (4.052e-04) 2.105*** (0.483) 0.001*** (2.690e-05) south africa -2.087e-04** (8.923e-05) 0.087*** (0.013) 0.872*** (0.023) 0.126*** (0.033) 8.385 (8.906) 0.003*** (5.465e-04) ***, ** and * represent 1, 5, and 10% level of significance, respectively. garch = generalized autoregressive conditional heteroskedasticity. table 6. full sample estimates of garch-midas for three stock returns. botswana south africa garch-midas+oil consumption oil 1.510e-05 (2.680) 0.157*** (5.975e03) 0.341*** (0.014) 0.117*** (1.971e-3) -1.731e-05 (2.807e05) 0.316*** (0.015) 0.441*** (0.020) 0.170*** (5.266e03) -2.064e-04** (8.224e-05) 0.100*** (0.011) 0.843 *** (0.019) 0.119 *** (0.019) w 6.030*** (0.388) 26.616*** (1.893) 8.168** (4.130) m 1.09e-03*** (8.866e-06) 1.271e-03*** (4.473e-05) 4.083e-03*** (3.156e-4) table 4. in-sample estimates of the garch model for three stock returns. variabl e k botswana -0.005(0.006) 0.011***(3.780e04) 0.264***(0.012) 0.272***(0.021) mauritius 0.004***(5.400e04) 0.243***0.339) 0.006***(0.001) 8.960e04***(2.080e04) south africa 0.004*** (0.001) 0.082***(0.008) 0.901***(0.009) -0.019**(0.008) ***, ** and * represent 1, 5, and 10% level of significance, respectively. garch = generalized autoregressive conditional 2008 2022 mauritius mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 36 | p a g e garch-midas+gepu gepu 1.653e-05 (0.532) 0.151*** (5.688e03) 0.342*** (0.0142) 0.016*** (5.085e04) -3.119e-05 (3.227e05) 0.050*** (1.720e03) 0.900*** (0.010) 0.099*** (6.770e03) 2.008e-04** (8.206e-05) 0.106*** (0.011) 0.833*** (0.020) 0.014*** (4.737e03) w 5.681*** (0.290) 5*** (0.133) 8.118** (4.026) m 1.113e-06*** (1.894e-08) -1.028e-6*** (1.754e-07) 1.711e-05*** (2.613e-06) the levels of significance are represented by ***, **, and *, respectively, indicating 1, 5, and 10%. garch-midas refers to generalized autoregressive conditional heteroskedasticity extended mixed data sampling, while gepu refers to global economic policy uncertainty. this is owing to the smaller aic and bic, and larger log l than those of the traditional garch (1,1) model. involving ocds and/or gepu in the garchmidas-rv model leads to improved fitness compared to the garch (1,1) model. in conclusion, garch-midas-rv+gepu are recommended for better model fitness. the out-ofsample projection pertains to the period from 05/03/2020 to 24/04/2022, which coincides with the covid-19 era. to assess the out-of-sample forecast capability of a volatility model, the loss function is utilised. it pertains to the anticipation of ocds as well as gepu variables concerning stock volatility in botswana, mauritius, and south africa. table 7. in-sample evaluation results for the garch and garch-midas models. variable garch garch-midas aic bic log-l aic bic log-l oil consumption demand shock botswana -1.057 -1.044 1461.079 -23207.7 -23172.2 11609.9 mauritius 2.594 2.607 -3563.671 -23024 -22988.5 11518 south africa 1.358 1.371 -1862.799 -17745.3 gepu -17709.8 8878.67 botswana -21337.2 -21301.7 10674.6 mauritius -22525.4 -22490 11268.7 south africa -17364.1 -17328.7 8688.06 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 37 | p a g e aic, bic, and log-l values are used to compare fitness of the two models. aic is the akaike information criteria, bic is the bayesian information criteria, and log-l is the optimal log-likelihood function. garch-midas =generalized autoregressive conditional heteroskedasticity extended mixed data sampling. table 8. results of out-of-sample volatility forecast validation. mse rmse model table 8 displays the mean square error (mse) and root mean square error (rmse), providing insight into the effectiveness of two models in predicting the daily total volatility of stock in particular countries. the garchmidas-rv+ocds model outperforms the garch model for sadc countries when considering both mse and rmse. conclusion and policy implications the response of stock market volatility in botswana, mauritius, and south africa to gepu and oil consumption demand shocks (ocds) was examined by using the garch-midas approach. our dataset comprises subsamples from 01/05/2008 to 24/04/2022, with the first being the in-sample data (01/05/2008 to 04/03/2020) corresponding to the pre-covid-19 period and the second being the out-of-sample data (05/03/2020 to 24/04/2022) corresponding to the during-covid-19 period. our study presents evidence of the effects of gepu and oil shocks on stock market volatility in three sadc nations, utilizing empirical analysis within the sample and prediction outside it. during the in-sample analysis, the findings indicate that the garch (1, 1) model is a good fit for daily data, displaying significant parameters for all targeted sadc countries with the exception of one. the garch-midas model also demonstrates a good data fit, with a positive and significant coefficient for either ocds or gepu on the countries' long-term volatility. these results suggest that both ocds and gepu have a noteworthy and positive influence on the sadc stock market in the insample data. the models' fitness performance is evaluated using optimum log-likelihood function, aic, and bic. the models garch-midas-rv+ocds and garch-midas-rv+gepu outperform the traditional garch (1, 1) model. the results of out-of-sample prediction indicate the garch-midasrv+ocds model showing better performance than the garch model for sadc countries when mse botswana garch 4.248e-05 6.517e-03 garch-midas 306.600e-12 1.751e-05# mauritius garch 0.018” 1.341e-01 garch-midas 0.761 8.726e-01# south africa garch 8.843e-02 2.973e-01 garch-midas 7.322e-09# 8.557e-05# mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 38 | p a g e and rmse are used. furthermore, the influence of ocds and gepu on stock market returns appears to be transient rather than enduring, indicating that these factors do not have a lasting effect. given these results, it is advisable that policymakers in the chosen sadc nations focus on the effects of oil consumption and global economic policy uncertainty and their possible influence on stock market instability. as the sadc countries are net importers of oil and have a fragile economic context post covid-19, global economic policy uncertainty shocks have significant effects: i) an increase in risk premium leads to more volatility and correlation in stock markets, especially in weaker economic conditions; ii) generally, lesser developed countries' stock returns experience negative effects; iii) crude oil price volatility is also impacted negatively, and is directly linked to major events, with varying impacts depending on the type of event. this suggests that measures to stabilize oil prices and promote economic stability and transparency could help in reducing stock market volatility. moreover, policymaker could consider implementing policies to encourage investment diversification to reduce the impact of global shocks on the domestic stock market. policies that promote the development of financial markets, including stock markets, could also increase resilience to external shocks and contribute to overall economic growth. furthermore, given the better fitness performance of the garch-midas-rv+ocds and garch-midas rv+gepu models compared to the traditional garch (1, 1) model, policymakers could consider using these models in their forecasting and risk management processes. finally, the study highlights the importance of considering the impact of external factors on domestic stock market volatility and the need for policymakers to implement policies that promote economic stability and financial market development. conflict of interests the author has not declared any conflict of interests. references ahmed my, sarkodie sa (2021). covid-19 pandemic and economic policy uncertainty regimes affect commodity market volatility. resources policy 74:102303. anderson t, bollerslev t, diebold f (2007). roughing it up: including jump component in the measurement, modeling and forecasting of return volatility. the review of economics and statistics 89:701-720. antonakakis n, chatziantoniou i, filis g (2013). dynamic comovements of stock market returns, implied volatility and policy uncertainty economics letters 120(1):87-92. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 1, january-february 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https:// https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial 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research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 1 | p a g e analyzing the implications of raising paid-up capital for commercial banks in developing economies: a nepalese perspective" dr. rachel u. kent and dr. akhilesh s. bajaj the university of tulsa, tulsa, ok, usa abstract: commercial banks hold a pivotal role in driving economic growth within developing countries by serving as essential financial intermediaries. in regions where a substantial portion of the population depends on low-wage livelihoods, particularly in traditional agriculture, commercial banks are instrumental in supplying vital capital for infrastructure development and the establishment of new businesses. term loans serve as a primary mechanism through which these banks channel funds to businesses, but efficient asset management and loan collection pose continuous challenges for commercial banks in developing nations. this paper focuses on the context of nepal, tracing the evolution of commercial banking from its inception with nepal bank ltd. in 1937 to the substantial entry of the private sector in the 1990s. nepal rastra bank (nrb) acts as the central bank overseeing monetary policy regulation. as of 2018, nepal hosted 28 commercial banks, categorized into public sector, joint venture, and domestic private banks. historically, public sector banks have dominated loan distribution, but their performance has lagged considerably behind joint-venture and domestic private banks, which exhibit similar performance metrics. this research delves into the dynamics of commercial banking in nepal, shedding light on the disparities in performance and the implications for economic growth and financial stability in the region. keywords: commercial banks, economic growth, nepal, asset management, loan collection. 1. introduction commercial banks play a very important role as financial intermediaries in promoting economic growth in developing countries. this is because the majority of the population in these areas lives on low wages, and is engaged in traditional agriculture. because of their size, commercial banks provide critical capital needed to develop and maintain infrastructure as well as to create new businesses (beck, demirgüç-kunt, & levine, 2010). term loans are often the instrument used to channel money from the banks to businesses and asset management or loan collection is an ongoing issue with commercial banks in developing countries (dziobek & pazarbasioglu, 1997; gizaw, kebede, & selvaraj, 2015). in the case of nepal, commercial banking began in 1937 with the formation of nepal bank ltd. (baral, 2005), with the private sector entering the market on a large scale in the 1990-s. the nepal rastra bank (nrb) serves as the national or central bank that regulates monetary policy. there were 28 commercial banks as of 2018 (gnawali, 2018), which may be broadly divided into public sector banks, joint venture banks and domestic private banks. while the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 2 | p a g e public sector banks have historically enjoyed the largest share of loans, they have also historically significantly underperformed compared to joint-venture and domestic private banks, both of which were found to be similar in performance (jha & hui, 2012). many developing countries, including nepal, have attempted systemic bank restructuring over the last few decades (pazarbaşioğlu, 1998). restructuring may include new regulations designed to improve the profitability and solvency of banks, and regulations designed to increase the intermediating role of the banks in the economy. with the imposition of successive standards from the basel committee on banking supervision (bcbs), popularly known as basel i (1988), basel ii 2004 and basel iii (2010), the nepalese commercial banks have seen increasing levels of monitoring and supervision, largely strengthening their stability (uprety, 2013). an earlier examination of nepalese banks using the camel (capital adequacy, asset quality, management quality, earning and liquidity) framework found that joint venture banks had a fair capital base and higher liquidity than needed, resulting in lower profitability (baral, 2005). the paid-up capital requirement (common stock) for commercial banks was rs. 2 billion. however, from 2015, the paid-up capital requirement was increased to rs. 8 billion, thereby increasing the lending capacity, and the credit exposure as well. the primary contribution of this work is to analyze if the factors that have driven the operating profitability of commercial banks in nepal have changed as a result of the increased paid-up capital requirement. in order to accomplish this, we performed a panel data regression analysis on multiple commercial banks in nepal over two separate time periods: 2007-2014 and 2015-2017. the rest of this paper is organized as follows. section 2 describes the background and the hypotheses tested. section 3 describes the data collection and presents the analysis. section 4 discusses our findings from a theoretical and practical standpoint. we conclude with limitations and suggestions for future studies in section 5. 1. background and hypotheses development until the mid-1970-s, bank safety worldwide was largely the domain of national regulators without regard to interdependence among banks (rost, 2010). the failures of the herstatt bank in germany and the franklin national bank in new york caused effects across national boundaries, leading to the formation of the basel committee on banking supervision (basel). the committee consisted of central bankers from the g10 countries and switzerland. the main thrust was to delineate supervisory authority between national and transnational bodies. basel 1 was a framework released in 1988 to primarily address the capital adequacy requirement for banks. the main driver here was the latin american debt crisis that occurred in the early 1980-s. a minimum ratio of capital to risk-weighted assets of 8% was established starting from 1992 (jokipii & milne, 2008). basel 2 was a three pillar framework that expanded on the rules in basel 1 regarding capital adequacy, and additionally recommended supervisory review of institutions‟ capital adequacy and internal assessments. a third pillar was also proposed to promote market disclosure, in order to promote sound banking practices (herring, 2002). basel 3 was begun to be developed in 2007 upon the imminent collapse of lehman brothers. it includes liquidity requirements and safeguards, such as a countercyclical capital buffer and a minimum liquidity to cover a 30-day period of stress. while basel 1 and 2 steered away from defining operational risk, basel 3 seeks to address this to some degree by enforcing liquidity standards and curtailing non-performing assets (bace, 2016). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 3 | p a g e while the basel standards have increased the stability of the banking system, the stringent requirements that accompany them have impeded the ability of commercial banks to lend in developing economies. basel 2 and 3 have also improved the internal and external operations of commercial banks. however, critics of basel 3 point to the reduced availability of credit and curtailment of economic activity if they are to be implemented (allen, chan, milne, & thomas, 2012). are non-performing loans an issue in developing economies, post basel 2 and 3? in a recent dissertation (havemann, 2019) points out how capital adequacy requirements instituted pre-2008 prevented bank failures during the 2008 crisis. african bank was an institution that made loans almost exclusively to low-income earners on an unsecured basis. funding came primarily from bond holders as opposed to retail deposits. african bank placed into curatorship in 2014, but central bank intervention led to limited loss spillovers and increased losses to the creditors who provided the bail-in. banks in botswana were studied in (mathame, 2018) who found that the capital adequacy ratio (car) was lower based on credit risk and non-performing loans, primarily since the banks were heavily dependent on the mining sector. in another survey of 109 european banks in (bongini, cucinelli, di battista, & nieri, 2018) from 2006-2016, the loss of profitability was found to be influenced by the deterioration of the loan portfolios of the banks.banks that adopted a more conservative lending policy went back to profitability more quickly. the lack of an appropriate credit culture in some developing countries also leads to increased non-performing loans (bonga, chirenje, & mugayi, 2019). in a study of banks in albania (duraj, 2015), non-performing loans were found to decrease bank profitability. a similar situation was found in a study of banks in ethopia(gizaw et al., 2015). however, npls have not always been found to affect bank performance negatively. as per (andesfa & masdupi, 2019) some researchers found that non-performing loans did not affect return on assets (roa). a study of jordanian banks in (alshatti, 2015) found a positive influence of npl on roa. a similar finding was reported in (zou & li, 2014), where a positive effect was found between npl ratio and roa as well as return on equity (roe). possible explanations for this may include that depositors do not take into consideration the credit risk exposure of the bank when deciding to make their deposits (agwu, 2018). this explanation becomes more plausible if the basel safeguards are in place in the banking system of the country, leading to a macro perception of stability. macroeconomic factors like the money supply and deposit to lending ratios can also drive increased deposits into banks. this increases the bank‟s ability to make more loans, and hence improves profitability, even if the percentage of nonperforming loans is higher than for smaller banks. in the case of nepal, credit risk (defined as the ratio of non-performing loans to total loans) was found to be negatively affected by the capital adequacy ratio in (poudel, 2013). in a more recent study of nepalese commercial bank roa performance from 2010-2015, a strong negative relationship between non-performing loans and roa was found, along with a positive influence of costs per loan assets (bhattarai, 2017). bank size was also found to be positively correlated to bank performance, measured by roa. based on the review of prior work shown above, we conclude that basel 2 and 3 requirements have imposed some stability in the banking systems of developing economies. however, nonperforming loans or credit risk are still relevant drivers affecting banks‟ financial performance. in 2015, the nrb (nepal rastriya bank) mandated banks and financial institutions to raise the minimum paid-up capital, or common stock, from rs. two billion to rs. eight billion, a four-fold mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 4 | p a g e increase, to be implemented over a two year period (sharma, 2015). a similar move was instituted by the bank of ghana, in 2017 (young, 2017). the goal behind these moves was to increase the minimum size of institutions to improve theoverall stability in the banking systems. while such moves have an immediate positive stock market effect, the effect of the increased capitalization requirements on bank behavior is not clear. for example, as banks make more loans, will their nonperforming loans have an increased affect on profitability? in this work, we investigate the performance of a sample of nepalese commercial banks pre and post mandate, to see how behavior has changed. factors in the study: operating profit: the dependent variable we look at is the operating profitability of the bank. this is reported in rupees every year and is the earnings before interest and tax. a common formula for calculating operating profit is: operating profit = operating revenue – cost of goods and services – operating expenses – depreciation & amortization non performing loans: npl is a ratio defined as: npl = (non-performingloans / total loans) * 100 liquidity: this is defined as a ratio: current assets/ current liabilities deposits to assets: this ratio is defined as: (total deposits/ total assets) * 100 credit exposure: this variable looks at the overall amount of loans made by the bank, in rupees. training ratio: this ratio is defined as: training = overall rupee amount spent on training / total number of staff] based on these variables, the following hypotheses were tested: h1: training ratio affects the bank‟s operating profit h2: deposits to assets affect the bank‟s operating profit h3: credit exposure affects the bank‟s operating profit h4: npl affects the bank‟s operating profit h5: liquidity affects the bank‟s operating profit we tested these hypotheses using two separate sets of data: a sample of nepalese commercial banks between 2007-2014, and another sample of the same banks between 2015-2017. 2. data collection and analysis publicly available financial statements from 2007 – 2017 for six well known joint-venture commercial banks in nepal were used for this study. the data we used are shown in appendix 1.the names of the banks have been masked for anonymity. panel data regression analysis using the plm package in the r system was used since data is across banks and across time for each bank(croissant et al., 2017). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 5 | p a g e table 1 shows the summary statistics for each factor used in our study. the relative standard deviation, or the coefficient of variation is (standard deviation / mean) * 100, and gives a dimension free illustration of variation in the data (everitt, 1998). we see that npl had the most variation while deposits to total assets had the least. this is not surprising since npl reflects the managerial policies of the bank regarding lending criteria, while banks are tightly regulated on the latter metric. table 1. descriptive statistics for factors minimum maximum mean std. deviation coefficient of variation % training ratio 748 16187 6942 4176.20 60.16 operating profit 78701459.0 5464678241.0 1778578035.25 1127167487.71 63.38 credit exposure 3839128465.0 144429063000.0 46535702441.50 27833065588.74 59.81 npl .004 4.220 1.10 .978 88.58 liquidity 3.0200 30.96 13.56 7.42 54.95 deposits to total assets 67.89 90.27 85.64 3.87 4.51 the model we used is shown below. yit = β0+β1(l)it+β2(npl)it+β3(cr)it+β4(d)it+β5(tr)it+ µit, where y – operating profit npl – non-performing loan cr – credit exposure d deposits l – liquidity tr – training ratio β0 constant parameter/intercept β1-5– coefficient of independent variables µ error term i – cross sectional t – time period table 2 shows the correlation between the factors. training expense credit exposure npl liquidity deposits to total assets training expense 1 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 6 | p a g e credit exposure 0.212 1 npl 0.08 .160 1 liquidity -0.368 -.228 -.505 1 deposits to total assets 0.261 .177 .349 -.0.49 1 table 2 correlation matrix of independent variables the correlations are low to moderate amongst the factors, with npl-liquidity and liquidity-deposits to total assets being the highest in magnitude. given these correlations, multicollinearity amongst factors appears to be low in our sample. since the levels of correlation are below 0.7, the variance inflation values were not calculated for any variable in our analysis. 3.1 panel data regression results time period 2007-2014 table 3 analysis of model in 2007-2014 adjusted r square is 0.66789 i.e. 66.79% variation of dependent variable is explained by the independent variables. independent variables such as liquidity, npl, deposits and training ratio are not statistically significant. time period 2015-2017 table 5 analysis of model in 2015-2017 adjusted r square is 0.92855 i.e. 92.86% variation of dependent variable is explained by the independent variables. table 4 coefficients in 2007 2014 from the coefficients, credit exposure is the only independent variable, which is statistically significant. other mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 7 | p a g e table 6 coefficients in 2015-2017 significant. other independent variables such as liquidity, deposits and training ratio are not statistically significant. tables 7 and 8 summarize which hypotheses were supported in the two data sets. note that a null being rejected implies support for the hypothesis. table 7 analysis of hypothesis for 2007-14 hypothesis variables null rejected? h1 liquidity h2 credit exposure rejected h3 npl h4 deposits h5 training table 8 analysis of hypothesis for 2015-17 hypothesis variables null rejected? h1 liquidity h2 credit exposure rejected h3 npl rejected h4 deposits h5 training 3. discussion earlier work has shown that non-performing loans impact banks‟ financial performance in developing economies. for example, the return on assets of nigerian banks was found to be affected by the default ratio (npl / total loans) in (kurawa & garba, 2014). the return on assets and return on equity of turkish banks was found to be affected by non-performing loans in (kadioglu, telceken, & ocal, 2017). however, the impact of non-performing loans on the financial performance of nepalese banks is uncertain. two unpublished masters theses cited in (gnawali, 2018) indicate that non-performing from the coefficients, credit exposure and npl are the only independent variable, which are statistically mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 8 | p a g e assets negatively impact commercial banks‟ financial performance in nepal. in contrast, another study found no evidence of non-performing loans impacting financial performance (subedi & neupane, 2013). our study, using panel data analysis, agreed with the latter finding, and found that nonperforming loans did not impact the operating profit of the commercial banks in our sample during the 2007-2014 pre-mandate period. this is in contrast to studies done on banks in other countries described above. one explanation for this finding may be found in the reputation for reliability that is part of the national character of nepal. nepalese workers, for example, have a well-deserved reputation for reliability and honesty, and are in demand around the world(lokshin, bontch osmolovski, & glinskaya, 2010; yamanaka, 2000). nepalese men also serve in military and security functions globally(gould, 2000; vines, 1999). another reason for the finding in the 2007-2014 periodmay be the debt recovery act passed in 2002 that required all nepal banks to address the large percentage of non-performing loans in their portfolios (shrestha, 2004). a third possible explanation is that depositors do not consider the credit risk exposure of the bank when making deposits (agwu, 2018), especially if they have underlying faith in the regulatory framework of the banking system. for the 2007-2014 pre-mandate period, we found that credit exposure, indicating the overall loans made by the bank, did positively affect the operating profit. the paid-up capital (or common stock equity) lower limit till 2014 was rs. 2 billion. during this period, banks that gave out more loans showed greater profitability, as per our findings.this follows directly from greater income derived from more loans, especially since non-performing loans were brought under control after 2002. from 2015 onwards, the paid-up capital requirement minimum was mandated to increase from rs 2 billion to rs. 8 billion for nepalese banks (acharya, 2017; sharma, 2015). our analysis of the 2015-2017 post-mandate time period shows that while credit exposure continued to affect operating profit positively, non-performing loans now had a significant negative effect. this indicates that credit risk had now become an issue. one possible explanation for this finding comes from the fact that in order to comply with the paid-up capital requirements, several banks had to merge. the increased paid-up capital also increased the amount of loans that banks could provide to borrowers. as confirmation, the credit exposure of every bank in our sample increased significantly starting from 2015 onwards (see data in appendix 1). however, apart from size increases, mergers typically lead to rapid change in the collective competence and tacit knowledge of the new organization (kreiner & lee, 2000) and provide a “diminished resource base for organizational learning” (lei & hitt, 1995). thus, a merger may lead to a loss of knowledge of local lending practices, and the credit profile of the local business community. localized lending practices have been shown to give greater risk-adjusted yield, for example in (carter, mcnulty, & verbrugge, 2004). the effect of distance between the bank and the borrowers was greater in lesser developed economies (alessandrini, croci, & zazzaro, 2009). hence, a mandate to significantly increase the size of banks in a system may lead to deteriorated lending practices, at least in the short term, to the point where the financial performance of the banks can be significantly affected, as in our sample. the theoretical contribution of this work is an analysis of the effect of increasing minimum capital requirements rapidly and significantly on commercial banks in a developing economy. we find that the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 9 | p a g e expected consolidation of banks and increase in number of loans leads to greater credit risk assumed by the banks, even if nonperforming assets were not a factor earlier, as was the case in our sample. on the methodological side, we use panel data analysis to account for correlation within each bank across time. from a practical perspective, our work offers many guidelines. first, increases in capital adequacy requirements as a result of basel 2 and 3 must be implemented gradually, so that lending strategies by bank management have time to adapt to the larger volume of loans. the situation in nepal is likely to improve since prior to the significant paid-up capital increase, non-performing assets were not an issue in determining profitability.however, in other economies where non-performing assets are already negatively affecting financial performance, policies regarding an increase in paid-up capital and bank consolidation should offer an even more gradual time line than would have been appropriate for nepal. resources should also be provided to ensure that localized knowledge specific to lending practices is not lost in the bank consolidation that follows. in the case of nepal, it is important for banks to review and tighten lending practices and for regulators to increase monitoring, going forward. any asset bubbles created as a result of the increased lending also need to be closely monitored. 4. conclusion in this work we analyzed the results of a significant increase in paid-up capital or common stock equity requirements on the operating profit of a sample of commercial banks in nepal. the data we used offered a unique opportunity to analyze this effect. prior policies such as the debt recovery act (2002) had reduced credit risk to lower levels. the only driver of profit in the 2007-2014 period that we found was the total amount of loans (credit exposure) issued by the bank. a very significant four-fold increase in paid-up capital led to widespread consolidation among banks and a significant increase in the number of loans being issued. a rapid increase in the number of loans issued led toa significant negative impact by non-performing loans on operating profit after the policy was implemented. our recommendations include a cautionary approach to implementing similar banking requirements in other economies, coupled with adequate training to ensure that specialized local lending knowledge is not lost, and the newly formed larger banks do not become more distant from their borrowers. our work has some limitations. first, we relied on publicly available data and measures in our model. variables measuring actual lending practices were not available for this study. second, we used a sample of 6 banks over 10 years. a larger sample may have yielded more significant results, though statisticians warn of overly large sample sizes where small effects are found to be statistically significant (aguinis & harden, 2009). for future research, we recommend that as basel 3 is implemented, the performance of banks be studied using the increased information that will be available under basel 3, especially with regard to liquidity requirements and management practices. a follow up study on the financial performance of nepalese commercial banks over the next few years is also recommended, to measure if lending practices have stabilized and investigate 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(1995). strategic restructuring and outsourcing: the effect of mergers and acquisitions and lbos on building firm skills and capabilities. journal of management, 21(5), 835-859. lokshin, m., bontch osmolovski, m., & glinskaya, e. (2010). work related migration and poverty reduction in nepal. review of development economics, 14(2), 323-332. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 12 | p a g e mathame, t. (2018). supervisory risk assessment in a basel environment: the stress testing of banks in botswana. university of cape town, pazarbaşioğlu, c. (1998). lessons from systemic bank restructuring (vol. 14): international monetary fund. poudel, r. p. s. (2013). macroeconomic determinants of credit risk in nepalese banking industry. paper presented at the proceedings of 21st international business research conference. rost, b. (2010). basel committee on banking supervision. in handbook of transnational economic governance regimes (pp. 319-328): brill nijhoff. sharma, r. d. (2015, july 24th 2015). nrb raises bank capital requirement to rs 8 billion. the himalayan times. retrieved from https://thehimalayantimes.com/business/nrb-raises-bankcapital-requirement-to-rs-8billion/ shrestha, g. k. (2004). financial sector reforms in nepal. nrb economic review, 16, 75-90. subedi, s., & neupane, b. (2013). determinants of banks‟ liquidity and their impact on financial performance in nepalese commercial banks. uprety, c. p. (2013). basel iii implementation: challenges and opportunities in nepal. basel iii implementation: challenges and opportunities, 237-275. vines, a. (1999). gurkhas and the private security business in africa. peace, profit or plunder, 123-140. yamanaka, k. (2000). nepalese labour migration to japan: from global warriors to global workers. ethnic and racial studies, 23(1), 62-93. young, e. a. (2017). bank of ghana increases the minimum capital for banks. retrieved from https://www.ey.com/publication/vwluassets/bank_of_ghana_increases_the_minimum_cap ital_for_bank s/$file/2017g_05385171gbl_bank%20of%20ghana%20increases%20the%20minimum%20capital%20for%20banks .pdf zou, y., & li, f. (2014). the impact of credit risk management on profitability of commercial banks: a study of europe. in. appendix 1: data used in study table 1. training ratio, operating profit and credit exposure year banks training expense total staff training ratio operating profit credit exposure mailto:contact@americaserial.com mailto:contact@americaserial.com https://thehimalayantimes.com/business/nrb-raises-bank-capital-requirement-to-rs-8-billion/ https://thehimalayantimes.com/business/nrb-raises-bank-capital-requirement-to-rs-8-billion/ https://thehimalayantimes.com/business/nrb-raises-bank-capital-requirement-to-rs-8-billion/ https://www.ey.com/publication/vwluassets/bank_of_ghana_increases_the_minimum_capital_for_banks/$file/2017g_05385-171gbl_bank%20of%20ghana%20increases%20the%20minimum%20capital%20for%20banks.pdf https://www.ey.com/publication/vwluassets/bank_of_ghana_increases_the_minimum_capital_for_banks/$file/2017g_05385-171gbl_bank%20of%20ghana%20increases%20the%20minimum%20capital%20for%20banks.pdf https://www.ey.com/publication/vwluassets/bank_of_ghana_increases_the_minimum_capital_for_banks/$file/2017g_05385-171gbl_bank%20of%20ghana%20increases%20the%20minimum%20capital%20for%20banks.pdf https://www.ey.com/publication/vwluassets/bank_of_ghana_increases_the_minimum_capital_for_banks/$file/2017g_05385-171gbl_bank%20of%20ghana%20increases%20the%20minimum%20capital%20for%20banks.pdf https://www.ey.com/publication/vwluassets/bank_of_ghana_increases_the_minimum_capital_for_banks/$file/2017g_05385-171gbl_bank%20of%20ghana%20increases%20the%20minimum%20capital%20for%20banks.pdf https://www.ey.com/publication/vwluassets/bank_of_ghana_increases_the_minimum_capital_for_banks/$file/2017g_05385-171gbl_bank%20of%20ghana%20increases%20the%20minimum%20capital%20for%20banks.pdf american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 13 | p a g e 2017 bank1 17,092,478 1,187 14,400 4,729,782,804 144,429,063,000 2016 bank1 5,667,870 1,005 5,640 3,699,688,752 111,780,681,000 2015 bank1 3,543,367 969 3,657 2,545,848,091 89,584,665,000 2014 bank1 4,633,683 942 4,919 2,891,610,284 71,708,512,000 2013 bank1 6,400,375 910 7,033 2,145,299,600 60,622,076,000 2012 bank1 3,953,243 883 4,477 1,357,096,209 55,874,347,000 2011 bank1 4,380,696 877 4,995 1,783,662,202 52,029,461,000 2010 bank1 3,162,162 877 3,606 1,928,425,381 50,041,481,000 2009 bank1 4,162,374 766 5,434 1,310,854,953 42,975,192,000 2008 bank1 4,330,860 622 6,963 1,013,331,907 36,518,503,000 2017 bank2 5,194,596 495 10,494 1,985,842,742 50,192,675,000 2016 bank2 2,295,460 435 5,277 1,701,248,338 41,402,347,000 2015 bank2 2,457,880 433 5,676 1,827,019,810 41,171,574,000 2014 bank2 1,553,093 460 3,376 1,978,908,777 39,210,395,000 2013 bank2 2,801,446 454 6,171 1,862,481,497 34,321,758,000 2012 bank2 3,800,616 424 8,964 1,694,009,908 26,974,977,000 2011 bank2 5,695,246 429 13,276 1,707,316,216 23,401,460,000 2010 bank2 6,554,738 429 15,279 1,612,467,214 20,701,946,000 2009 bank2 4,800,913 392 12,247 1,506,108,858 18,758,432,000 2008 bank2 4,714,722 377 12,506 1,248,432,244 17,587,870,443 2017 bank3 10,360,820 848 12,218 5,464,678,241 105,621,541,000 2016 bank3 5,444,033 792 6,874 4,344,447,596 91,993,791,000 2015 bank3 11,428,342 706 16,187 3,235,924,937 78,774,890,000 2014 bank3 7,326,161 724 10,119 3,549,363,372 66,294,545,000 2013 bank3 8,737,232 742 11,775 3,464,952,933 57,191,503,224 2012 bank3 8,934,625 650 13,746 2,640,336,248 50,021,684,138 2011 bank3 7,467,211 657 11,366 2,081,190,251 44,468,804,901 2010 bank3 8,822,575 557 15,839 1,709,121,201 39,016,206,023 2009 bank3 5,681,241 505 11,250 1,570,204,646 32,500,502,288 2008 bank3 4,796,328 416 11,530 1,122,713,930 30,256,652,353 2017 bank4 7,153,814 601 11,903 1,998,089,550 58,025,513,277 2016 bank4 4,395,400 470 9,352 1,478,537,702 45,079,836,617 2015 bank4 4,060,981 415 9,785 925,693,203 30,651,616,831 2014 bank4 2,111,199 311 6,788 654,893,931 22,680,658,738 2013 bank4 678,950 231 2,939 458,938,092 15,989,208,846 2012 bank4 396,270 232 1,708 189,934,364 10,212,474,617 2011 bank4 238,503 197 1,211 241,935,219 7,200,551,543 2010 bank4 111,384 149 748 135,407,713 7,238,558,764 2009 bank4 299,978 120 2,500 78,701,459 5,845,136,972 2008 bank4 114,864 61 1,883 78,701,459 3,839,128,465 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 14 | p a g e 2017 bank5 4,471,852 835 5,356 2,449,761,449 91,557,768,233 2016 bank5 5,441,894 857 6,350 2,297,520,673 79,796,981,782 2015 bank5 3,538,858 856 4,134 679,560,515 62,815,599,427 2014 bank5 3,504,526 835 4,197 982,579,118 55,329,593,123 2013 bank5 5,075,617 830 6,115 1,145,973,993 49,526,322,948 2012 bank5 3,659,884 793 4,615 1,057,056,360 42,584,895,177 2011 bank5 3,184,322 647 4,922 1,015,213,473 39,545,254,061 2010 bank5 3,176,851 577 5,506 579,231,460 36,049,314,954 2009 bank5 5,538,572 591 9,372 1,029,535,742 32,628,846,005 2008 bank5 4582364 584 7,847 954,953,506 26,006,889,740 2017 bank6 5,903,090 748 7,892 3,089,925,916 80,133,906,000 2016 bank6 2,169,371 739 2,936 2,666,102,674 71,827,799,000 2015 bank6 1,112,129 696 1,598 2,252,640,623 56,381,528,000 2014 bank6 735,113 696 1,056 2,338,065,548 50,599,467,000 2013 bank6 1,488,497 643 2,315 2,302,748,773 44,793,263,000 2012 bank6 1,938,143 625 3,101 1,538,338,190 37,792,502,000 2011 bank6 1,198,785 586 2,046 1,418,397,900 31,440,377,000 2010 bank6 1,824,053 568 3,211 1,272,090,189 27,499,899,000 2009 bank6 2,280,943 534 4,271 972,950,326 19,509,798,000 2008 bank6 2,495,154 449 5,557 718,833,853 24,131,922,000 table 2. non-performing loans (npl), liquidity yea r bank s capital npl total assets (size) liquidit y car numyear s 2017 bank1 20,367,203,000.0 0 0.83 0 150,818,033,55 4 10.50 13.0 2 32 2016 bank1 18,182,544,000.0 0 0.68 0 129,782,705,31 4 7.20 14.92 32 2015 bank1 11,754,294,000.0 0 1.250 104,345,436,41 3 12.00 11.9 32 2014 bank1 8,993,849,000.00 1.770 86,173,927,574 19.20 11.27 32 2013 bank1 7,813,057,000.00 1.910 73,152,154,761 16.00 11.49 32 2012 bank1 6,963,182,000.00 3.320 65,756,231,954 13.60 11.1 32 2011 bank1 6,324,627,000.00 0.94 0 58,356,827,501 7.70 10.91 32 2010 bank1 5,651,045,000.00 0.62 0 57,305,413,482 7.80 10.55 32 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 15 | p a g e 200 9 bank1 5,095,354,000.00 0.58 0 53,010,803,126 10.30 11.24 32 200 8 bank1 3,891,236,000.00 1.120 38,873,306,084 10.90 11.28 32 2017 bank2 11,975,101,000.00 0.190 77,408,597,693 19.71 21.0 8 31 2016 bank2 7,779,408,000.00 0.32 0 65,185,732,479 7.98 16.3 8 31 2015 bank2 6,111,788,000.00 0.34 0 64,926,805,120 24.03 13.1 31 2014 bank2 5,333,516,000.00 0.48 0 53,324,102,172 21.18 12.27 31 2013 bank2 4,828,551,000.00 0.770 45,631,100,342 16.43 12.54 31 2012 bank2 4,295,167,000.00 0.78 0 41,677,052,360 22.40 13.93 31 2011 bank2 3,835,592,000.00 0.62 0 43,810,519,664 6.10 14.22 31 2010 bank2 3,498,973,000.00 0.610 40,213,319,926 6.74 14.51 31 200 9 bank2 3,190,367,000.00 0.66 0 40,587,468,00 9 8.18 14.7 31 200 8 bank2 2,630,900,636.00 0.92 0 33,335,788,326 5.84 13.15 31 2017 bank3 14,752,639,000.0 0 0.790 140,332,060,18 2 10.02 12.42 36 2016 bank3 12,203,615,000.0 0 1.140 127,300,195,37 3 6.77 11.73 36 2015 bank3 10,154,456,184.00 1.830 115,985,701,411 14.15 11.57 36 2014 bank3 8,259,701,304.00 2.230 87,274,545,920 11.32 11.24 36 2013 bank3 7,364,514,686.00 2.130 73,343,593,148 9.32 11.59 36 2012 bank3 6,086,741,224.00 2.330 63,250,488,220 8.60 11.01 36 2011 bank3 5,173,399,192.00 1.770 58,099,619,842 4.90 10.5 8 36 2010 bank3 4,390,228,607.00 1.480 52,079,725,697 3.02 10.5 36 200 9 bank3 3,727,082,787.00 0.80 0 43,867,397,504 9.03 10.7 36 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 16 | p a g e 200 8 bank3 2,968,913,131.00 0.740 37,132,759,149 8.37 11.1 36 2017 bank4 9,870,186,114 0.010 69,995,901,442 26.08 15.57 14 2016 bank4 6,039,446,132 0.019 55,964,557,699 24.24 12.36 14 2015 bank4 3,734,498,766 0.07 0 40,301,197,377 22.32 11.08 14 2014 bank4 3,069,210,208 0.017 29,376,985,784 26.68 12.54 14 2013 bank4 2,565,034,704 0.027 21,976,539,752 30.96 14.87 14 2012 bank4 2,211,515,612 0.479 13,722,466,141 30.24 20.7 4 14 2011 bank4 2,173,184,816 0.00 4 9,363,380,873 26.57 28.4 1 14 2010 bank4 932,609,659 0.08 0 7,238,558,764 28.19 16.51 14 200 9 bank4 909,860,064 0.175 5,845,136,972 11.97 19.0 2 14 200 8 bank4 456,006,865 1.513 3,839,128,465 17.61 17.73 14 2017 bank5 12,613,817,027 0.85 0 107,255,479,96 6 12.15 25 2016 bank5 9,815,198,969 1.230 99,863,008,08 0 6.27 10.8 4 25 2015 bank5 8,041,967,083 3.220 82,801,550,614 8.32 11.14 25 2014 bank5 7,155,579,476 1.960 73,589,845,698 8.72 11.23 25 2013 bank5 6,414,437,452 2.89 0 61,113,501,223 6.08 11.55 25 2012 bank5 5,283,900,074 2.09 0 54,364,427,882 8.72 11.02 25 2011 bank5 4,711,243,495 4.220 46,736,203,884 5.75 10.6 8 25 2010 bank5 4,218,361,500 3.520 42,717,124,613 6.76 10.72 25 200 9 bank5 3,845,211,300 2.160 39,330,131,823 6.76 11.02 25 200 8 bank5 3,253,515,981 2.360 36175531637 5.13 12.42 25 2017 bank6 13,063,702,000 0.250 116,510,445,575 16.52 14.69 24 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 3, july-september 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 17 | p a g e 2016 bank6 10,094,804,000 0.38 0 113,885,046,40 2 16.61 12.66 24 2015 bank6 8,457,023,000 0.66 0 99,167,293,661 24.27 13.33 24 2014 bank6 6,422,257,000 0.970 70,445,082,845 16.91 11.31 24 2013 bank6 5,777,682,000 0.62 0 65,741,150,457 15.91 11.59 24 2012 bank6 4,574,753,000 0.84 0 55,813,129,057 17.22 11.02 24 2011 bank6 3,605,841,000 0.34 0 46,236,212,262 9.55 10.4 3 24 2010 bank6 3,257,142,000 0.160 41,382,760,711 15.53 10.77 24 200 9 bank6 2,348,390,000 0.48 0 36,916,848,654 14.26 11.34 24 200 8 bank6 2,703,870,000 0.68 0 27,149,342,884 4.56 11.44 24 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 23 | p a g e examining corporate ownership and risk management in sri lankan firms 1dr. anika perera and 2prof. nishan silva 1assistant lecturer, department of accountancy, sri lanka institute of advanced technological education 2professor in finance, faculty of management and finance, university of colombo, abstract: corporate governance plays a pivotal role in mitigating corporate scandals and financial crises that have plagued global economies in recent years. numerous large companies across the globe, including those in the united states, europe, and asia, faced collapse during financial crises, highlighting the importance of effective corporate risk governance. in sri lanka, similar business catastrophes occurred primarily in the banking and finance industry between the late 1980s and the early 2000s. corporate governance measures, such as board structure, compensation structure, and ownership structure, significantly influence a firm's risk profile, cash flows, size, and regulatory compliance. ownership structures, in particular, play a crucial role in resolving or exacerbating agency conflicts within firms. risk and performance are intertwined, leading owners to seek the balance between managing risk and achieving financial success. in response to these crises, countries like the uk and the usa have initiated regulatory frameworks emphasizing the role of corporate governance and risk management. these frameworks offer guidance on internal control mechanisms and board attributes to enhance corporate accountability and reduce the risk of firm insolvency. however, many asian countries, including sri lanka, have yet to implement regulatory frameworks addressing the role of boards in risk management. this study explores the relationship between ownership structures and corporate risk-taking, shedding light on the significance of ownership in shaping a firm's approach to risk management. keywords: corporate governance, ownership structure, risk management, financial crisis, regulatory framework 1. introduction the necessity of corporate governance became very crucial with many corporate scandals and financial crisis took place around the world in recent times (kaur & gill 2008). a number of large american, european and asian companies collapsed during the financial crisis that took place all over the world (wei &geng, 2008). in sri lankan perspective, business catastrophes took place in the late 1980s and in the early 1990s through to 2008, especially in the banking and finance industry (heenetigala, 2011; mapita et al., 2015). researchers connected the reason for the corporate collapses and financial crisis are failure of effective adaptation of corporate risk governance. as per jensen and meckling (1976) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 24 | p a g e corporate governance measures like board structure, compensation structure and ownership structure determines the risk, cash flows, firms‟ size and regulations of the firm and further they argued that these variables have strong influence on the firm‟s risk. further, they explicit that different ownership structures have different implications according to their tendency to resolve or aggravate agency conflicts. risk and performance like two side of the coin, hence owners tend to avoid risk part and seek the other side which is main reason for the risk governance to the corporate board. from the impact of crisis and collapse uk has been initiated the regulatory framework with the concern on the role of corporate governance and risk management published in financial reporting council (frc,2011) under boards and risk. simultaneously, in usa, corporate governance reforms which form part of the sarbanes–oxley act (2002) provide specific guidance on internal control mechanisms and board attributes to improve corporate accountability and reduce the risk of firm insolvency. however, no any regulatory framework has been initiated in asian countries perspectives including sri lanka with shade of boards and risk. shareholders are the owners of corporations (monks & minow 1995) and they are different types (connelly et al. 2010) such as individual, family, state, and professional, government, foreign and public (la porta, de silanes & shleifer ,1999; gollakota& gupta, 2006). owner structure directly influence on the firm risk. ownership structure has been identified as an important factor in shaping corporate risk taking (amihud & lev, 1981; may, 1995; boubakri et al., 2013). however, the relationship between ownership structure and corporate risk taking remains unexplored in sri lankan perspective. senaratne and gunaratne (2008) found that ownership is concentrated in most sri lankan listed companies with the presence of controlling shareholders. as per them, concentrated ownership, institutional ownership and executive (management ownership) are the main elements for sri lankan companies, however the impact of concentrated ownership with firm‟s risk remain unexplored. this study sheds on the light on gap, and examine of empirical study on ownership structure and firm risk. the next section of the paper discusses the literature related to ownership type and risk of firm. then the hypotheses are developed and the theoretical framework is presented. next, the methodology is outlined after in which the analysis and discussion of findings are presented. this is followed by the conclusions of the study with implications and suggestions for future research. 2. review of literatures and hypothesis development an owner called “principal” is the shareholder who invested with the view of profit and “agent” who has been appointed by principal to act on behalf, this is agency theory, advanced by jensen and meckling (1976). these two parties have incongruence interest; due to that agency cost arises. agency cost is an economic phenomenon concerning the fee to a „principal‟ when the principal chooses or hires an „agent‟ to act on its behalf (jensen & meckling,1976). agency theory in the viewpoint of ownership structure and firm risk is first developed by berle and means (1932) and then theorized by monsen and downs (1965) and monsen et al., (1968). they argue that principalagent separation leaves possibility for conflicting goals to arise. in terms of risk-taking, owner takes greater incentives and rewards than the managers do and therefore favor riskier projects to maximize the value rooted in their equity holding. conversely, managers often have both the preference and incentive to pursue strategies and practices that benefit themselves at the expense of shareholders. managers may engage in short-run cost augmenting activities to enhance their nonsalary income and/or they may indulge their need for mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 25 | p a g e power, prestige, and status by attempting to maximize corporate size and growth rather than corporate profits (chun. s & lee. m, 2017). obviously, as per fama (1980) managers will choose to invest in less risky investment to protect their employability in the firm. thus, managers may pursue non-valuemaximizing strategies unless they have proper incentives or face appropriate pressure such as pressures from director board. therefore, agency theory clearly defines the association with the ownership structure and firm risk seeking behavior. there are many studies available to depict the relationship between institutional ownership, management ownership and concentrated ownership structure and risk of the firm which are outlined below. 2.1 management ownership and firm risk management ownership structure means the equity holding percentage by the executives of the board. the executive directors‟ ownership is measured as the percentage of equity hold by all the executive directors/management on the board which include voting rights and capital percentage. the voting rights that come with holding equity in the firm make directors with large holdings of firm equity have the ability to influence decisions. board members with large ownership cannot be easily discharged because they have voting rights and this influence can keep them in their jobs (wright et al., 1996). executive directors are compensated in terms of equity, as well as salary, whereas neds are compensated with director fees for their work and may be compensated with firm equity. this is where executives owning shares. to align the interests of the executive directors with the shareholders who want maximum returns, they are compensated with firm equity. agency theorists believe that directors having ownership in the firm can influence them to maximize returns on shares and reduce agency costs (jensen and meckling, 1976). more ownership in the capital would encourage directors to invest in more value enhancing activities which ultimately go with risky project (jenkins and seiler, 1990). hitt, hoskisson and ireland (1994) states that rewarding to managers with firm equity, would help them to invest in initiatives that increase the long-term value of the firm. ceos with greater stockholdings may have stronger incentives to take risky projects, suggesting that there may be a positive association between ceo ownership and performance variability (cheng, 2007).wright et al. (1996) find positive relation between equity ownership and firm risk when executives hold low equity investment whereas, the relationship shows negative when management‟s investment is high. further, they explicate that investors desire growth oriented risk taking whereas some situation investor want to reduce risk in order to protect the investment. board of directors are making financial decision whether to go with risky project or not mainly because of their wealth portfolio. the benefits and costs because of their position and the potential for entrenchment. if the board member‟s invested mainly in the firm, then they may try to minimize risk by avoiding riskier projects (wright et al., 1996). most of the risk related literature consist the positive relation between managerial ownership and managerial risk-taking. some studies are highlighted here. laeven and levine (2009) did study with bank sample and find that, if there are powerful owners, they prefer to face high risk, in addition to this, they find that large executive equity owners have stronger inducement for risk than non-shareholding executives. in another study, ceos have a high proportion of investment in equity reveal high performance (sanders & hambrick, 2007). on the other hand, some line of studies shows if compensation is more sensitive with stock return volatility, then executives tend to avoid risky projects in order to avoid high risk and claims for compensation. (coles, daniel, & mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 26 | p a g e naveen, 2006). no studies were found that associated board executive equity ownership to firm risk using a sri lankan-based data sample. the literature mostly supports the view that equity ownership by executive directors will be positively related to firm risk. therefore this hypothesis as follows: h1: management shareholding is positively related to firm risk 2.2 institutional owners and firm risk one of the important issues emerging from the recent financial crisis is the alleged negative role played by institutional investors leading up to and during the crisis period. some researchers preserve that institutional investors exacerbated the crisis by pressuring financial institutions for short-term profits and increasing the risk-taking behavior (callen & fang, 2013). institutional investors can be any entity such as a mutual fund, pension fund, and investment bank, insurance company or any other company that has a large amount of money to invest. these firms can be very knowledgeable about the firms they invest in and can have a strong voice to influence decisions owing to the percentage of stock held in the firm (sudha et al., 2016). institutional investor could be in two category one is monitoring institutional investors and other one is short-termism institutional investors. monitoring institutional investors, by virtue of their large shareholdings, have the incentive to collect information and monitor management because they reap greater benefits than smaller investors from monitoring the organization such as firm growth, r&d investment, executive compensation, management (earnings forecast) disclosures, ceo turnover, antitakeover amendments, and corporate governance (callen & fang ,2013). actually, prior studies provides experimental indication of this „„short-termism‟‟ view. this proof suggests that institutional investors trade heavily based on current earnings news, place excessive emphasis on shortterm performance, and fail to serve as monitors in correcting ceo over compensation (cheng et al., 2010; cella et al., 2011). most of agency theorists predict that institutional investors having substantial holdings of equity in a firm will monitor management to protect their investment and ensure a good return (monks and minow, 1995). but, cheng et al. (2011) find that institutional investors may be interested in short-term profits and, therefore, encourage managers‟ risk-taking behavior. wright et al. (1996) and hutchinson et al. (2015) find that these investors may encourage boards to take higher risks to achieve higher returns. callen and fang (2013) also shows that temporary institutional investor ownership increases the firm risk. according to manconi and yasuda (2012), one of the motives for this behavior can be the cost of monitoring management because of which the institutional investor would opt to sell the stock. the recent literature mostly supports the positive relationship between the percentage of substantial institutional holdings and firm risk. based on the empirical finding and theoretical support, it assumes to be positive association with firm risk. to test the above argument in sri lankan context, the below hypothesis developed, h2: the percentage of substantial holding by institutional investors is positively related to firm risk 2.3 concentrated ownership and firm risk jensen and meckling (1976) argue that large concentrated shareholders can have an impact on corporate risk taking. la porta et al. (2000) express that the concentrated ownership structure of large firms in emerging countries is known as the root cause of agency conflicts in the firm. jensen and meckling(1976) argue that representatives of majority shareholders could motivating for higher performance because it eradicate agency problems between the principal and the agents. concentrated mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 27 | p a g e ownership is uncommon in uk and usa on the other hand european countries as well as in latin america, southeast asia and africa; firms are typically controlled by few powerful investors (wei &geng 2008). in developing countries, stake holding is also highly concentrated (la porta et al. 2000). in most sri lankan listed companies ownership is concentrated in the hands of a controlling shareholder, who enjoys much higher controlling rights over cash flow and widely held entities are rare as in most other asian countries (senaratne & gunaratne 2008; mapita et al., 2015). wright et al. (1996) argues that due to managerial significant effect, concentrated owners may protect the prevailing private privileges by taking a conventional approach to investment policy, because managers can engage in relationship-investment making their replacements difficult for outside investors. gedajlovic and shapiro (2002) and hu and izumida (2008) found that japanese firms whose ownership structure is more concentrated deliver higher operating returns. claessens and djankov (1999) demonstrate that these firms achieve a higher productivity. shleifer and vishny (1986) argue that large shareholders have the means to steer firms towards high-risk and highreturn projects. according to hill and snell (1989), large shareholders also dissuade firms from embarking on unrelated diversification strategies. as a result, firms with concentrated ownership remain more focused, which contributes to their higher performance, but also explains why they tend to display a higher idiosyncratic risk. this issue is potentially more severe in sri lanka with relatively less effective corporate governance system, which results in a lack of the mechanisms to constrain the private benefits of controlling shareholders and managers. the literature mostly supports the view that concentrated ownership will be positively related to firm risk. therefore this hypothesis as follows. h3: concentrated ownership is positively related to firm risk 3. methodology 3.1 sample selection the population of the study is 293 companies listed in the colombo stock exchange (cse) representing twenty industry sectors. the sample is comprised of the 69 firms listed in the colombo stock exchange for the 20102017 financial years. banking and finance sector was omitted from the sample due to the fact that obeying to the governance mechanisms is mandatory for banking and finance companies while for other companies is non mandatory. it is voluntary with several mandatory rules and also some companies were excluded due to data unavailability. therefore to protect the consistency of the conditions under which the research is carried out companies from banking and finance sector was ignored from the sample. data collection was mainly based on annual reports of the companies in the sample. the unit of analysis was a firm-year. the present study was based on secondary data, which is based on the published audited annual reports of the companies. 3.2 variables this section presents the dependent, independent, and control variables used in the econometric analysis. 3.2.1 independent variable ownership variable refer as independent variables such as institutional ownership (io), managerial ownership (mo) and concentrated ownership (co). institutional ownership is measured as the total percentage of substantial (greater than 3 per cent) ownership of equity in a firm by institutions such as pension funds, mutual funds, investment banks and companies (callen & fang, 2013; sudha et al., mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 28 | p a g e 2016). management‟s ownership is measured as the percentage of equity hold by all the executive directors on the board which include voting rights and capital percentage (sanders & hambrick, 2007; coles et al., 2006 and sudha et al., 2016). the concentrated ownership (co) is measured by using the herfindahl index 5 (hi5). the first five largest shareholders and shareholding percentage are taken into consideration in the herfindhal index and got the squared sum of it (nguyen, 2011; khan, 2005) 3.2.2 dependent variable this study determines firm risk as dependent variable and measures based on accounting, market and mix of tem. in this study use the two folders of measurement using accounting and market data which ensures that the results of the study are robust. firm risk measures used in this study are total risk, asset return risk and financial risk. total risk is measured by the standard deviation of the firm's daily stock returns for each fiscal year. it is measured as the standard deviation of the rate of return on equity for the company, and is expressed as a rate of return per month computed from the (continuously compounded) equity rates of return for the company's equity. the standard deviation is a measure of historical volatility, and is used by investors to gauge the amount of expected volatility. this measure encompasses both systematic and unsystematic risk. total risk can be explained as the extent of the stock volatility and measured by previous studies as the standard deviation of equity returns for each fiscal year (laeven & levine, 2009; wright et al., 1996; hutchinson; 2001; nguyen, 2011; pathan, 2009; sudha et al., 2016). the standard deviation of this ratio (pit / pit -1) times the square root of the number of days of trade activity (250 days) gives the annualized volatility of equity return for each stock. asset return risk is used as an alternative risk measure which represents the variance of the asset returns. following (flannery & rangan, 2008; pathan, 2009; sudha et al., 2016), volatility of asset returns or asset return risk will be computed as the ratio of market value of equity to market value of total assets times the standard deviation of the daily stock returns. this will be annualized by multiplying the resulting value by the square root of the approximate number of trading days in the year. further, arr is computed as the standard deviation of the daily stock returns times the ratio of market value of equity to market value of total assets times square-root of the approximate number of trading days in the year which is 250. financial risk which represents the accounting data used by (eling & malank, 2011). these are commonly used measures to assess firm risk. to measure, logarithm of the ratio of total assets to total shareholder equity is used. total assets are defined as the sum of current and non-current assets. total shareholder equity is composed of common equity, minority interest, and preferred equity. 3.2.3 control variable there are some control variables used in this study that are considered to affect either the firm's risk taking or the measurement of that risk, such as firm size, firm performance and leverage. firm size is used to control for difference in size of the firms. large size of the firm may have better access to capital markets and borrow at better conditions (ferri and jones, 1979), therefore large leverage firms would be able to diversify and invest more. hence, it predicts that larger firms will be associated with less firm risk. firm performance as a control variable, as it is possible that the firms change risk taken depending on the performance of the firm. if a firm does not meet the targeted firm performance in the prior year, managers in an attempt to meet targeted performance figures for the current year will take more risk mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 29 | p a g e in terms of investment choices. therefore, it is predicted that low performance of the prior year will be associated with higher firm risk. 3.2.4 definition of variables table table 01: definition of variables variables presign measures source independent variables management ownership(mo) + equity ownership of all the executive board members as a percentage of the outstanding shares (sanders&hambrick, 2007; coles et al., 2006 and sudha et al., 2016) institutional ownership (io) + percentage of total of substantial institutional investors holding more than 3% of shares in the firm (callen & fang, 2013; sudha et al., 2016) concentrated ownership (co) + herfindahl index 5 (hi5). the first five largest shareholders and shareholding percentage. the herfindhal index and got the squared sum of it nguyen, 2011; khan, 2005 dependent variable total risk (tr) the standard deviation of the daily stock returns in each year (laeven&levine, 2009; wright et al., 1996, hutchinson ,2001;nguyen, 2011; pathan, 2009; sudha et al., 2016) asset return risk (arr) the standard deviation of the daily stock returns times the ratio of the market value of equity to market value of total assets times square root of trading days (flannery &rangan (2008); pathan (2009) &sudha et., al (2016) financial risk (fr) logarithm of the ratio of total investments to total shareholder equity (eling&malank ;2011). control variable performance the return on assets for the firm for the previous year (cheng, 2008) firm size the natural logarithm of total assets (pathan,2009; sudha et al., 2016). financial leverage total debt over assets (sudha et al., 2016) 3.3 regression model the empirical model use to estimate the relationship between ownership structure and firm risk represented in below equation. risk = β1+ β2 (institutional ownership)i,t+ β3 (managerial ownership)i,t+ β4 (concentrated ownership)i,t + β5(roa)i,t+ β6(size)i,t+ β7 (lev)i,t + ε i,twhere, roa for performance, fz is for firm size and lev is financial leverage. i stands for the firm and varies from mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 30 | p a g e 1 to n; t is the year and varies from 2010 to 2017; β1 is the constant that does not vary over time; β1 to β7 are the coefficients in the regression; ε i,t it is the residual variable that varies with time; and natural log board size will be used. 4. results 4.1 descriptive statistics table 4.2 shows descriptive statistics of the study. total risk (tr) is 1.49 with the maximum value of 7.64 and minimum value of 0.42. the average tr shows 1.49 which is more than 1 implies that sri lankan companies experience higher level of total risk. the mean value of the arr is 1.96 with the maximum value of 43.97 and minimum value of 0.0008. standard deviation has recorded 3.58 meanwhile average shows 1.96 which is more than one as a result tr is validated through arr hence, both mean depicted the same trend. financial risk (fr) represents the accounting data. the mean value of the fr is 1.16 with the maximum value of 20.01 and minimum value of 0.0005. standard deviation has recorded 1.75. the average 1.16 shows that sri lankan companies are recorded the risk which is more than one. fr is calculated purely from the accounting data whereas tr calculated from the market data meanwhile arr calculated with two folder coverage market and accounting data. from the summary descriptive statistics it confirms that listed companies in sri lanka shows tr, arr and tr are positive at the same time mean value more than one. the mean mo of listed companies in sri lanka is 8percent which is greater than the uk results which is reported by (sudha et al., 2016) and but it shows the more similar results to the japan perspective (sun, 2017). the minimum mo reported is 0.08 percent and maximum 70 percent and standard deviation shows 17.7 percent. the mean of io shows 71 percent whereas this is very higher when compared to uk results which is 34.14 percent (sudha et al., 2016) and japan results which was 27.5 percent (sun, 2017) at the same time standard deviation shows 27 percentage with the maximum of 99 percentage minimum of 0 percentage. the mean of co shows 3333.6 which higher than the usa, japan results. standard deviation shows 2050 whereas maximum reported 9222.3 and minimum reported 270.8. variables mean median maximum minimum standard deviation dependent variables total risk 1.49 1.25 7.64 0.42 0.74 asset return risk 1.96 0.92 43.97 0.0008 3.58 financial risk independent variables 1.16 0.71 20.01 0.0005 1.75 management ownership % 0.08 0.003 0.70 -0.008 0.177 institutional ownership % 0.71 0.82 0.99 0.00 0.27 concentrated ownership control variables 3336.2 2877.5 9222.3 270.8 2050.13 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 31 | p a g e roa (%) 0.07 0.05 0.72 -0.07 0.08 firm size (ln) 22.42 22.33 26.34 18.23 1.49 leverage (ratio) 0.16 0.13 0.74 0.00 0.14 table 2: descriptive statistic 4.2 correlation table 3 represents the pearson‟s correlation for all the variables in the study. it examined the association between ownership variables and risk variables. there is a positive correlation between management ownership and tr, at the same time management ownership shows negative relationship between arr and fr. institutional ownership reports negative relationship between tr, on the other hand shows positive association between arr and fr. there is a positive association between concentrated ownership and tr, by the way shows negative association between arr and fr. table 3: correlation between variables tr arr fr mo io co roa fz lev tr 1 arr 0.517* 1 fr 0.164* 0.869* 1 mo 0.073* -0.031 -0.058 1 io -0.067* 0.026 0.059 -0.62* 1 co 0.133* -0.014 -0.066 -0.179* 0.329* 1 roa -0.047 0.144* 0.266* -0.094* 0.083* 0.05 1 fz 0.383* -0.24* -0.145* -0.101* 0.213* -0.194* -0.181* 1 lev -0.227* -0.195* -0.16* -0.054 -0.048 -0.232* -0.287* 0.405* 1 this table shows the pearson‟s pair-wise correlation between all the independent and dependent variables used in the empirical model. *denotes that correlation is significant at the 0.05 level 4.3 regression results and discussion. the table 4 depicts the results of estimation model 01, model 02 and model 03. the hausman test rejects the validity of using the random effect model, so the estimation results of fixed effect models are presented. the pre-sign indicates the prediction as made in the hypotheses. results revealed that the overall models are significant at 95% confidence interval level. r-squared value of all models around 56 percent shows the amount of variation in the dependent variable is explained by the independent variables in the models. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 32 | p a g e table 4: estimation results of determinants of firm risk and ownership structure explanatory variables pre-sign total risk (01) asset return risk(02) financial risk(03) constant 11.435(7.240)*** 50.326(7.064)*** 19.991(5.738)*** management ownership + -1.187(-2.770)*** -4.157(-2.150)** -1.122(-1.1875) institutional ownership + 0.059(0.229) 4.108(3.508)*** 1.7706(3.0920)*** concentrated ownership + 0.00004(0.101) 0.0001(0.964) 0.0001(1.150)*** roa -0.408(-0.858) 0.5015(0.2337) 1.4583(1.390) firm size -0.444(-6.063)*** -2.3635(-7.1500)*** -0.938(-5.805)*** leverage 0.620(1.811)** 1.498(0.970) 0.392(0.519) r-squared 0.5065 0.5637 0.5663 adjusted rsquared 0.4287 0.4949 0.4980 f-statistic 6.5148 8.2008 8.2885 prob (f-statistic) 0.000 0.0000 0.0000 no of firms 69 69 69 no of observation 552 552 552 note: this table shows the results from the estimation of the empirical model using generalized least square–fixed effects method; the dependent variables of total risk, asset return risk and financial risk are used alternatively in the empirical model. the model fit is also reported; along with the coefficient the t-statistic is reported in parentheses; the superscripts of *, ** and **** statistical significance to 10%, 5% and 1% respectively. as per the finding, it shows that management ownership is related negatively and significantly with risk variables measures such as total risk, asset return risk and financial risk. however, financial risk does not show significance association with management ownership. so, it shows the evidence to reject the hypothesis one (h1).results depict that managers are expected to take less risk as their managerial ownership increases. this result shows contradicting finding with uk, us and japan studies. in the uk studies, the results shows higher board executive equity ownership is related positively and significantly with total risk (sudha et al., 2016), in line with this finding, saunders et al. (1990) found that, in us banks where managers held a higher proportion of equity, there was significantly higher risk-taking behavior and sun (2017) shows managers ownership are positive and statistically significant association with firm‟s risk. it may be that executive directors with a higher proportion of investment have no incentive to increase firm risk to try and maximize returns for themselves, due to uncertainty of return and job security. it is found that the percentage of ownership held by institutional investors is positively and significantly related to both financial risk and asset return risk, but total risk also associated positively with mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 33 | p a g e institutional owners with no significant relation. it shows the evidence to accept the hypothesis two (h2). this result confirms finding from past studies of (callen & fang, 2013; cheng et al., 2011; hutchinson et al., 2015). further, finding confirm that institutional ownership is positively related with firm risk. the result shows of concentrated ownership with total risk, asset return risk and financial risk are positive. the finding shows significant positive association with financial risk. the results consistent with the finding of these studies, (shleifer &vishny, 1986; wright et al., 1996). it may be large shareholders have the motivations and power to steer firms towards adopting value-enhancing strategies that are associated with higher risk. the control variables were significantly influence the firm risk (firm size and leverage). larger firms (firm size) are associated significantly and negatively with total risk, asset return risk and financial risk. it may be for very large firms, a wrong choice in investment may not affect the stock price. firms with higher financial leverage take less risk; this can be due to the fact that firms face the burden of repayment and, therefore, taking lesser risk in listed companies in sri lanka. firm performance (roa) shows negative association with total risk at the same time positive association with assets return risk and financial risk. this finding aligns with the study of sudha et al (2016) with uk sample. therefore the roa, firm size and leverage significantly impact the risk of the companies listed in sri lanka. 5. conclusion this paper examines the relationship between ownership structures and firm risk in listed companies in sri lanka. using panel date set of sixty nine companies over the sample period of 2010 to 2017. there are three types of ownership structures identified such as management ownership, institutional ownership and concentrated ownership which are the common features of sri lankan companies‟ ownership structure. the negative association was hypothesized between ownership structures and firm risk. the finding of the study reveals that the management ownership shows negative and significant association with firm risk which is the interesting and uncommon finding when compare with earliest literatures. on the other hand, institutional and concentrated ownership structures show positive relation with firm risk which is the similar finding and consistent with past studies on developed countries‟ sample. this finding emphzise that, the clear relation with ownership structures and risk taking abilities of companies in sri lanka. these finding highlights the optimal ownership structure to gear up the corporate performance via mitigate the corporate risk. by using this finding, policy makers and regulators could draw the attention of appropriate mix of ownership to prevent the financial humiliations in future. nevertheless, this study has certain restrictions. the scope of the study was limited to 69 listed companies in sri lanka. therefore, future researchers can expand the study by using a larger sample of companies. in addition, the current study used only an eight-year time span from 2010 to 2017, which can also be expanded. further, this study eliminates companies in the banking and financial sectors like banks, finance companies, leasing companies, insurance companies, investment companies and fund management companies due to their unique corporate governance regulations. therefore, it would be useful if future researchers undertake studies on those companies as well and focus on sector wise studies separately to further explore the relationships studied in this paper. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 34 | p a g e references acharya, v. v., amihud, y., & litov, l. 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(2009). strong boards, ceo power and bank risk-taking. journal of banking and finance, 33(07), 13461350 sanders, w., & hambrick, d. (2007). swinging for the fences: the effects of ceo stock options on company risk taking and performance. academy of management journal,50, 1055–107 saunders, a., strock, e. and travlos, n.g. (1990), “ownership structure, deregulation, and bank risktaking”, journal of finance, vol. 45 no. 2, pp. 643-654. senaratne, s., &gunaratne, p. (2008). corporate governance development in sri lanka: prospects and problem. journal of management. shleifer, a., vishny, r., 1986. large shareholders and corporate control. journal of political economy 94, 461–488. sudha, m., ibrahim, s., &archbold, s. (2016). boards attributes that increase firm risk – evidence from the uk. corporate governance, 16(02), 233 – 258. wei, g, &geng, m 2008, „ownership structure and corporate governance in china: some currentissues‟, managerial finance, vol. 34,no. 12, pp. 934-952. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 37 | p a g e wright, p., ferris, s., sarin, a., & awasthi, v. (1996). impact of corporate insider, blockholder, and institutional equity ownership on firm risk-taking. academy of management journal, 39, 441463. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 1 | p a g e social and labour plans in south african mining: challenges and opportunities thabo michael maseko and sipho david nkosi faculty of management, school of tourism and hospitality, university of johannesburg, south africa. doi: https://doi.org/10.5281/zenodo.12772251 abstract: mining plays a pivotal role in both national and local development in south africa. this article examines the evolving regulatory and legislative landscape impacting mining enterprises and explores the intricacies of partnerships aimed at fostering local economic development. a key focus is on the government's regulatory influence on mining activities and its facilitation of strategic partnerships. a unique feature of south africa's mining sector is the mandate for social and labour plans (slps). these plans present opportunities for ensuring a smooth transition to a post-mining economy for communities reliant on mining. however, significant challenges persist, particularly in aligning the commitments outlined in slps with municipal integrated development planning, which is essential for local development. the article underscores the need for further research into the dynamic impact of mining on local communities, the effectiveness of government frameworks, and the complexities of partnerships in driving mining-led local economic development in south africa. keywords: mining regulation, social and labour plans, local economic development, government frameworks, south africa introduction historically, mining has played a crucial role in the economic development of south africa. for at least 50 years, mining has assumed the status of key driver of the national economy (crankshaw, 2002; department of minerals and energy [dme], 2008a; mabuza, 2009). currently, in terms of contribution to gross domestic product, the mining sector has been overtaken both by manufacturing and the finance and service sectors. indeed, some analysts are writing that south africa must prepare for the “post commodity economy” (mabuza, no date). despite its relative decline, it remains that mining still plays a pivotal role in the contemporary south african economy (dme, 2008a, 2009). according to official data, the mining sector accounts for 7.9% of south africa’s gdp, albeit it is argued that “the indirect multiplier effects take the contribution to about 18.4% in total” (dme 2009). in addition, for 2006, mining contributed r 140 billion to south african exports, which constitutes 32.3% of national total mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 2 | p a g e merchandise exports and 25.2% of total foreign exchange earnings. overall, the sector employs (2006) approximately 458 600 workers, directly accounting for 3% of the country’s economically active population and indirectly “contributes to the welfare of a good deal more” (dme, 2008a). it is claimed that south africa has more than half of the world’s reserves of manganese, chromium and platinum group metals as well as 40% of the world’s vanadium, gold and vermiculite reserves (dme, 2008a, 2009). the country remains a leading world supplier of an array of minerals and mineral products (mabuza, no date). in 2009, it was recorded that 53 different minerals were produced from a total of 1212 mines or quarries, including 47 which produced gold, 33 which produced platinum-group minerals, 89 which produced coal and 240 which produced diamonds (dme, 2009). although gold has historically been the main mineral produced in south africa, gold is giving way to new contenders in terms of the changing mining economy (crankshaw, 2002). christianson (2011) points out the peak in south africa’s gold production was recorded in 1970 and by 2010, the country mined less than one-fifth of the 1970 volume of the precious metal. lydall (2009) documents that since the 1980s, an increasingly important source of foreign exchange has been the country’s resource of platinum group metals, which comprise platinum, palladium, rhodium, ruthenium, iridium and osmium. of south africa’s total mineral sales in 2006, the platinum group metals accounted for 53.6% of sales followed by gold (36.7%) and coal. currently, the platinum metals group is the segment of mining which is experiencing the most dynamic growth and expansion in south africa’s minerals cluster (walker, 2004, 2005; walker and minnitt, 2006). during 2006, platinum group producers committed to some 95 related projects with the single largest investments being impala platinum’s 16 shaft in north west worth r 4500 million followed by anglo platinum’s r 2400 million commitment in the rustenburg area (tjatjie, 2006). it is against this background of the continued significance of mining in the current south african economic landscape that this article interrogates two key issues. first, an analysis and mapping of the nature of the changing regulatory and legislative environments affecting mining enterprises in south africa is undertaken. second, an overview is given of existing research debates on partnerships, mining and local economic development in south africa. this critical review of changing regulatory frameworks and local impacts of mining development in south africa contributes to a wider international scholarship which exists around mining enterprises and partnerships for local socioeconomic development programming (rogerson, 2011). the changing regulatory framework for south african mining prior to 1994, south africa’s minerals economy developed essentially without undue state intervention with the result that market forces largely dictated the pattern of its evolution (dme, 2008a). the new government initially adopted a cautious approach to the policy changes towards the mining sector mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 3 | p a g e (crankshaw, 2002). a significant policy shift is that national government in south africa has followed the example of other countries, such as australia or botswana, in favoring a greater and more active involvement in the development of the state in mineral rights (mainardi, 1997). with democratic change, a policy review was undertaken of the country’s mining and minerals policy which took account the changing institutional environment as well as restructuring taking place in the mining industry (department of minerals and energy dme, 1998). this policy review commenced in 1995 and was led by the department of minerals and energy (dme) which is the national government’s leading agent in the regulation and development of south africa’s mineral resources. the review involved representatives of the executive and legislative branches of government, as well as organized business, small-scale mining sector, labor, communities and environmental groups. the outcome of this review process was the production of a white paper released in october 1998, minerals and mining policy for south africa, which examined six core themes, inter alia, business climate and minerals development, participation in ownership and management, „people issues‟ (including health, safety and housing), environmental management, regional cooperation and governance (dme, 1998). by 2010, considerable uncertainty exists in the investment environment for mining enterprises which has been occasioned by a poor enabling environment for mining investment and the growing worries by local investors about recurring discussions of nationalization of mines (christianson, 2011; nicol 2011; shone 2011). despite these fears, foreign investors, most notably from china (bannister, 2011), are expanding their footprint in the south african mining industry at precisely the time when established south african enterprises are seeking to expand their operations and investments outside south africa (christianson, 2011). mineral and petroleum resources development act no 28 of 2002 the white paper marked a watershed in south african minerals policy; for it represents the basis for initiating new state intervention in the country’s minerals economy in order to address the legacy of racially discriminatory policies which had excluded a large majority of the country’s population from full participation in the mining industry (dme, 2008a). the only significant regulatory measure prior to this was the mine health and safety act 1996 (act 29 of 1996) which provides for the protection of the health and safety of employees and other persons at mines. the policy formulated in the white paper was encapsulated in the mineral and petroleum resources development act no 28 of 2002 (mprda) which regulates the prospecting for and optimal exploitation of minerals in the country. the mprda was passed by the south african parliament in october 2002 and promulgated on 1 may 2004 (republic of south africa (rsa), 2004). later, amendments have been effected to the act (republic of south africa [rsa] 2007, 2009). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 4 | p a g e this act defines the entire regulatory environment of the minerals industry from rights and ownership to mineral sales, value addition (beneficiation) and marketing. essentially, the act has six core objectives. first is to recognize state custodianship of all mineral resources in the country. second is to promote equitable access to the country’s mineral resources, especially amongst historically disadvantaged south africans. third is to promote investment, growth and employment opportunities in the minerals industry and thereby, contribute to the country’s welfare. fourth is to provide security of tenure in respect of existing prospecting and mining operations. fifth is to ensure that the country’s mineral resources are developed in an “orderly and ecologically sustainable manner”. sixth is to ensure that holders of mining rights contribute towards the socio-economic development of the localities and areas in which they operate (republic of south africa (rsa), 2002a) of special significance was the act’s recognition of state custodianship of natural resources, which brought south africa’s regulatory environment in line with that of most other minerals producing countries (rsa, 2002a). it was argued that this universally recognized minerals rights arrangement would “lead to the freeing up of unused and hitherto effectively sterilized privately held mineral rights in prospective mineral terrain” which in turn might “attract international exploration and mining companies and also increase the level of competition among local players” (dme, 2008a). the mprda was to regulate approval and renewal of mining rights on a regular basis. the act allowed holders of „old order‟ mineral rights the opportunity to comply with its provisions and conversion of their rights within a period of five years ending in 2009, failing which, the „old order‟ rights would cease to exist. overall, one of the central tasks of the mprda was to provide the basis for transforming of the mining industry and south africa’s minerals economy (dme, 2008b). a critical regulatory provision of the mprda is the submission of a social and labor plan as the prerequisite for the grant of mining or production rights. the social and labor plan requires that applicants for mining or production rights develop and implement comprehensive human resources development programs, including employment equity plans in order to assist transformation of the industry. a second aspect of the social and labor plan is preparation of local economic development programs and processes which are targeted to save jobs and manage downscaling and/or closure. the dme states that these programs are aimed “at promoting employment and advancement of the social and economic welfare of all south africans whilst ensuring economic growth and socio-economic development” (dme, 2008b). in particular, the management of downscaling or closure seeks to minimize the “impact of commodity cyclical volatility, economic turbulence and physical depletion of the mineral and production resources on individuals” (dme, 2008b). any application for a mining or production right or conversion of an old order right in terms of the mprda has to be accompanied by submission of a social and labour plan. the plan is submitted to the “regional manager” who is defined in the act as “the officer designated by the director-general as mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 5 | p a g e regional manager for a specified region” (rsa, 2002a). the regional manager may refer the plan back to the applicant with proposals for amendments. once lodged and agreed, however, the plan is valid and cannot be amended without consent of the minister until a closure certificate is issued. in terms of the mprda, holders of mining rights or permits remain “responsible for any environmental liability, pollution or ecological degradation, and the management thereof until the minister has issued a closure certificate” (rsa, 2002a). the holder of a mining right has to submit an annual report on its compliance with the social and labour plan to the relevant regional manager or designated agency. the dme has issued a set of guidelines for the preparation of social and labour plans. it is stated that the objectives of these plans are threefold. first is to promote employment and advance the social and economic welfare of all south africans. second is to contribute towards transformation of the country’s mining industry. three is to ensure that holders of mining or production rights contribute both to the socio-economic development of areas in which they operate and critically also to “the areas from which the majority of the workforce is sourced” (dme, 2008b). in terms of the human development program me of the social and labor plan, its core objective “is to ensure the availability of mining and production operation specific skills and competencies of the workforce, and skilling of employees for portable skills utilizable by the employees outside the life in the mining or production industries” (dme, 2008b). in other words, it is to improve skills in mining as well as skills that might be needed after the mine’s closure. issues to be addressed include a detailed skills development plan that shows how the mine intends to offer its employees opportunities to be functionally literate and numerate, learnerships, portable skills and any other training. other considerations include preparation of a career progression plan, mentorship plan, internship, bursary plan and employment equity plan. the central focus of the led programme is described as to ensure poverty eradication and community upliftment both “in the areas within which mining or production takes place and in areas from which the majority of the workforce is being sourced” (dme, 2008b). given effective financing, the development bank of southern africa is optimistic for the led opportunities that can be linked to mining projects (van zyl, 2008). the dme, however, makes clear the led programme “is not the corporate social investment that companies have been involved with all along, but rather what the mine or production operation would leave behind” (dme, 2010). much of the most prominent corporate social investment (csi) initiatives – such as the anglo-american group’s anglo-zimele initiative involve development of a range of support programmes (include finance) for black-owned smmes that might be engaged in procurement for the supply chains of mining enterprises (anglo-platinum, no date; anglo-american south africa and the international finance corporation, 2008; anglo-american south africa, 2008, 2009; sanchez, 2009; anglo-american south africa, 2010). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 6 | p a g e in contrast to csi initiatives, it is stated that the led programme would include “sustainable projects which the mine or production operation will initiate, implement and support financially or otherwise” (dme, 2008b). further guidelines are provided that, in accordance with the led programme, the mine “must ensure co-operation with the formulation of the integrated development plans of the areas within which they operate; and co-operating with government in the implementation of the integrated plans for communities where the operation takes place and for major labour sending areas” (dme, 2008b). in other words, mines should link to the formulation and implementation of integrated development plans (idps) in their operational area and also have a commitment to implementation of idps in labour sending areas. effectively, the mine must consult with communities and relevant authorities as well as participate in existing development forums and establish their led programmes in line with the idp of “the district municipality within which the operation takes place” (dme, 2008b). the mine must provide an analysis of the impact of its operations in respect of the following: number of jobs, smme development, infrastructure development, community development and poverty eradication. in addition, it must furnish a plan to establish “the preferred requirements for housing and living conditions of the workforce”, including new operations for giving information on the sustainability of the settlement beyond the mine’s life and for existing operations and measures for improving standards of housing. finally, the social and labour plan must incorporate processes relating to the management of downscaling, retrenchment, and for regenerating local economies which would be implemented in time of need. these processes are to be developed in line with south africa’s department of labor’s social plan guidelines, which can be traced back to the 1998 presidential job summit (african institute of corporate citizenship, 2001). included here are provisions for establishing a future forum, mechanisms to save jobs and avoid job losses and mechanisms to provide alternative solutions and procedures for creating job security in circumstances where job losses are inevitable. most importantly, the holders of mine rights must outline mechanisms to ameliorate the social and economic impact on individuals, regions and economies where retrenchment or closure of a mine operation is certain. this might encompass activities such as counseling services, training programmes for self-employment, and comprehensive training and reemployment programmes. overall, the applicant for a mining right is responsible for funding of the social and labour plan in the three key dimensions of human resource development; the led programme; and, processes relating to management of downscaling and retrenchments. in addition, it is stated in the mprda that the holder of a mining right must give an undertaking to “ensure compliance with the social and labour plan and to make it known to the employees” (rsa, 2004). the effective intent in this mining legislation is therefore that mining companies are required to start planning for mine closure even at the time (or prior to) that the mine actually opens its operations (marais and atkinson, 2006). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 7 | p a g e one remarkable aspect of the social and labour plans (slp) is that after approval by dme, these plans are not made public. the secrecy around these plans has created considerable concern and controversy. a recent report by action aid points out in critical fashion that this secrecy surrounding slps “is of particular concern” as they are what mining companies largely rely on “to justify its working in a particular area” (action aid, 2008). further, it is argued that local municipalities are often reliant on company slps to promote local economic development as there are few other investors in many remote rural areas. action aid (2008) contends that the fact “local communities are not even aware of what is in these plans hardly bodes well for promoting their own development”. the action aid is highly critical of dme and states that “dme‟s contention that these are not and should not be made public is an apparent attempt to protect the mining companies from further scrutiny” (action aid, 2008). the mining industry charter beyond the mprda, another important aspect of regulation for the south african mining industry relates to the broad-based socio-economic empowerment (bbsee) charter or mining charter which seeks to redress the historical, social and economic inequalities that exist in south africa’s minerals industry (rsa, 2002a). the mining charter was introduced in 2002 and its formulation “was actively pushed by the dme” (sanchez, 2009). the mining charter has several stated aims. first is to promote equitable access to the nation’s mineral resources to all the people of south africa. second is to substantially and meaningfully expand opportunities for historically disadvantaged south africans (hdsa), including women, to enter the mining and minerals industry and to benefit from exploitation of the country’s mineral resources. third is to utilize the existing skills base for the empowerment of historically disadvantaged south africans. fourth is to expand the skills base of hdsa in order to serve the community. fifth is to promote employment and advance the social and economic welfare of mining communities and the major labour distribution areas and finally to promote beneficiation of south africa’s minerals (republic of south africa (rsa), 2002b). the main objective of the mining charter was to achieve 26% ownership by previously disadvantaged individuals in mining companies by 2012. it is argued that the charter furnishes “a framework to help the mining companies comply with the mineral and petroleum resources development act, which obliges them to promote black economic empowerment when applying for the new mineral rights or converting current rights” (fauconnier and mathur-helm, 2008). sanchez (2009) points out that as the mining charter was one of the earliest charters; its stated target group is hdsa as opposed to black south africans. the spirit of the charter is, however, not one to favor the advancement of white women and gives considerable emphasis to the advancement of preferential procurement and according preferred supplier status to hdsas. a key element is the scorecard which sets a framework, targets and timetable (dme, 2008a). during april 2009, the dme released codes of practice for the minerals mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 8 | p a g e industry – so termed mining codes – which set specific targets for mining companies in respect of procurement spent with black economic empowerment local suppliers. it is pointed out that these “codes are currently at discussion stage and a subject of dispute between the industry and the government” (sanchez, 2009). as a whole, the language and recommendations in the mining charter contains a number of similarities with the mprda. with respect to mine community and rural development, it commits stakeholders in partnership with all spheres of government to undertake to “co-operate in the formulation of integrated development plans for communities where mining takes place and for major labour sending areas, with special emphasis on development of infrastructure” (rsa, 2002b). nevertheless, the afore statement is slightly different to that contained in the dme (2008a) social and labour plan commitments in respect of a commitment to assisting idp formulation in labour sending areas as well as operational areas. in another 2008 dme document, it is clarified that in terms of community upliftment objectives, stakeholders “will cooperate in the formulation and implementation of integrated development plans for communities where mining takes place and in major laboursending areas, as well as encouraging urban renewal in mined out areas in order to avoid the creation of ghost towns” (dme, 2008a). the focus on encouraging urban renewal is a new commitment which is not reflected as such in earlier documentation. in the 2008 mineral and petroleum resources development amendment act, a re-definition of the focus is given in terms of empowerment to be aimed at „the socio-economic development of communities, immediately hosting, affected by supplying labour to the operations” sustainable development and mining towards the end of 2005, the dme launched the sustainable development through mining programme which targets a “sustainable development strategy for the south african mining sector and to work towards reporting sustainable development progress to the united nations in 2010 in terms of south africa’s commitments made at the johannesburg world summit on sustainable development” (dme, 2009). although this initiative does not appear to have impacted so far upon the regulatory environment affecting mining enterprises, it provides useful information as to expectations of national government relating to the activities of mining enterprise. as this initiative moves forward, it is expected to consolidate as a full-fledged sustainable development strategy (dme, 2009). the discussion document, which was released in august 2009, states that the sustainable development challenges are numerous. significantly, it highlights that “the developmental needs of the industry are often not (yet should be) interlinked with regional and local community needs” (dme, 2009). it asserts that the integration of mining social and labour plans mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 9 | p a g e must fall in line with municipal idps and led plans. further, the discussion document identifies certain „negative‟ aspects of the mining environment which a national strategy would have to offset. first is the attraction of labour from long distances which results in “haphazard settlements in mining towns or areas adjacent thereto”. second is the social and health impact of mining such as hiv/aids which is exacerbated by single sex living arrangements. third is the fact that mining “has not often necessarily contributed significantly to rural development in „labour migratory areas‟, although this does not undermine its contribution to income and improved quality of life for families whose members are employed on mines” (dme, 2009). fourth is the question of land degradation, water and air quality deterioration. fifth is that despite legislation such as the mprda, mining has not always resulted in appropriate economic benefits and spin-offs for rural communities. sixth is the issue that local municipalities in south africa’s mining-dependent areas are largely under-resourced and lack capacity. in respect of the vision for sustainable development linked to mining, several critical issues are highlighted which relate to economic and social development as well as partnerships. it is argued in line with the mprda that mining needs to deepen its contribution to socioeconomic development and that it has “a responsibility to practically promote and uplift community livelihoods” (department of minerals and energy (dme), 2007). especially, for the sdm vision for sustainable resilient communities, both economic and social needs must be addressed. these include, inter alia, creating opportunities for community economic initiatives based on local entrepreneurship, infrastructure development, skills development and resources, as a basis for local economic development and competitiveness prior to and after mine closure (dme, 2009). the question of improved health care and mitigation of health and safety risks are important spheres of social development. in support of human capital development, the discussion document suggested the need for continued implementation and improvement of measures linked to health and safety standards as well as identifying a strengthened contribution of the mining sector to general health care and health education initiatives (dme, 2009). the document urges the importance of developing “effective partnerships and communication networks to promote good governance and ensure the ability of government (that is, the dme) to fulfill its mandate” (dme, 2009). critical issues to achieve this goal include ensuring transparency and availability of information, the maintenance of democratic and inclusive communication channels, the implementation of co-operative governance; support for partnerships between and within government departments, industry and civil society; and, encouraging multistakeholder integrated local level planning (dme, 2007, 2009). finally, the dme discussion document reiterates that “mining should be conducted within a regional development context”. what this means is explained that “mining activity in any region or area should be integrated into the developmental plans of that region as agreed by various regional stakeholders” such that it prevents mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 10 | p a g e “the phenomena currently known as „ghost towns‟ when mines close, and will serve to move mining closer to sustainable development” (dme, 2009). mining as a driver for local development in south africa at present, there exist only a handful of investigations that interrogate issues around mining and local government in south africa. the existing scholarship on mining, partnerships and local economic development is analyzed here. the range of studies includes work on the local development impacts and responses to the downscaling of gold mining in the free state (seidman, 1993; binns and nel, 2001; nel and binns, 2001), the closure of coal mines in northern kwazulu-natal (binns and nel, 2003; nel et al., 2003), and planning for the closure of diamond mining in free state (centre for development support, 2005; marais et al., 2005). as a whole, it is evident that most existing investigations in miningdependent towns relate to responses to local crises of decline rather than the operations and local impacts of „living mines‟. the most important work on operational mining is controversial research surrounding anglo-platinum‟s operations in limpopo (action aid, 2008). mining and local economic development research on issues around mining and local economic development can be subdivided into two different strands of research. the first concerns the local impacts of existing operational mines; the second focuses more squarely on issues of downscaling and potential or actual mine closure. operational mines and their impacts upon local communities and livelihoods in south africa have attracted little research attention. one exception, however, is provided by the highly critical analysis which was undertaken recently of anglo platinum’s activities upon rural communities in limpopo (action aid, 2008). key findings of the investigation undertaken of anglo platinum’s operations were as follows. first is that mining replaces or destroys traditional ways of life and livelihoods and can result in the loss of agricultural land for large numbers of rural dwellers. second is that whole communities have lost access to drinking water because of serious water pollution linked to mining operations. third is that forced removal of communities has been affected as villages have been removed from their homes following so-termed „relocation agreements‟ which anglo platinum made with associations that the company claims represent „the community‟ but which are associations established by the company itself. fourth is that several rural communities suffer daily the consequences of intrusive mining operations including blasting activities which destroy or damage local homes and the environment. fifth is resistance and community protests to improve services offered to villagers or to challenge loss of land to mining operations has been met with police brutality and legal action from anglo-platinum. sixth is that corporate claims of social responsibility have been shown as mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 11 | p a g e shallow as the company spends less than 1% of its profits on voluntary local community development on education, health and welfare or smme development. lastly, corporate claims of positive impacts in terms of increased job opportunities and local incomes must be set against losses endured by large numbers of farming households of their basic livelihoods and food security with few alternative livelihood opportunities available. overall, the actions of this mining corporation were considered by action aid (2008) as a possible violation of human rights as guaranteed under south africa’s constitution. this claim was, however, not fully endorsed in a report produced by the south african human rights commission and focused on the platinum mine near mokopane, limpopo (anglo platinum, 2008). nonetheless, the human rights commission’s report draws attention to the “disintegration of trust” in communities impacted by relocation and offered a series of recommendations both for communities and companies in relation to resettlement issues. of critical importance was that it highlighted the necessity for stronger partnerships between the mining company and the local municipality in order to address both local service delivery and environmental issues such as blasting. an important outcome of this report has been that anglo-platinum entered into a collaboration agreement with the south african local government association (salga) on basic service provision, municipal capacity building and infrastructure development (anglo-platinum, 2009; salga and anglo-platinum, 2009). the central objectives of this partnership are twofold. first, to promote and protect anglo platinum’s reputation and socio-economic value in communities interested in or affected by the company’s activities. second is to build a mutually beneficial and sustainable environment for both communities and anglo platinum. this partnership is taking root against the backdrop of five major strategic challenges. first, anglo platinum confronts high levels of community mobilization, damage to corporate image, “inconsistent alignment with government strategies”, and generally poor and conflictual relationships with many communities that it deals with. second, the company also faces the challenge of how to ensure the development of mostly poor communities with immense development problems and now affected by its mining operations. third, an additional serious challenge exists to address the impacts of mining operations on community safety, health and welfare. fourthly, entrepreneurial and other economic opportunities offered through the mine’s operation are not being maximized by local communities. fifth, local government in the mining areas of anglo platinum has serious shortcomings in terms of institutional capacity (anglo-platinum, 2009). the approach is essentially one toward building partnerships and improved relationships between municipalities, the private sector and local communities. this approach is considered the essential base for supporting transformation with respect to local development as well as building the capacity of local government to be an effective agency for local development. at its core the emphasis is upon driving a mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 12 | p a g e pro-active local economic development and community development agenda (salga and angloplatinum, 2009). as noted, however, the largest focus of writing in existing work on mining and local economic development relates to the devastating consequences of mine downscaling and closure for localities rather than to the impact of ongoing my operations. the critical point is highlighted by several observers that mining towns are often „mono-industries‟ as the local economic bases of the majority of towns are heavily mining-dependent and thus highly vulnerable to the effects of operational downscaling or closure (binns and nel, 2001; centre for development support, 2005; marais and atkinson, 2006; marais, 2011). the south african experience of mining monoculture, in most respects, is little differentiated from that recorded in other parts of the world. amongst the multiple consequences for localities from mine closures in south africa, the following effects are recorded across the existing literature on the decline of gold, coal and diamond mining activities (seidman, 1993; binns and nel, 2001; nel and binns, 2001; binns and nel, 2003; nel et al. 2003; centre for development support, 2005; marais et al., 2005; marais, 2011). local research highlights the following issues. the quantity and quality of local jobs decreases dramatically leading to situations of underand unemployment with negative consequences for standards of living. job losses impact not only on mine employees but also in negative fashion on local mine supporting industries. in addition, service suppliers, including informal sector suppliers of services (taxi, spazas, hawkers) to mine employees, are negatively affected. furthermore, the local informal sector suffers negative consequences, not least as migrant labour return home. the specialist skills associated with mining is a factor which makes re-employment in other economic sectors highly problematic. retrenchment packages for workers are rarely used for business development, instead, for paying off debt or family maintenance. local governments are hit badly by reduced revenues from local taxes and often higher nonpayment rates for services as increases in indigency occur with sudden increases in the numbers of poor people in need of local government support. many local services such as schools, water and sanitation have to be modified in order to accommodate reduced numbers of local inhabitants. local facilities and infrastructure provided by mines, including buildings, roads and subsidized clinics and schools become subject to deterioration or breakdown, not least in circumstances where the underresourced local municipality is forced to take over operation and maintenance. finally, negative social effects are recorded in terms of loss of social status, breakdown of social networks and community cohesion. as a whole, the mapping out of the negative impacts of mine downscaling and closure shows the complexity of local planning challenges that must be dealt with in order to achieve sustainable development and the making of a post-mining economy (marais, 2011). the weight of these multiple challenges lends further credence to the argument that appropriate planning for mine closure should mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 13 | p a g e not be left to a crisis response to be undertaken in the immediate years before intended closure or run down. instead, planning for a sustainable post-mining economy and sustainable communities needs to be undertaken on a long-term basis and start at the time of the opening of mine activities (marais and atkinson, 2006). in addition to tracking the consequences associated with the decline of mining, the existing literature details issues of local response and of positive local development initiatives in the face of local economic decline and crisis (nel et al., 2003; marais, 2011). mining closure forces municipalities to live up to their mandate of developmental local government and engage more pro-actively in local development initiatives (nel et al., 2003; marais et al., 2005). from the existing record, a number of examples can be noted. in the declining coalmining areas of northern kwazulu-natal, a strong local response was found in utrecht, where a series of initiatives were launched for changing the economic base from mining to tourism (binns and nel, 2002). key actors behind these initiatives were local government which enjoyed strong support from and linkages with mine authorities. among critical led projects were the establishment of a local game reserve, an arts and crafts center, a game farm and urban farming (binns and nel, 2003). at the nearby town of dundee, local responses again involved the municipality in becoming pro-active in partnering with other local stakeholders in responding to the town’s economic crisis; here, arts and crafts and urban farming were sectors of attention (nel et al., 2003). further, in those towns affected by collapse and rundown of gold mining in the free state, partnerships were again formed with the objective of creating new sources for job creation. the local municipality in welkom identified several new „key sectors‟ for developing the regional economy, namely, intensified agricultural production, jewelry manufacture, tourism, freight and cargo distribution; and, the establishment of sector-driven specialized training and support centers (binns and nel, 2001; nel and binns, 2001). finally, in the former free state diamond mining center of koffiefontein, the mine closure precipitated the consolidation of joint initiatives led by the mining company de beers to use the mining activity and infrastructure as the basis for tourism development (marais et al., 2005; marais and atkinson, 2006). this development is in line with international trends of using closed mines as heritage tourism attractions (helmuth, 2008). the opportunity for partnerships through idp planning and implementation the new mining legislation introduced since 2002, in the form of the mrpda, provides a changed paradigm for the activities of mining enterprises to the extent that they must deepen their commitments to local development. in particular, the requirement to produce the social and labour plan potentially encourages mines to develop far more reaching programmes for local development than those usually contained in corporate social responsibility initiatives or plans. the objectives set forth in the mining charter in terms of advancing the social and economic welfare of mining communities and labour sending areas provide a catalyst for facilitating collaboration between mining companies and local mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 14 | p a g e municipalities. in many respects, municipalities are at the „coal face‟ of local development and since 1998 have been acknowledged to be “the key front-end development agencies of the state” (marais and atkinson, 2006). in several respects, municipalities enjoy a number of advantages over civil society organizations as development agencies. in particular, they can “pass by-laws, raise revenue, receive government subsidies and grants, undertake spatial planning and provide bulk infrastructure” (marais and atkinson, 2006). the most critical focal point for collaboration is through the development and implementation of idps which emphasize infrastructure development for communities in areas of mining operations (dcogta, 2009). the idps offer a real opportunity for integrated development programmes and coordinated development for most municipalities. it has been stressed correctly that idps fulfill a pivotal role in bringing together a wide array of developmental issues, priorities, stakeholders and programmes and represent an important platform to build sustainable local economies. accordingly, marais and atkinson (2006) argue “it is imperative that the mining sector takes cognizance of the idps that have been drafted” and where mines have not so far participated in idp preparatory processes, this should be remedied in future. indeed, the more seriously that idps are taken by key developmental stakeholders such as mines, “the more robust the idps will progressively become”. furthermore, for the mining sector, the idps are critical, in that they address developmental issues, “not from the standpoint of the mining sector itself, but from the point of view of the surrounding communities and the government authorities” (marais and atkinson, 2006). in many respects, the idp can be interpreted as a valuable lens, identifying threats and opportunities in a local economy, and offers a “way of understanding how the mining sector is perceived and experienced by the larger society, and therefore, how the mines can target their social interventions most effectively”. generally, the preparation of idps involves varying degrees of public participation (marais, 2011). notwithstanding differential bases of participation in preparation, idps “are probably the most accurate contemporary record of how local leaders and local residents view mining issues” (marais and atkinson, 2006). furthermore, as idps are acknowledged as binding documents for wider cooperation by municipalities, the implications are that if partnerships are sought with national or provincial departments, then such programmes should be negotiated through the relevant municipality through the channel of the idp. this argument points to the imperative for improving (often unrealistic) idps, which often sidestep issues of economic development, and of expanding the frequently limited or poor public participation processes involved in idp preparation to embrace mining companies. it has been observed that in the drafting of many idps, mining representatives may not have participated because of a feeling of reluctance arising out of idp biases in favour of lobby groups representing the poor and widespread distrust of the private sector by municipal officials. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 15 | p a g e overall, marais and atkinson (2006) make the important observation that what is needed now is “for the interventions of mines, government departments and municipalities to find common points of contact, so that partnerships can be forged and synergies exploited”. in partnership with the german international development, south africa’s department of cooperative governance (2009) is seeking to promote „cross-sector partnerships‟ between south african local government and the country’s mining sector. in this regard, idps can offer valuable opportunities for consultation and partnership. in terms of searching for cross-sectoral collaborative partnerships between municipalities and mining companies for improved service provision, infrastructure development and implementation, undoubtedly, idps provide a promising starting point. in planning and implementation for a sustainable post-mining economy, idps are a core vehicle for change. it must be concluded therefore that idps offer a basis for leveraging cooperation and partnership between mining enterprises and local government. the existing shortcomings in processes must be thus identified and addressed as „first level blockages‟ to the making of effective cross-sectoral partnerships. concluding remarks within international scholarship on the mining sector, the south african case represents a high-profile example of the development of partnerships for enhanced socioeconomic development (rogerson, 2011). this review of the changing policy environment affecting south african mining enterprise and associated research highlights the significance of government intervention and regulation as a lever for partnership formation. in particular, the most distinctive aspect of the south african policy record relates to the implementation of the social and labour plans. arguably, potential opportunities exist for these plans to be a basis for a smooth transition to a postmining economy in local communities which are mining dependent. nevertheless, critical challenges remain in terms of monitoring the commitments of mining companies in their social and labour plans towards municipal integrated development planning, which is one of the anchors for local development planning in south africa. further research is needed on the changing impacts of mining on local communities in south africa, the development and challenges of partnerships, and of the role of mining-led local economic development. acknowledgement the university of johannesburg is thanked for research funding support. references action aid (2008). precious metal: the impact of anglo platinum on poor communities in limpopo, south africa. johannesburg: action aid. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 16 | p a g e african institute of corporate citizenship (2001). research topic 3: mining and society local development. unpublished input to mining minerals sustainable development southern africa regional research. anglo american south africa (2008). anglo zimele news. johannesburg: anglo-american and anglo zimele. anglo american south africa (2009). anglo zimele: empowering partnerships. johannesburg: anglo-american and anglo zimele. anglo american south africa (2010). anglo zimele: independence through enterprise partnerships. johannesburg: anglo-american and anglo zimele. anglo-american south africa and the international finance corporation (2008). the anglo zimele model: a corporate risk capital facility experience. johannesburg and washington dc: anglo zimele empowerment initiative and the international finance corporation. anglo platinum (2008). anglo platinum welcomes south african human rights commission report examining mining and human rights – media release 4 november available at www.angloplatinum.com (accessed 2 march 2010). anglo platinum (2009). collaboration with salga on basic service provision, municipal capacity building and infrastructure development, unpublished presentation 6 october. anglo platinum (2008). partnership in action, johannesburg: anglo platinum. bannister d (2011). chinese puzzle. mining decisions: 50-56. binns ja, nel e (2001). gold loses its shine – decline and response in the south african goldfields. geography, 86: 255-260. binns ja, nel el (2003). the village in the game park: community response to the demise of coal mining in kwazulu-natal, south africa. econ. geogr., 79: 41-66. centre for development support, university of free state (2005). application for a new mining right for de beers consolidated limited (koffiefontein mine): social impact assessment report. bloemfontein: university of free state centre for development support. mailto:contact@americaserial.com mailto:contact@americaserial.com http://www.angloplatinum.com/ http://www.angloplatinum.com/ american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 17 | p a g e christianson d (2011). precious little. mining decis., pp. 25-27. crankshaw p (2002). mining and minerals. in lemon a, rogerson cm eds. geography and economy in south africa and its neighbours, aldershot: ashgate, pp. 63-80. department of cooperative governance (2009). capacity development for partnerships between local government and the mining sector. pretoria: dcogta and gtz slgp. department of minerals and energy (dme) (1998). a minerals and mining policy for south africa. pretoria: dme. department of minerals and energy (dme) (2007). sustainable development in mining initiative: development of indicators for monitoring the contribution of the south african mining & minerals sector to sustainable development. available at www.dme.gov.za (accessed 1 march 2010). department of minerals and energy (dme) (2008a). invest in an intense and diverse mineral industry. available at www.dme.gov.za (accessed 1 march 2010). department of minerals and energy (dme) (2008b). social and labour plan, available at www.dme.gov.za (accessed 1 march 2010). department of minerals and energy (dme) (2009). a strategic framework for implementing sustainable development in the south african minerals sector: towards developing sustainable development policy & meeting reporting requirements. available at www.dme.gov.za (accessed 1 march 2010). fauconnier a, mathur-helm b (2008). black economic empowerment in the south african mining industry: a case study of exxaro limited. south afr. j. bus. manage., 39 (4): 1-14. helmuth a (2008). economic diversification of a mining town: a case study of oranjemund. unpublished masters of business administration dissertation, rhodes university, grahamstown. lydall m (2009). backward linkage development in the south african pgm industry: a case study. resour. policy, 34: 112-120. mabuza m (2009). the role of mining in south africa beyond 2010. available at www.dme.gov.za (accessed 1 march 2010). mailto:contact@americaserial.com mailto:contact@americaserial.com http://www.dme.gov.za/ http://www.dme.gov.za/ http://www.dme.gov.za/ http://www.dme.gov.za/ http://www.dme.gov.za/ http://www.dme.gov.za/ http://www.dme.gov.za/ http://www.dme.gov.za/ http://www.dme.gov.za/ http://www.dme.gov.za/ http://www.dme.gov.za/ http://www.dme.gov.za/ http://www.dme.gov.za/ american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 18 | p a g e mainardi s (1997). mineral resources and economic development: a survey. dev. south. afr., 14: 61-77. marais l (2011). the state of partnerships for closure planning in mining dependent municipalities. paper presented at the local government and mining roudtable, sandton, 24 march. marais l, atkinson d (2006). towards a post-mining economy in a small town: challenges, obstacles and lessons from south africa. bloemfontein: centre for development support, university of free state. marais l, pelser a, botes l, redelinghuys n, benseler a (2005). public finances, service delivery and mine closure in koffiefontein (free state, south africa): from stepping stone to stumbling block. town reg. plann., 48: 5-16. nel e, binns t (2001). decline and response in south africa‟s free state goldfields. int. dev. plann. rev., 24: 249-269. nel e, hill tr, aitchison kc, buthelezi s (2003). the closure of coal mines and local development responses in the coal-rim cluster, northern kwazulu-natal, south africa. dev. south. afr., 20: 369-385. nicol m (2011). why mining should be nationalized. new agenda. south afr. j. social econ., policy, 42 (second q.): 17-21. republic of south africa (rsa) (2002a). mineral and petroleum resources development act, 2002.pretoria: government printer. republic of south africa (rsa) (2002b). broad-based socio-economic empowerment charter for the south african mining industry, pretoria: dme. republic of south africa (rsa) (2004). mineral and petroleum resources development act, 2002 (act 28 of 2002): mineral and petroleum resources development regulations. government gazette 466 (2625): 23 april. republic of south africa (rsa) (2007). mineral and petroleum resources development amendment bill. pretoria: creda. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 19 | p a g e republic of south africa (rsa) (2009). mineral and petroleum resources development amendment act. government gazette 526 (32151): 21 april. rogerson cm (2011). mining enterprise and partnerships for socioeconomic development. afr. j. bus. manage., 5(14): 5405-5417. salga and anglo-platinum (2009). memorandum of understanding. unpublished document, south african local government association, pretoria. sanchez c (2009). black economic empowerment and the development of south african smmes – an application to the mining industry. unpublished masters in international economic development, dauphine universite, paris. seidman gw (1993). shafted: the social impact of downscaling on the free state goldfields. south afr. sociol. rev., 5 (2): 14-34. shone h (2011). fasten your seat belts. mining decis., pp.33-36. tjatjie t (2006). investment in a selection of south africa‟s mineral sector. pretoria: dme. van zyl j (2008). enhancing the development impact of mining projects through effective financing. paper presented at the mining summit, 910 september, johannesburg. walker mi (2004). sustaining competitive advantages: the role of the minerals inputs cluster in the economic growth and development of south africa: a preliminary assessment. unpublished phd dissertation, university of the witwatersrand, johannesburg. walker mi (2005). unpacking the nature of demand and supply relationships in the mining capital goods and services cluster: the case of pgms. paper presented at the trade and industrial policy secretariat, annual forum. available at www.tips.org.za (accessed 2 march 2010). walker mi, minnitt rca (2006). understanding the dynamics and competitiveness of the south african minerals input cluster. resour. policy, 31: 12-26. mailto:contact@americaserial.com mailto:contact@americaserial.com http://www.tips.org.za/ http://www.tips.org.za/ the main question we seek to answer is, if the human rights message improves household behavior american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 37 | p a g e challenges and opportunities in the business of water: future outlook carlos javier gonzález centrum católica graduate business school, pontificia universidad católica del perú, lima, perú. doi: https://doi.org/10.5281/zenodo.12772253 abstract: the water sector presents substantial opportunities for private sector involvement, yet challenges persist in realizing anticipated benefits and scale. this article explores the landscape of private sector participation in water management amidst evolving global policies, heightened public scrutiny, and the recognition of water as a fundamental human right. despite its potential, the sector faces complexities ranging from regulatory frameworks to ethical concerns surrounding corrupt practices. as water companies navigate consolidation and growth, they confront unanticipated challenges that necessitate strategic readiness and adaptation. this study examines these dynamics to propose insights for enhancing private sector engagement and effectiveness in the water industry. keywords: private sector participation, water management, human right to water, corruption in water sector, water industry challenges introduction once unnoticed, water supply utilities are now the centre of attention. escalating drinking water and environmental standards and increasing public vigilance and financial problems are leading to decreasing confidence in their competence and sustainability. yet water industry is a large and growing business whose true economic significance is only beginning to be realized. while the growth in various sectors of water industry varies, the industry seems to be consolidating and coalescing into more of a unified industry. in the united states, which many like to consider the bastion of capitalism and free enterprise, resistance to private water systems continues since the 19th century. as of now, the percentage of population served by the private organisations (including publicly owned systems operated by the private sector) is only 12%. misfortunes of high visibility privatization projects are often dubbed as people’s victory by the popular press and the early predictions of rapid privatization are no longer valid. acceptance of private water projects is wider in europe. thatcherite privatization in uk generated considerable opposition at the time, but by this time, 45% of the population in europe is being served by private operators. rapid growth is visible in mediterranean and north african regions. overall, privatization escalated all over the world in the 1990‟s but stumbled thereafter due to opposition from mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 38 | p a g e the civil society groups, especially in developing countries leading to what came to be known as „water wars‟. the term “water wars” referred originally to the famous protests in cochabamba, bolivia, in 2000, when the government handed over the control of water supply of that city to consortium headed by the us construction company bechtel. the politicians who organized the people against the government have reaped rich benefits in terms of popularity, with many of them now occupying high political offices including the presidency of the republic. there have been similar street battles in other countries with tragic loss of lives. inevitably, the battles have been reflected in acrimonious debates among policy analysts. some of the literature has been academic while much of the populist and polemical debate has taken place on the web. during the last seven years or so, there has been some thaw in opposition to privatization and as shown in figure 1, overall activity in terms of the number people being served by the private sector seems to be continuing to advance especially in developing countries. the business of universal coverage safe drinking water was formally recognized as a basic need in the 1970‟s (ilo, 1976). in november 1980, the un declared that the next ten years would bring 'safe water and sanitation for all'. the then un's secretary-general, kurt waldheim, announced at the time that the goal was 'eminently achievable'. faster construction of water supply and sanitation systems all over the developing world was the declared aim of the international drinking water supply and sanitation decade and the who estimated that services were laid out as twice the rate of the 1970s, and yet universal access was nowhere on the horizon when at the end of the decade, global consultations were held in delhi, india in september, 1990. the delhi declaration called for „water for all‟ by with the slogan of „some for all, rather than more for some‟. the declaration was adopted by the united nations general assembly as „strategy for the nineties‟. in retrospect, it seems surprising that such an egalitarian declaration achieved a broad consensus considering that neoclassical economics was in ascendance at the time. inevitably, when the policy initiatives emerged out of this declaration, world bank and donor countries found „welfare state connotations‟ of delhi declaration disconcerting. within two years, the influence of neoliberal ideas became evident and the 1992 dublin principles illustrated their perspective in the fourth principle by stating that “water has an economic value in all its competing uses and should be recognized as an economic good” (wmo, 1992). neoliberal diagnosis was stated clearly: “past failure to recognize the economic value of water has led to wasteful and environmentally damaging uses of the resource. the increased role of the markets was recommended for managing water as an economic good. international aid agencies adopted dublin principles and actively promoted the role of the private sector in provision of drinking water. it has been alleged, however, that this change of course, especially in case of bilateral aid agencies, was not as much out of concern for universal coverage as for promotion of business of their water companies (budd and mcgranahan, 2003). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 39 | p a g e meanwhile, those opposing privatisation were campaigning to get drinking water declared as a human right. since human rights have no hierarchy, it was expected that water as a human right would be deemed to be as important as other rights mentioned in the universal declaration of human rights (udhr) of 1948. this move was not without controversy. at the un commission on human rights in 2002, canada voted against the right to drinking water insisting that international law should not recognize the existence of a right to water as this is a domestic issue for each country. consequent to heavy lobbying from the governments of the global south and northern ngo‟s, the un committee on economic, social and cultural rights developed a general comment, which confirms that the right to water is implicitly contained in the international covenant on economic, social and cultural rights. this comment (no. 15) adopted by the un committee on economic, social and cultural rights at its twenty-ninth session in november 2002 affirmed that „the human right to water entitles everyone to sufficient, safe, acceptable, physically accessible and affordable water for personal and domestic uses‟. a general comment is only an interpretive tool and does not, in itself, constitute legally binding 'hard law'. even so, the general comment gained wide acceptance amongst many states and intergovernmental organisations, including the world bank. on july 28, 2010, the united national general assembly voted (with 41 abstentions) on a non-binding resolution recognizing the right to water and acknowledged that clean drinking water is integral to the realization of all human rights. on 30 september, 2010, the human rights council, responsible for mainstreaming human rights within the un system, adopted by consensus a resolution affirming drinking water as a human right. canada, the united states and more than two-thirds of the european union are opposed to international action in this regard and therefore do not recognize human right to water. a related unresolved issue relates to the role of business with respect to human rights. the united nations has not acceded to the demands of the human rights advocacy groups that the same range of human rights duties be imposed on private business that the states have accepted for themselves under treaties the latter have ratified. norms drafted to this effect by a committee appointed by the un were opposed by the business groups and were finally rejected by the concerned un body in 2005. after several years of deliberation, in june 2011, the un human rights council endorsed the "guiding principles on business and human rights: implementing the united nations 'protect, respect and remedy' framework" proposed by un special representative john ruggie. these guiding principles mainly relate to rights at work and rights mentioned in the udhr. case law relating to water as human right has not yet developed. there is little shared knowledge across different stakeholder groups in the water business and human rights domain. since most developing countries recognize water as a human right, those in water business need to plan ahead before they receive nasty surprises. normally, the quantity of water supplied in terms of liters per capita per day would not cause a problem as the drinking water supplied by the private sector is more than that considered adequate for personal use, but affordable price could be a cause for controversy. also, while the right to water does not mean free mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 40 | p a g e water, a water utility would still need to evolve a policy as to how and when to deny water supply to a consumer for non-payment of bill if no alternative supply of drinking water is available to the consumer. a trickier area could be enhanced coverage. the governments usually sell privatisation on the grounds that it would lead to coverage of uncovered areas; but quite often, the coverage does not increase to the extent promised (clarke et al., 2009). the water business enterprise will need embed their responsibility to respect the right to water by expressing their commitment to meet this responsibility through a statement of policy that is informed by relevant expertise and is approved at the highest level in the company. the statement needs to stipulate expectations from personnel and partners directly linked to the operation of drinking water supply, communicate the same to all stakeholders, be publicly available and reflected in operational procedures. with the help of rights groups, the enterprise would need to set up a non-judicial grievance redressal mechanism. in addition, the enterprise will also need to carry out a human rights due diligence which could be an ongoing process as the operating context evolves. water business and corruption water business has an old unsavory reputation both in developed and developing countries. grand rapids, michigan water scandal of 1900 in which a bribe of $ 100,000 was passed on was a typical figure 1. population served by private sector water companies. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 41 | p a g e case of municipal corruption in those days which the people found “as fascinating as a dime novel” (mcgerr, 2003). recent spectacles of corruption include prosecution against officers and agents of lyonnaise des eaux in france, vivendi (now veolia) in france and italy and siemens, pirelli, bicc, marubeni and tomen in singapore, not to mention the grand larceny in developing countries. the water sector is particularly vulnerable to corruption because the technical complexity required to design and construct water infrastructure projects leaves less room for public transparency and leads to information asymmetry. water sector is also complex in the sense that it involves a multitude of actors. this leaves water governance dispersed across political boundaries and several agencies which makes effective regulation and oversight difficult. the atmosphere of discretionary action opens up for many loopholes especially when high demand for water services reinforces the power position of suppliers. high capital intensity combined with a high frequency of interaction with suppliers and procurers makes procurement and contract implementation easy to manipulate. kiltgaard‟s (1988) equation „corruption = monopoly + discretion – accountability‟ is useful for understanding why corruption in water sector is ubiquitous at every point along the water delivery chain, including policy design, budget allocation and operation. according to global corruption report 2008, in wealthier countries, corruption is concentrated in awarding of contracts for building and operating municipal water structure. the report notes that the stakes are high as this market is worth an estimated us$ 210 billion annually in western europe, north america and japan alone (transparency international, 2008). further, corrupt practices have caused water shortages in some countries like spain. in respect of the developing countries, according to this report, corruption inflates the overall cost for achievement of millennium development goal (mgd) in respect of drinking water by us$ 48 billion. sub-saharan africa seems to be worst placed region in this respect. in the successive yearly corruption perception indices compiled by transparency international nearly half of the twenty countries that perform worst in the index come from the region. at the same time, this region is not moving with adequate speed towards achievement of mgd in respect of drinking water. worldwide, privatisation of water supplies has progressed on economic grounds while losing the political wars with the public perception that privatisation deals were corrupt. this perception has been the primary determinant of the political outcome. numerous water privatisation efforts have failed in latin america, africa, asia and the united states, following opposition from public interest groups. these groups have claimed with some justification that the deals were not transparent because of which the water rates rose unreasonably and the promised service improvements were not carried out. the most high-profile reversal came in 2000 in cochabamba, bolivia, mentioned earlier where negotiations were carried out with only one firm. transparency is essential for privatisation to be viewed as politically legitimate. from the point of view of the government, an effective way to combat corruption in privatisation is by increasing the flow of information to the public on transactions, on the financial mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 42 | p a g e and operational performance of state-owned firms prior to sale and on expectations after privatisation. at the same time, the businesses cannot shirk their responsibility. there was a time when bribing the officials of the third world countries was not only legitimate, in many developed countries it was tax deductible. in the us, foreign corrupt practices act (fcpa) had been on the statute book since 1977 but not many people were even aware of its existence. due to pressure from the civil society groups, toughening is noticeable on the part of western governments. recent years have seen a spurt in crafting anti-bribery laws as also enforcement of existing laws. a new british antibribery law, passed in 2010, even makes small “facilitation payments” to speed up routine business punishable. oecd‟s bribery convention requires members to change their legal system and open law-enforcement systems to intense external scrutiny and the members are subject to public naming and shaming when they breach them. enforcement of fcpa has gone up steadily from 5 actions in 2004 to 74 in 2010. it is no longer possible for any ceo to claim with a sophisticated shrug that doing deals in africa always means paying kickbacks. if businesses in the water sector are serious about combating corruption, instead of forming a cartel, the industry groups could form an ethics committee. stung by allegations of unjustified overpricing, companies accounting for almost all of supply for water pipes in columbia american pipe and construction, pvc gerfor, titán manufacturas de cemento, tubotec, celta, colombiana de extrusiónexrucol and flowtite andercol – formed an ethics committee which includes outside experts. the committee has been successful in pointing out specific cases of irregularities in procurement forcing the government authorities to make amends. efficiency and cost the water business in private sector is likely to be more efficient than public utilities which are often overstaffed, technologically challenged and corrupt (segerfeldt, 2005; world bank, 2006). however, this would not automatically result in lower prices for the consumers. the main argument against private business entering water sector is that it increases prices, making water unaffordable for millions of poor people. it is argued that as a natural monopolist, the business finds it easier to increase prices rather than increasing returns to scale by increasing coverage. this could be controlled by having private sector compete for the right to sell water to the market and to award this right to the company offering to sell this water at the lowest price. even so, the cost to the consumer is likely to increase as public subsidies to the water utility would be discontinued or drastically reduced. in developing countries, these subsidies amount to $ 45 billion per year and on average the average are as high as 70% of the costs (segerfeldt, 2005). ideally, the reform including raising prices should precede privatisation. this was the case in gabon where it required ten years of ground work to bring the tariffs to the level reflecting cost (tremolet and neale, 2002). in the event vivendi won a concession contract based on a 17.25% price cut. revenue recovery could also be more efficient under private sector management. for example, in buenos aires, the private company found that 11% of properties classified mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 43 | p a g e as residential were actually nonresidential and another six per cent had under-reported their size. reclassification resulted in increased fee from 425,000 customers. in most cases, tariffs go up when private business takes over water utilities and quite often prices increase in a haphazard manner. when the private operator took control of the buenos aires water supply, average tariffs were cut by 27%. next year, the prices were increased by 13% and three years later by another 27% and increases continued till 2002 before the currency crisis hit the country. in early 2002, prices were about 93% higher in treal terms than they were at the time of privatisation (delfino et al., 2007). the focus of studies on price increases has been on the consumers who are already connected to the piped water supply sytems. those who are not connected usually purchase lower quality water from vendors paying, on average, 12 times the price of water from the regular mains. therefore, availability of a water connection at doubles the existing price would give poor people substantial economic benefits (segerfeldt, 2005). these people, however, are trapped in poverty and have no voice. a coalition of potential beneficiaries does not exist. on the other hand, those already connected to the system have a vested interest in subsidized water available from a public utility and get support from public utility employees as also from anti-business ngo‟s in their bid to retain the status quo. ferment and the future according to global water intelligence, about 16% of the world’s population will be served by the private operators by 2015. in the recent years, more national and regional level companies have been getting contracts as compared to global players. another notable feature is the increasing tendency for national companies of developing countries to gain these contracts, which until 1995 were regarded as being almost exclusively the domain of companies from developed countries. big contracts (for example, buenos aires in 1993 and jakarta in 1997) created controversies preparing ground for water wars of the next decade. inevitably, there was a move away from mega-contracts to smaller and possibly table 1. business responsibility in psp. variable service/ management contract affermage/ lease concession bot boo divestiture ownership no no no no yes yes investment no no no yes yes yes risk no shared yes yes yes yes o&m yes yes yes yes yes yes duration short medium medium long long indefinite increasing public opposition ─────────► mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 44 | p a g e less contentious contracts. the average contract size has diminished since the 1990s. however, this trend may not continue as evident from an ipo issued in 2010 for a mega contract for water supply in chongqing, china. water sector is in ferment and the businesses seem to be slow to respond to new challenges. while economic challenges are daunting, political considerations need to be given priority. businesspersons should not consider it strange that large number of people consider the idea of profit being made out of water abhorrent. after all, the number of for-profit institutions in the public education sector is quite small as compared to public and non-profit institutions. blaming the occasional distress of water companies on vested interests and anti-business groups is counterproductive. given the experience of water wars, the degree of privatisation in future is likely to be decided primarily by politics. the business opportunities for private businesses will accelerate but neither in the united states nor in developing countries, will there be divestiture of the type that occurred in england and wales. many developing countries are trying private public-community partnership; but these experiments are only on a small scale. in bigger projects, developing countries are trying to sell the idea of privatepublic partnership (ppp) for private sector participation (psp), because the objectives of the two „partners‟ are quite different. the type of participation being tried out is given in table 1. in countries where the idea of privatisation leads to fierce resistance and social strife, only service contracts and management contracts are possible. this could be the initial approach in south asia and some countries of latin america like bolivia and perú. later, the business could move on to affermage and lease. when going in for concessions, the business will need to look at the foreign exchange risk. devaluation of peso in argentina in 2002 caused such a problem that the net worth of the water utility became negative. there is tendency to underbid for contracts as the bidders are confident that the contract can be renegotiated. this tendency has been widespread in latin america where three fourths of the contracts signed in the 1990‟s was renegotiated within an average period of 19 months after signing the contract (gausch, 2004). in view of public criticism, this option may not be available in future and the business will have to assess the realistic costs and hedge their bets. as compared to the rest of infrastructure businesses, where often technology is the main issue, the water business is likely to get more and more complex. conclusion there is general agreement that public utilities have been too slow in extending access to services and that they can be inefficient and corrupt. at the same time, increasing private sector involvement to address these problems remains controversial. most of the research in water business is in the form of case studies. there is need for more of econometric research based on natural experiments. the water business brings fresh capital for investment in infrastructure. however, the loans are usually in dollars but the tariff is denominated in local currency. the business needs to hedge the currency risk in a professional manner instead of trying to re-negotiate the contract by bribing the politicians. the water mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 45 | p a g e business is being wrong footed both by human rights groups and anti-corruption activists. individual water companies need to clean up their act and business groups need to do more by taking effective measures like forming ethics committees. the water business needs to go beyond technocratic solutions to problems and involve stakeholders in formulating innovative solutions. considering that incomes in developing countries are rising and that one billion people are without safe water and perhaps several times that number do not have tap water on demand, the potential market is huge. this market can be profitably tapped only when water business eschews short-termism and rises to the new challenges. references budd j, mcgranahan g (2003). are the debates on water privatization missing the point? experiences from africa, asia and latin america. environ. urban, 15(2): 87-113. clarke grg, kosec k, wallsten s (2009). has private participation in water and sewerage improved coverage. j. int. dev., 21(3): 327-361. delfino ja, casarin aa, delfino me (2007). how far does it go? the buenos aires concession: a decade after the reform. unrisd, geneva. ilo international labour office (1976). employment growth and basic needs: a one-world problem: report of the director-general of the international labour office. geneva: i.l.o. klitgaard re (1988). controlling corruption. berkley, ca: university of california press. mcgerr m (2003). a fierce discontent: the rise and fall of the progressive movement in america, 1870-1920. new york: oxford university press. segerfeldt f (2005). water for sale: how business and market can resolve the world‟s water crisis. cato institute, washington dc. stottman w (2000). the role of the private sector in the provision of water and wastewater services in urban areas. in water for urban areas, uitto ji, biswas ak (eds.). united nations university press, tokyo, pp. 156-199. transparency international (2008). global corruption report: corruption in the water sector. berlin: transparency international. tremolet s, neale j (2002). emerging lessons in private provision of infrastructure services in rural areas: water and electricity services in gabon. world bank, washington, dc. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 46 | p a g e wmo, world metereological organisation (1992) international conference on water and the environment: the dublin statement and report of the conference. geneva: wmo. world bank (2006). approaches to private participation in water services. world bank, washington, dc. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 32 | p a g e banking regulation and liquidity risk: an analysis of waemu 1dr. seraphine prao and 2fabrice anzara, m.sc. 1associate professor at alassane ouattara university (bouaké) /lampelaboratory of economic policies’ analysis and modeling, ivory coast. 2ph.d. student at alassane ouattara university (bouaké) /lampelaboratory of economic policies’ analysis and modeling, ivory coast. abstract: the banking sector's role in allocating resources to investment projects is pivotal in developing economies. banks transform short-term deposits into long-term loans, a process laden with responsibility and risk. liquidity risk, characterized by a bank's inability to meet short-term commitments, poses a significant threat to its financial stability and reputation. this study delves into the impact of banking regulations on liquidity risk, a topic of contentious debate in the literature. keywords: banking sector, liquidity risk, banking regulation, financial stability, investment project 1. introduction the banking sector plays an important role in developing economies. this is because the process of bank intermediation places a heavy responsibility on banks to allocate the resources raised to various investment projects in the economy. as part of this process, banks typically convert short-term deposits into loans with a much longer average maturity (casu et al, 2019). this transformation of schedules is not without consequences for the bank, as it could eventually compromise its financial structure, and ultimately expose it to liquidity risk. according to hakimi and zaghdoudi (2017), liquidity risk refers to a situation in which a bank is unable to meet its short-term commitments. it then becomes insolvent and is unable to meet the withdrawal demands of its customers. liquidity risk undermines the confidence of depositors and affects both the performance of banks and their reputation. in light of this definition, the prospect of such a scenario has given rise to much discussion about the ability of banking regulation to address it. however, the effects of regulation on liquidity risk have been hotly debated in the literature. on the one hand, some authors such as berger and bowman (2009) argue that bank regulation has the potential to reduce liquidity risk. indeed, these authors argue that a highly capitalized bank can cope with contingencies resulting from a shock, as capitalization acts as a cushion, which increases the absorptive capacity of banks in case of difficulties or large losses. in contrast to these authors, a section of the literature argues that bank regulation can also increase liquidity risk. according to these authors, if the bank decides to hold enough liquid assets in its portfolio, to reassure its depositors, while investors have a preference for less liquid assets, this could result in a decrease in liquidity creation and an increase in liquidity risk (horváth et al 2014), known under the banner of the financial fragility hypothesis. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 33 | p a g e very recently, the economic literature has emphasized the role that the financial market could play in this analytical framework. indeed, the financial market is an important component of the financial system whose influence has been growing in recent years. the interest of the literature in the financial market is explained by the interactions that it has with the banking market. indeed, following this literature, it appears substantially, that the considerable growth of the financial market in recent years, would be largely related to banking regulation (chen et al, 2021). in this regard, levine (1991) states that constant regulatory pressures have caused banks to shift from traditional activities to market activities. similarly, buchak et al, (2018) argue that traditional banks have been subject to significant regulation since the last financial crisis. this regulation is causing costs to rise and limiting the range of products they can offer, hence the shift from traditional business to disintermediated finance activities. while market activities are known to contribute significantly to the financing of the economy, they can also undermine the stability of the banking system. for example, dell'ariccia et al (2008) find that securitization increases risk because it reduces banks' incentive to monitor borrowers. for uhde et al (2012), securitization and the complexity of derivatives lead to information losses that can lead to bad investments. furthermore, banks may have incentives to speculate on certain financial assets to improve their returns. in an interconnected and interdependent world, the instability generated by such practices could lead to a crisis with disastrous consequences for the banking system but also for the real economy (fsb, 2015). thus, in light of the above, it would appear that the effect of banking regulation on liquidity risk is weakened by the risk-taking induced by the development of the financial market. thus, the ambivalence about the role of the financial market in the relationship between regulatory capital and liquidity risk is a legitimate concern that deserves attention. concerning waemu countries, it should be noted that the financial crisis that occurred in the 1980s gave rise to a vast reform program. to improve the resilience and contribution of banks to the development of the countries in the zone, the banking authorities implemented the prudential system as promoted by the basel committee. thus, the union will see the entry into force of the basel 1 agreements in 2000, followed by an increase in banks' share capital as of 2007. initially set at 3 billion cfa francs, the capital stock will be raised to 10 billion cfa francs, but the entry into force will be gradual. more recently, in 2018, the union also adopted the basel 2 and 3 agreements. however, despite all the reforms undertaken, an analysis of the facts raises somme questions. indeed, over the period 1996 to 2018, there has been a strengthening of the regulatory arsenal. contrary to the expected negative effect on liquidity risk, the strengthening of the regulatory arsenal has instead been accompanied by an increase in liquidity risk, with the ratio rising from 4.32% to 6.57% (wdi, 2020). at the same time, while the strengthening of the regulatory arsenal was followed by the development of the financial market, with an increase in market capitalization from 1% to 32% (gfdd, 2020), this increase in capitalization seems to have been conducive to an increase in liquidity risk, over the same time. thus, based on these facts, it appears that the role of the financial market in the relationship between regulatory capital and liquidity risk merits reflection. and it is here that we place the problem of our study. the central question that we attempt to answer in this study is the following: to what extent does the financial market activity in the relationship between regulation and bank liquidity risk? mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 34 | p a g e consequently, the general objective of the study is to examine the role of the financial market in the relationship between banking regulation and liquidity risk in the waemu zone. specifically, it is to examine the nature of the relationship between regulatory capital and bank liquidity risk and to determine the role of market capitalization in the relationship between regulatory capital and bank liquidity risk. in connection with these specific objectives, we postulate the following assumptions. the first is that the relationship between regulatory capital and liquidity risk is non-linear. the second is that regulatory capital reduces liquidity risk for a given level of market capitalization. pour mener à bien cette étude, les données utilisées dans notre cadre empirique ont été obtenues de la bceao (2020) ; wdi (2020), and gfdd (2020) et couvrent la période 1996-2018. au plan méthodologique, nous avons recouru à la méthode de panel à transition lisse (pstr) développée par gonzalez et al (2005). a l’issue des estimations, nos résultats montrent qu’il existe une relation non linéarité entre la règlementation bancaire et le risque de liquidité, en interaction avec le marché financier. en effet, nous montrons que l’efficacité de la règlementation bancaire est réduite au-delà d’un seuil de capitalisation boursière de 24,93%. plus précisément, la règlementation bancaire réduit le risque de liquidité en dessous du seuil tandis que l’effet au-dessus du seuil est positif mais non significatif. to conduct this study, the data used in our empirical framework were obtained from bceao (2020); wdi (2020), gfdd (2020) and cover the period 1996-2018. methodologically, we used the smooth transition panel method (stp) developed by gonzalez et al (2005). our results show that there is a non-linear relationship between banking regulation and liquidity risk, in interaction with the financial market. indeed, we show that the effectiveness of bank regulation is reduced above a market capitalization threshold of 24.93%. more precisely, bank regulation reduces liquidity risk below the threshold while the effect above the threshold is positive but not significant. our study is not lacking in interest and stakes. indeed, while many studies have addressed the troubled role that the financial market can play in preserving banking stability, to our knowledge, no study has conducted empirical verification, in african countries. this study, therefore, aims to draw the attention of banking authorities to the need to take into account disintermediated finance activities in the implementation of regulatory provisions to ensure the sustainability of the regional banking system. in the following, we structure this paper as follows. the second section discusses the literature review. section 3 presents the methodological framework adopted. section 4 is devoted to the details of the data, the definition of the variables, and the descriptive statistics. in section 5, we present the main results of this study. the conclusion is presented in section 6. 2. banking regulation, bank liquidity risk, and financial markets: theoretical and empirical contributions this section is organized around two main points: the theoretical review and the empirical review. the theoretical review focuses on the theoretical foundations linking banking regulation, liquidity risk, and the financial market, while the empirical review provides an overview of the various empirical works. 2.1. review of the theoretical literature the link between banking regulation and liquidity risk is a very controversial topic in the literature. the various contributions from this literature are essentially based on two main opposing points of view. indeed, while some authors claim that bank regulation reduces liquidity risk, other authors take a contrary view. however, these two views are respectively summarized under the risk absorption mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 35 | p a g e hypothesis and the financial fragility hypothesis. in this section, two main points will be discussed. the first point relates to the arguments underlying each of the postures in this literature, while the second point highlights the role of the financial market in these dynamics.\ concerning the link between banking regulation and liquidity risk, many authors postulate the existence of a negative relationship. theoretically, the main arguments developed in this approach are largely based on the risk absorption hypothesis (varotto, 2011). according to this hypothesis, banks create bank liquidity by transforming illiquid assets into liquid assets. since this process generates risk, the bank may quickly find itself unable to meet withdrawal demands from customers. thus, to mitigate such a situation and ensure the continuity of banking activity, banks are required to hold sufficient capital (berger and bowman, 2009). indeed, in an environment marked by the permanent presence of risks, meeting capital requirements has several advantages. first, bank capitalization can increase the ability of banks to create liquidity, thereby removing the specter of a crisis associated with low liquidity asset holdings in their portfolios (bhattacharya and thakor, 1993; allen and gale, 2004). second, by enabling banks to cope with shocks or situations of an unforeseen nature, bank capitalization contributes greatly to the strengthening of banking stability (repullo, 2004). thus, bank capital plays, in this case, the role of a cushion allowing banks to improve their resilience to instability. in contrast to the above-mentioned work, one strand of the literature emphasizes that bank regulation can exacerbate liquidity risk. the argument developed in the framework of this approach is based on the work of diamond and rajan (2001). according to these authors, this positive relationship could be explained by the fragility of the bank's financial structure. thus, according to this hypothesis, banks as financial intermediaries allocate the resources collected to investments by granting loans. following the loans, they are obliged to monitor until the interest is fully repaid. however, when banks are poorly capitalized, they make more effort in monitoring to avoid the risk of deposit run-off. to reassure their depositors, banks are forced to adopt a fragile financial structure, i.e., composed largely of liquid assets (horvàth et al 2014). yet, under these conditions, equity providers are less likely to invest their money in less risky assets, thus reducing liquidity creation. similarly, gorton and winton (2001) argue that bank capital increases liquidity risk. for these authors, the high sensitivity of bank capital to information is a potential risk factor for investors, as it may force them to sell capital at a price below its value, thereby exacerbating liquidity risk within the bank. the dynamics of the relationship between bank capital and liquidity risk can also be influenced by the financial market. indeed, in light of the recent financial crisis, it has become apparent that the numerous regulatory requirements that followed have led banks to become increasingly involved in market activities. yet, there is formal evidence that these activities can amplify risk and reduce overall welfare (plantin, 2015; irani et al, 2021). the concern about these activities, in general, is about the instruments used, and in particular securitization and derivatives. in this respect, dell'ariccia et al (2008) indicate that derivatives promote risk. according to them, since derivatives allow banks to transfer their risk exposure to third parties, they no longer have the incentive to screen and monitor borrowers. moreover, the resulting loss of information could severely aggravate the problems of information asymmetry while reducing market efficiency (uhde et al, 2012). kirilenko and lo (2013), they believe that high-frequency trading feeds speculation on certain assets with the consequence of increasing volatility. in addition to volatility, gemayed and preda (2018) argue mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 36 | p a g e that it can also promote procyclicality and be the cause of a financial crisis. moreover, in the face of stressful episodes, the observed mimicry effects can promote contagion and create a crisis of systemic nature. in this context, marketrelated activities could potentially weaken the banking system by attenuating the capacity of banking regulation to deal with risks. 2.2. review of the empirical literature in their seminal contribution, berger and bowman (2009) analyze the effects of bank regulation on liquidity creation. they use a sample of u.s. commercial banks over the period 1993 to 2003. the results of this study reveal that regulatory capital reduces liquidity risk at large banks while it tends to exacerbate it at small banks. at the level of medium-sized banks, however, this relationship is not significant, indicating a suppression of both effects for banks belonging to this class. fungáčová et al (2010) focus on the case of russia, following the adoption of the deposit insurance system. applying an experimental method, to bank data, between 1999 and 2007, they find that bank regulation increases liquidity risk before and after the adoption of the deposit insurance system. moreover, they find that this relationship varies with size and ownership structure. indeed, the increase in liquidity risk is significant for small banks, medium-sized banks, and domestic private banks, while it is not significant for large banks, foreign banks, and state-owned banks. berger et al (2014) study how regulatory interventions and capital injections jointly influence risktaking and liquidity creation in germany. using the instrumental variables method, they find that regulatory interventions increase liquidity risk while capital support appears to be insignificant. for the czech republic, horvàth et al (2014) examined the relationship between bank capital and liquidity creation. this study differs from the previous ones by taking into account a possible causality between these two variables. the use of the granger causality test allows us to find the existence of a negative bidirectional causal relationship between bank capital and liquidity creation. these results show that capital requirements reduce liquidity creation (increase liquidity risk). on the other hand, bank liquidity creation can also reduce bank capital and expose the bank to insolvency risk. with a simultaneous equation model, distinguin et al (2013) indicate in the european case that banks reduce their regulatory capital when they create a lot of liquidity. on the asia-pacific side, fu et al.(2016) examines a set of commercial banks from 14 countries. they observe that bank capital improves the liquidity of large banks as well as banks located in developing countries in asia. furthermore, the causality study finds that the trade-off between the financial stability benefits of higher capital requirements and those of greater liquidity creation applies to all banks in the sample, regardless of their size and economic region. examining 35 asian countries, hsieh et al (2022) show that bank capital increases liquidity but does not lead to increased bank lending. thus, the higher the political risk, the lower the liquidity, given the uncertainty it generates. however, it appears that only well-capitalized banks can increase their liquidity in such an environment. over the period 2003 to 2014, umar et al (2018) show that the increase in bank capital increases liquidity risk in the brics, thus confirming the financial fragility hypothesis. for their part, the work of lei and song (2013) focuses on a panel of chinese banks. the study concludes that bank capital increases liquidity risk. in contrast, this relationship seems weaker for foreign banks. building on this work, chen et al (2021) consider the role of shadow banking activities in the relationship between bank capital and liquidity creation. first, they note that banks with less capital create a lot of liquidity, which confirms mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 37 | p a g e the risk-taking hypothesis. in contrast, regulatory capital improves bank liquidity when shadow banking is taken into account. some authors have focused on how prudential regulation interacts with the securitization process. in this vein, keys et al (2009) examined the effect of different regulations on the moral hazard problem associated with securitization. the results reveal that loan quality is inversely related to the amount of regulation. thus, the more regulated the lenders behind the securitization, the worse the loan quality. fève et al. (2019) implement a smallscale dsge model for the us economy in which traditional banks interact with shadow banking. they find that shadow banking activities amplify the transmission of shocks and mostly help banks escape regulatory constraints. furthermore, they observe that the rush of banks into shadow banking activities reduces the ability of macroprudential policies targeting traditional credit to reduce economic volatility. using syndicated credit data, irani et al. (2021) find that capital requirements in the banking sector have favored the emergence of shadow banking. in particular, they note that weakly capitalized banks are reducing their exposure through asset sales while shadow banking is taking over the credit market. according to the authors, this situation led to a relative decline in credit and the volatility that occurred during the 2008 financial crisis. also in south korea, lee et al (2022) find that regulatory capital requirements led to a decline in credit among regulated banks and an increase of about three quarters in lending by shadow banking lenders. finally, harutyunyan et al (2015) find that shadow banking increases procyclicality and volatility more than traditional bank activities. the study of 26 jurisdictions thus confirms the perverse effects of disintermediated finance activities on the stability of the banking system. 3. the methodological framework of the study this section includes two points, through which, respectively, the specification of the pstr model and the estimation procedure will be presented. 3.1. specification du modèle the choice of the estimation method is an important factor that must take into account the nature of the data as well as the objectives to be achieved. in this study, since we are interested like the relationship (linear vs. nonlinear) between regulatory capital and liquidity risk, we opt for the smooth transition panel method (pstr) developed by gonzalez et al. the pstr model is a fixed effect model with an exogenous regressor. moreover, it is a non-linear homogeneous panel model whose theoretical specification is as follows: y it i 0' xit 1' xit g (q it , , c ) it (1) in this equation, i = 1, …, n ; and t = 1, ……, t with n and t representing the individual and time dimensions, respectively. is the dependent variable, is the individual vector of fixed effects, and et is the transition function that depends on the transition variable , the threshold parameter c as well as the smoothing parameter . is the vector kk of explanatory variables and is the error term. and denote the vector of linear and nonlinear model parameters. the transition function allows the system to gradually transition from one regime to the other. to better define this transition function gonzalez et al (2005); granger and teräsvirta (1993); teräsvirta (1994); jansen and teräsvirta (1996) propose an m-order logistic function as follows: 1 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 38 | p a g e m g (q it , , c ) 1 exp( (q it c j ) (2) j 1 where ; and is the vector of the parameter in level. γ represents the assumed positive smoothing parameter. ibarra and trupkin (2011) state that if γ is large, then the pstr model can be considered a 2-regime model. under these conditions the transition function can be written as follows: m y it i 0' x it j' xit g (q itj , , c j ) it (3) j 3.2. estimation procedure linearity test since the study seeks to establish a non-linear relationship between bank capital and liquidity risk, we must first perform the linearity test. this test consists in checking whether the link between bank capital and liquidity risk can be estimated by a standard panel model (linear panel model) or by a pstr model. the null hypothesis of the test is versus the alternative hypothesis . however, due to the presence of unidentified nuisance parameters in the pstr model, under the null hypothesis, the associated test is nonstandard (gonzalez et al, 2005). to circumvent this identification problem, the transition function is replaced by the firstorder taylor expansion around thus, the new transition function can be written as follows: y it i 0'* x it 1'* x it q it ........ m'* x it q itm it* (4) where the parameter vectors are multiples of and where is the residual of the taylor expansion. the null hypothesis can be tested using fischer's lm test, wald's test as well as the lr test likelihood ratio test. the statistics associated with these three tests are as follows: lm fischer test : lm f (ssr0 ssr1) / k / ssr0 / (nt n k ) (5) lm wald test : lmw nt (ssr0 ssr1) / ssr0 (6) lr test : lr 2 log(ssr1) log(ssr0 ) (7) where is the sum of the squares of the panel residuals under (linear panel model with individual effects) and the sum of the squares of the panel residuals under h1 (pstr model with two regimes). note also that the fischer lmf statistic follows a fischer distribution with k and nt-n-k degrees of freedom, where k, n, and t represent the number of explanatory variables, number of countries, and number of years, respectively. the wald statistic and the lr test follow a chi2 distribution with k degrees of freedom . if at the end of the test, the null hypothesis is rejected, this would imply that the model can be estimated using the pstr. in this case, the next step would be to determine the number of regimes in the model. test of the number of regimes the second step of the procedure aims at testing the number of regimes of the pstr model. in practical terms, this test consists in identifying whether the pstr model with two regimes is appropriate to capture the nonlinearity between bank capital, and liquidity risk. the null hypothesis of the pstr model with two regimes is tested against the alternative hypothesis of the pstr model with at least mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 39 | p a g e three regimes. the test decisions are also based on wald, fischer and lr test statistics. if the null hypothesis is accepted at the end of the test then the pstr model with two regimes will be estimated. otherwise, the pstr model with three regimes will be estimated. after selecting the number of regimes, the last step is to estimate the model with the nonlinear least squares method. 4. specification of the study model the purpose of this section is to define the specification of the model used and the source of the data. 4.1. model specification and variable description as mentioned above, we use the smooth transition panel method (stp) to examine the relationship between bank capital and liquidity risk. to do so, we adopt the following specification: rliq it i 1car it 2 capit 3cred it 4 cr 3 it 5tcpib it 6 infit ( 1' car it (8) ' ' ' ' ' 2 capit 3 cred it 4 cr 3 it 5tcpib it 6 infit ) * g (capit , , c ) it in equation 8, the endogenous variable is liquidity risk. liquidity risk typically arises when the bank is unable to meet its short-term liabilities. this leads to considerable losses that can negatively affect the bank's performance and above all, impact the real economy severely (hakimi and zaghdoudi, 2017). in the literature, the liquidity ratio is measured as the share of liquid assets held by the bank to total assets. thus, an increase in liquid assets leads to a decrease in liquidity risk while a decrease in liquid assets reflects an increase in liquidity risk. since the liquidity ratio and liquidity risk move in opposite directions, we decide to capture liquidity risk by the inverse of the liquidity ratio, which we multiply by 100 to facilitate our interpretations. bank capitalization (car) is the variable of interest in this study. it is calculated as the ratio of bank capital to total assets. according to the bale agreements, a ratio higher than 8% indicates that the bank is sufficiently capitalized, while a ratio lower than this threshold suggests that the bank is not solvent. looking at the literature, studies on the link between regulatory capital and liquidity risk lead to contradictory results. some argue for a decrease in liquidity risk while others postulate the opposite effect (berger and bowman, 2009; berger et al, 2014; fu et al, 2016). the expected effect can therefore be positive or negative. the second variable of interest in the study is the financial market. it can be captured using different proxies such as market capitalization, turnover, and the number of shares traded (jun et al, 2003). however, since the most widely used measure in the literature is bank capitalization, it will be used in this study as a proxy for capturing capital market growth (cap). similarly, regarding the objectives initially set, market capitalization will be used as a transition variable to test the non-linearity of the relationship between regulatory capital and liquidity risk. the first control variable is the credit ratio (cred). the credit ratio represents the share of credit granted by banks to the private sector as a percentage of gdp. the choice of this variable in the model is motivated by the fact that the main activity of banks in the zone is granting credit. moreover, credit is the primary cause of risk in the banking industry (pantalone and platt 1987). thus, a bank that extends a lot of credit may lack the cash resources to meet the withdrawal demands of its customers. banking concentration (cr3) measures the market share of the 3 largest banks in the country. the higher the market share, the more concentrated the banking sector is, while the lower the market share, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 40 | p a g e the more competitive the banking sector becomes. the literature is divided on the effect of concentration on liquidity risk. some authors argue that since concentration gives banks market power, they can use it to establish and develop long-term relationships with their customers. on this basis, banks would be less exposed to risk given the privileged relationship they have with their customers (petersen and rajan, 1995). on the other hand, when the banking market becomes competitive, it erodes the value of the banks' franchise (rents), pushing them to take more risk to compensate for the decline in revenues (brei et al 2020). based on this work, the expected effect can be both positive and negative. to capture the effect of macroeconomic conditions on bank liquidity management, we add the gdp growth rate (tcpib) and inflation (inf) to the model. in general, expansionary periods are conducive to the development of banking activities, because banks experience fewer defaults from their counterparties. in contrast, during a recession, the general price level rises and affects the ability of agents to repay their loans (kanga et al, 2021). consequently, the expected effects of gdp growth and inflation are positive and negative, respectively. 4.2. data sources for this study, the data used covers 7 countries, all members of the waemu, except guinea-bissau, due to a lack of sufficient data for the study period, which runs from 1996 to 2018. the data comes from multiple sources, including the world bank (wdi, 2020); global financial development data (gfdd, 2020); and the central bank of west african states (bceao, 2020). 5. results and discussions of the study this section is structured around two main points. the first point is related to the analysis of the data, and the preliminary tests. the second point is dedicated to the analysis of the results obtained from the pstr model 5.1. data analysis and preliminary tests in this section, we proceed to the analysis of the data as well as the various preliminary tests. these include descriptive statistics, the correlation matrix, the linearity test, and the determination of the regime number. the results of the descriptive statistics are shown in table 1 below: table 1: descriptive statistics of variables variables observations mean standard deviation minimum maximum rliq 161 4.387 1.550 1.422 9.186 car 161 9.562 2.141 5.637 17.351 cap 161 21.171 11.218 0.511 37.826 cred 161 15.588 7.118 2.659 40.055 cr3 161 74.785 16.140 39.655 100 tcpib 161 4.562 3.108 -4.666 15.376 inf 161 2.241 2.557 -3.099 11.305 source: authors based on wdi (2020), gfdd (2020), bceao (2020) the analysis in table 1 shows that the average liquidity risk in the union is 4.387%. over the study period, it varies between 1.422% and 9.186%. the low standard deviation of 1.550 indicates that banks have almost the same risk-taking behavior regardless of the country. bank capital averages 9.562%, which suggests a good level of capitalization in line with the bale agreements. market capitalization mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 41 | p a g e represents on average 21.17% of gdp with a dispersion of about 11.21. the credit granted by banks, is, on average 15.58% between 1996 and 2018. its minimum and maximum values are 2.65% and 40.05% respectively. in the subregion, the three major banks hold an average of 74.78% of banking assets, indicating that the banking sector is highly concentrated in the union. over the study period, the countries benefited from a rather favorable macroeconomic context, as the average growth rate of the gross domestic product stood at 4.56%. inflation averaged 2.24. the low dispersion of 2.55 shows that, overall, the general price level in the union has varied very little. following the descriptive statistics, we perform the correlation matrix analysis of the variables to guard against the risk of multicollinearity. the results of the matrix are reported in table 2 below. table 2: correlation matrix [1] [2] [3] [4] [5] [6] [7] [1] rliq 1 [2] car -0.410* 1 [3] cap 0.419* -0.158* 1 [4] cred 0.576* -0.420* 0.587* 1 [5] cr3 -0.395* 0.171* -0.311* 0.262* 1 [6] tcpib 0.241* -0.183* 0.135 0.103 -0.109 1 [7] inf -0.191* 0.095 -0.156* -0.199 0.190* 0.069 1 source: authors based on wdi (2020), gfdd (2020), bceao (2020) note: * represents significance at the 5% level from the results provided in table 2, we see that all the correlation coefficients are on the whole lower than 0.8. thus, there is no problem of multicollinearity between our variables. bank capital is negatively correlated with liquidity risk with a coefficient of 0.410. on the other hand, we observe a moderate correlation between market capitalization and liquidity risk on the one hand, and between credit and liquidity risk on the other. their respective coefficients are 0.419 and 0.576. as for the growth rate, it is weakly related to liquidity risk. the associated correlation coefficient is 0.241. the same is true for inflation, which has a correlation coefficient of 0.191. after the analysis of the data, we can now turn to the second point concerning the results of the preliminary tests. these are mainly the linearity test and the regime number test. the linearity test consists of testing whether the relationship between bank capital and liquidity risk can be captured by a linear panel model or by a non-linear panel model. the results of the linearity test are summarized in the following table: table 3: linearity test test statistics p-value wald (lmw) test 10.777 0.096 fischer (lmf) test 1.770 0.109 lrt test 11.155 0.084 source: authors based on wdi (2020), gfdd (2020), bceao (2020) the null hypothesis that the linear panel model is appropriate for analyzing the relationship between bank capital and liquidity risk is rejected at the 10% threshold by two out of three tests. it follows that mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 42 | p a g e the financial market has a non-linear effect on the relationship between bank capital and liquidity risk and that this non-linear effect can be captured by a pstr model with at least two regimes. the second test is related to the determination of the number of regimes of the pstr model. this test consists of testing whether the relationship between bank capital and liquidity risk can be estimated by a pstr model with two regimes (one threshold), or a pstr model with at least three regimes (two thresholds). the results of the test are presented in the following table: table 4: number of regimes test test statistics p-value wald test 3.230 0.780 fischer test 0.464 0.834 lrt test 3.263 0.775 source: authors based on wdi (2020), gfdd (2020), bceao (2020) through table 4, we see that all our probabilities are not significant. therefore, the null hypothesis cannot be rejected. in other words, the pstr model with two regimes, i.e., with a threshold is adequate to analyze the non-linear relationship between bank capital and liquidity risk. following the analysis of the various preliminary tests, we can now proceed to the interpretation of the results of the pstr model. 5.2. result of the pstr model for the analysis of the non-linearity between bank capital and liquidity risk, the various tests carried out led us to estimate a pstr model. the purpose of this section is to comment on the results and to draw the main lessons from them. the results of the estimation are listed in table 5 above: table 5: result of the pstr model estimation variables explained variable: rliq regime 1 : cap ≤ 24.93% regime 2 : cap > 24.93% car -0.155** (-2.444) 0.016 (0.256) cap -0.023 (-1.052) 0.065*** (2.610) cred 0.243*** (6.917) -0.039 (-1.293) cr3 0.019*** (2.519) -0.023*** (-2.711) tcpib 0.029 (1.241) -0.004 (-0.103) inf 0.008 (0.663) 0.005 (0.334) source: authors based on wdi (2020), gfdd (2020), bceao (2020) note: ** significant at 5% level, *** significant at 1% level the analysis of table 5 allows us to appreciate the effect of the different variables on liquidity risk. indeed, bank capital negatively influences liquidity risk for a level of market capitalization below the threshold of 24.93%. on the other hand, above the threshold, its influence becomes positive but not significant. similarly, market capitalization negatively influences the liquidity risk below the threshold mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 43 | p a g e without this influence is significant. however, above the threshold, the influence becomes significant and positive. as for bank credit, its influence remains significant and positive only in the first regime. bank concentration has a positive influence in the first regime and a negative influence in the second regime. the growth rate and inflation remain insignificant, regardless of the regime considered. the negative influence of bank capital on liquidity risk reflects the fact that bank capital reduces liquidity risk for a market capitalization level below 24.93%. indeed, this result suggests that the effect of bank capital on liquidity risk is dependent on the evolution of the financial market. to this effect, for a low level of financial market development (cap ≤ 24.93%), bank capital reduces liquidity risk. however, when the financial market develops (cap > 24.93%), it weakens the effectiveness of bank capital and leads to an increase in liquidity risk. indeed, this result could be explained by the fact that in the absence of a developed financial market, the banks that provide the bulk of banking intermediation are subject to increased supervision. thus, the pressure of the regulator to respect capital requirements encourages banks to be cautious and leads to a decrease in liquidity risk. on the other hand, when the financial market develops, it offers banks new investment and placement possibilities, outside the regulatory provisions. however, in the absence of control and supervision, a moral hazard problem arises, which favors risk-taking, hence the increase in liquidity risk in the second regime although not significant. this result is consistent with that obtained by fève et al (2019) whose study focused on the us economy. indeed, they showed in their work that shadow banking activities amplified the transmission of shocks, and more importantly, reduced the effectiveness of macroprudential policies. however, in the case of china, chen et al (2021) reach contradictory results. analyzing the role of shadow banking in the relationship between bank capital and liquidity risk, they observe that, on the one hand, in the absence of shadow banking activities, banks with low capital ratios were more involved in liquidity creation. on the other hand, when shadow banking activities are taken into account, they find that banks with sufficient equity created much more liquidity. similarly, when we consider the direct effect of market capitalization, we find that it reduces liquidity risk in the first regime, while it increases liquidity risk in the second regime. the positive effect of market capitalization above the threshold confirms the hypothesis that capital market development increases exposure to liquidity risk. this result is in line with the work of dell'ariccia et al (2008) and gonzález et al (2016). these authors respectively showed that market activities in particularty securitization and derivatives increase risk and in turn financial instability. for the control variables, bank lending increases liquidity risk only in the first regime. this effect is because credit granting is the main activity of banks. as such, it represents the primary risk factor for banks. indeed, given that the resources used to finance come, to a large extent, from depositors, rapid credit growth can unbalance the structure of the balance sheet and weaken the banks. eichengreen and arteta (2002) have shown in this context that rapid growth in bank credit can increase the probability of a crisis. finally, bank concentration increases liquidity risk in the first regime and decreases it in the second regime. indeed, bank concentration gives banks market power. with market power, banks can charge sufficiently for loans and pay low interest on deposits to build up large margins (brei et al, 2020). however, the low remuneration of deposits may discourage deposits and encourage depositors to seek better investment alternatives. under such a perspective, banks would not have enough liquid assets to mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 44 | p a g e meet immediate needs, which will result in increased liquidity risk. in contrast, in the second regime, the decrease in liquidity risk could result from gains in market power. indeed, market power can reduce liquidity risk if it promotes the diversification of services. the major advantage of diversification is that it generates new sources of revenue that contribute to the stability of banks. in addition, risk reduction can result from the development of a long-term relationship with customers to protect against potential risks (petersen and rajan, 1995). 6. conclusion the objective of this study was to analyze the role of the financial market in the relationship between bank capital and liquidity risk in the waemu zone. to do so, we used a panel of 7 countries, all members of the region, over the period 1996 to 2018. guinea-bissau was excluded due to the lack of sufficient data over the period indicated above. methodologically, the estimation strategy consisted in applying the smooth transition panel method (pstr) developed by gonzalez et al (2005). we show that there is a non-linearity between bank regulation and liquidity risk about the financial market characterized by a smooth transition between the two regimes. indeed, bank capital negatively influences liquidity risk for a level of market capitalization below the 24.93% threshold. on the other hand, above this threshold, market capitalization weakens the effectiveness of bank capital and leads to risk-taking, although not significantly. in light of these results, it is clear that the development of regulatory and prudential provisions cannot be done without taking into account these possible effects on the financial market at the risk of accentuating the fragility of the entire financial system. thus, frank cooperation between the banking and financial market regulators could mitigate moral hazard problems and strengthen the stability of the banking system. references allen, f., & gale, d. (2004). financial intermediaries and markets. econometrica, 72(4), 1023-1061. bceao (2020). bceao (2020). data from the website of the central bank of west african states. berger, a. n., & bouwman, c. h. (2009). bank liquidity creation. the review of financial studies, 22(9), 3779-3837. berger, a. n., bouwman, c. h., kick, t., & schaeck, k. (2014). bank liquidity creation following regulatory interventions and capital support. journal of financial intermediation, 26, 115-141. bhattacharya, s., & thakor, a. v. (1993). contemporary banking theory. journal of financial intermediation, 3(1), 250. brei, m., jacolin, l., & noah, a. (2020). credit risk and bank competition in sub-saharan africa. emerging markets review, 44, 100716. buchak, g., matvos, g., piskorski, t., & seru, a. (2018). fintech, regulatory arbitrage, and the rise of shadow banks. journal of financial economics, 130(3), 453-483. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 45 | p a g e casu, b., di pietro, f., & trujillo-ponce, a. (2019). liquidity creation and bank capital. journal of financial services research, 56(3), 307-340. chen, t. h., shen, c. h., wu, m. w., & huang, k. j. 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(2011). the relationship between inflation and growth : a panel smooth transition regression approach. research network and research centers program of banco central (working paper). irani, r. m., iyer, r., meisenzahl, r. r., & peydro, j. l. (2021). the rise of shadow banking : evidence from capital regulation. the review of financial studies, 34(5), 2181-2235. jansen, e., & teräsvirta, t. (1996). testing parameter constancy and super exogeneity in econometric equations. oxford bulletin of economics and statistics, 58, 735-763. jun, s. g., marathe, a., & shawky, h. a. (2003). liquidity and stock returns in emerging equity markets. emerging markets review, 4(1), 1-24. kanga, d., murinde, v., & soumaré, i. (2021). how has the rise of pan-african banks impacted bank stability in waemu ? journal of international financial markets, institutions and money, 73, 101364. keys, b. j., mukherjee, t., seru, a., & vig, v. (2009). financial regulation and securitization: evidence from subprime loans. journal of monetary economics, 56(5), 700-720. kirilenko, a. a., & lo, a. w. (2013). moore's law versus murphy's law: algorithmic trading and its discontents. journal of economic perspectives, 27(2), 51-72. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 1, january-march 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 47 | p a g e lee, h., lee, s., & paluszynski, r. (2022). capital regulation and shadow finance : a quantitative analysis. https://uh.edu/~rpaluszy/banking.pdf lei, a. c., & song, z. (2013). liquidity creation and bank capital structure in china. global finance journal, 24(3), 188-202. levine, r. (1991). stock markets, growth, and tax policy. the journal of finance, 46(4), 14451465. pantalone, c. c., & platt, m. b. (1987). predicting commercial bank failure since deregulation. new england economic review, issue jul, 37-47. petersen, m. a., & rajan, r. g. (1995). the effect of credit market competition on lending relationships. the quarterly journal of economics, 110(2), 407-443. plantin, g. (2015). shadow banking and bank capital regulation. the review of financial studies, 28(1), 146-175. repullo, r. (2004). capital requirements, market power and risk-taking in banking. journal of financial intermediation 13 (2), 156–182. teräsvirta, t. (1994). specification estimation and evaluation of smooth transition autoregressive models. journal of american statistical association, 89(425), 208-218. uhde, a., farruggio, c., & michalak, t. c. (2012). wealth effects of credit risk securitization in european banking. journal of business finance & accounting, 39(1 2), 193-228. umar, m., sun, g., & shahzad, k. (2018). bank regulatory capital and liquidity creation: evidence from brics countries. international journal of emerging markets, 24(4), 430-452. varotto, s. (2011). liquidity risk, credit risk, market risk and bank capital. international journal of managerial finance, 7(2),1-27. wdi (2020). world development indicator mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 1 | p a g e the nexus between budget deficit and exchange rate unification in nigeria 1okereke samuel felix, 2onyia chinedu callistus and 3agada aloysius ezike 1department of economics and development studies, federal university of dutsin-ma, katsina state, nigeria. 2department of banking and finance, enugu state university of science and technology enugu state, nigeria. 3department of business administration, cosmopolitan international business school, abuja, nigeria. *corresponding author: chinedu.onyia@esut,edu.ng *2 doi: https://doi.org/ 10.5281/zenodo.11085310 abstract: the paper examined the effect of exchange rate unification on budget deficit in nigeria. using time series data from secondary sources covering the period 1981 and 2022 and the ardl bound test technique, the study found evidence of a long-run equilibrium relationship between budget deficit and the official exchange rate. the estimated unrestricted ardl error correction model revealed that current official exchange rate which served as the unified exchange rate in the paper has a negative but insignificant effect on budget deficit. however, one period lagged (past) value of official exchange rate exert a negative influence on budget deficit in nigeria. implying that increase in past official exchange rate (depreciation of domestic currency) compounded the problem of budget deficit in nigeria. the paper found that budget deficit in nigeria is higher during years the country practiced multiple exchange rate than periods of single (unified) exchange rate system. the study, recommended the need to encourage more local productions to curb importation of goods that can be easily produced locally. this can start with policy reforms in power, infrastructure, taxes, etc, to improve the manufacturing sector and local production making it competitive. this will reduce the demand for dollars especially in the black market by importers in a bid to import goods, and boost revenue to the economy. keywords: official exchange rate, budget deficit, ardl bound test. 1. introduction governments, both in developed and developing nations, engage in numerous activities and offer diverse services to their citizens through budget allocations. these services encompass economic and social infrastructure provision, defense, law enforcement, establishment of pension schemes, and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 2 | p a g e more. the degree of government involvement in service provision varies over time and across regions, influenced by the prevailing political and economic ideologies within a society, as well as its evolving needs and aspirations (abeng & alehile, 2012). this collective performance constitutes the fiscal behavior of the government, a concept characterized by the dual process of allocating expenditures while simultaneously generating revenues to finance them. hence, the government's fiscal behavior is encapsulated by its revenue and expenditure plans, which form the core components of its budgetary framework. however, when expenditures surpass revenues, it results in fiscal deficits (aladejare, 2014). this fiscal conduct aligns with the principles outlined by keynes in 1936, suggesting that augmenting government spending and/or reducing taxes are effective means of attaining broader macroeconomic goals such as robust economic growth, minimal inflation, low unemployment rates, and a robust balance of payments position. these objectives are achieved by stimulating aggregate demand and investment. in the context of developing nations like nigeria, escalating government expenditures have become a recurring feature in annual budgetary schemes, resulting in persistent budget deficits. this trend represents a significant developmental hurdle in nigeria's fiscal landscape (world bank, 2022) available statistics shows that the percentage share of budget deficit/surplus to gdp and the corresponding average official exchange rate (₦/us$) from 1981 to 2021 in nigeria. statistics from the (central bank of nigeria, 2022) depicts that percentage share of budget deficit to gdp stood at 2.8% in 1981, -6.1% in 1991, -2.7% in 2001, -1.8% in 2011 and -4.1% in 2021, while the average official exchange rate (₦/us$) stood at 0.61 in 1981, 9.91 in 1991, 111.95 in 2001, 153.86 in 2011 and 425.9 in 2021, (cbn, 2022). thus, during this period, nigeria has witnessed 38 years of budget deficits, with only 2 years of surplus fiscal operations, and this has persisted alongside dual exchange rates, thereby causing untold hardship to many nigerians, (wosowei 2013). budget deficits have been blamed mostly for much of the economic crisis in the nigerian economy for many years resulting in debt crisis, poor economic performance, and foreign exchange problems (ezeabasili, et al, 2012). as a result, the current administration in nigeria is hinged on exchange rate unification amidst rising fiscal deficit. the dual exchange rate system which also allows both fixed and floating rates in the market was adopted in nigeria in september, 1986, and this has been in place till 2023, (cbn, 2021). in june, 2023, the central bank of nigeria came up with a policy to unify the multiple exchange rates into a single exchange rate system, with transactions to hold on investors and exporters (i&e) window. the dual exchange rates have had several adverse effects on nigeria’s economy, it has created economic distortions of which individuals and businesses engage in speculative activities and also take advantage mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 3 | p a g e of the rate differentials to make profits, (cbn, 2023). these practices have resulted in an inefficient allocation of resources and hindered economic growth. however, there exists a divergence of opinions regarding the impact of exchange rate unification on budget deficits. one perspective argues that over time, unifying the exchange rate could result in the government's foreign exchange revenue surpassing its foreign currency obligations. onyekpere (2023) suggests that exchange rate unification would ensure that any foreign exchange income received by the government would now be monetized at the new unified rate, which is significantly higher than the previous rate sanctioned by the central bank of nigeria. this would consequently increase the resources available to the government for developmental initiatives. moreover, the resources previously allocated to subsidize those who obtained foreign exchange at the cbn-imposed rate would no longer be expended on wasteful expenditure. conversely, other scholars such as ozili (2024) argue that the unification of the exchange rate could elevate the naira value of foreign debts, as both federal and state governments rely on borrowing from foreign creditors to finance their budgetary requirements. consequently, governments would need to allocate more naira to service or repay these debts. the implication of exchange rate unification is that in nigeria, being an import-dependent economy, the cost of goods and services imported into the country, previously funded at the lower exchange rate, would now escalate due to the increased naira requirement for imports. this scenario is likely to instigate an inflationary spiral effect (gray 2021; sanusi, 2010). nevertheless, the country do not have an immediate source of increasing foreign exchange supply considering the backlog of unmet foreign exchange demand and associated obligations as well as estimates of future foreign exchange demand for the years ahead. therefore, there is the danger of the market facilitating a free fall of the naira which will depreciate the currency to an unimaginable level leading to price instability, inflation and uncertainty in the economy, (ozili, 2024). although, the issue of budget deficit has been a thorn in the flesh of policy makers in the country, but part of the perennial policy challenges facing nigeria, are multiple exchange rates and the free fall of the naira and how to control it. the challenge of having multiple exchange rates amidst currency depreciation has both monetary and fiscal policy implications. fiscal deficit may be unavoidable in the developmental process; however, it is the level, magnitude and the tendency to stabilize the value of the naira that have galvanized empirical assessment of the relationship between fiscal deficits and exchange rate unification, (oladipo and akinbobola, 2011). from the foregoing, the study aimed at investigating the following objectives. i. examine if budget deficit differ between period of dual exchange rate system and that of single exchange rate system. ii. investigate the impact of the official exchange rate on budget deficit. following the introduction, the rest of the paper is structured as follows. section 2 deals with the literature review. methodology is mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 4 | p a g e covered in section 3. the estimated results and discussion are dealt with in section 4. the paper is concluded in section 5 2. literature review 2.1 theoretical literature 2.1.1 the keynesian theory keynesian theory suggests that a budget deficit will have a positive influence on an economy’s real growth rate (keynes 1936). this fiscal behaviour is in line with the theory of (keynes 1936), opined that increased government spending and/or cutting taxes are instrumental tools to achieving the overall macroeconomic objectives of high economic growth rate, low inflation, low unemployment rate as well as a virile balance of payments position through increased aggregate demand and investment, (sabr, ahmed & khan 2021). 2.1.2 the mundell-fleming model the mundell-fleming model, devised by robert mundell (1968) and marcus fleming (1967), extends the investment savings – liquidity preference money supply (is-lm) model. this model illustrates the short-term dynamics in a small open economy, interrelating the nominal exchange rate, interest rate, and output. it posits a direct link between the budget deficit and current account deficit, with causation from the former to the latter (sanni, gaiya, ipinjolu, aliyu, & okafor, 2022). according to the model, an increase in the budget deficit boosts domestic absorption and aggregate demand, exerting upward pressure on domestic interest rates compared to global rates (sanni, et al., 2022). consequently, the elevated domestic interest rates attract foreign capital inflows, leading to increased demand for domestic currency and currency appreciation. this, in turn, raises the cost of domestic goods relative to foreign goods, thereby expanding the trade deficit (onafowokan & owoye, 2006). 2.2 empirical literature eldepcy (2022) explored the causal relationship between different methods of financing budget deficits and the real exchange rate in egypt over the period 1975 to 2020. employing the structural vector autoregressive (svar) technique with a variable lag structure, the study revealed that the money supply ratio to gdp significantly influenced fluctuations in the real exchange rate in the short and medium terms. additionally, the study found that non-bank financing, as indicated by the real interest rate, played a minor role in these fluctuations, suggesting an increasing reliance on local bank financing for budget deficit funding during the study period. furthermore, the analysis revealed a substantial reliance on local sources, particularly local bank financing, to cover the budget deficit. domestic non-banking sources showed comparatively less influence on real exchange rate fluctuations and, consequently, on the value of the egyptian pound relative to the us dollar. sanni, gaiya, ipinjolu, aliyu, and okafor (2022) examined the role of exchange rate in nigeria's twin deficits hypothesis from 1981 to 2019. employing the ardl model for data analysis, the study mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 5 | p a g e uncovered a bidirectional causal relationship between the current account deficit and fiscal deficit. furthermore, it was found that there exists a positive correlation between the current account balance and fiscal balance during periods of both exchange rate appreciation and depreciation, both in the short and long terms. these findings solidify the significance of the exchange rate in the twin deficits hypothesis within the nigerian context. sabr, ahmed & khan (2021) explored the impact of budget deficits on economic growth in iraq spanning from 1980 to 2018. utilizing the autoregressive distributed lag (ardl) model for regression analysis, the findings indicated a positive short-term influence of budget deficits on economic growth, contrasting with a negative long-term impact. ayinde & bankole (2021) scrutinized fiscal dominance and exchange rate stability in nigeria, utilizing quarterly data from the first quarter of 1981 to the fourth quarter of 2018. employing the structural vector autoregression (svar) technique, the study aimed to analyze the study's objective and examine the shock transmission effects of budget deficit and public debt on exchange rate movements in nigeria. additionally, the study employed the autoregressive distributed lag (ardl) model for a robust test to analyze the shock transmission effects of fiscal dominance components on exchange rate movements in nigeria. granger causality tests were also conducted to trace the direction of causality among fiscal deficit components and exchange rates. results revealed a bi-directional causal relationship between budget deficits and changes in exchange rates in nigeria, while public debt did not granger cause exchange rate movements. structural vector autoregression estimations suggested that exchange rate movements in nigeria responded solely to the shock effects of financial openness, while ardl results revealed that both public debt and budget deficits had destabilizing effects on exchange rates in nigeria. nwosa (2017) examined the relationship between fiscal policy and exchange rate movements in nigeria for the period 1980 to 2015. employing ordinary least squares (ols), the study found that fiscal policy variables were statistically significant in influencing exchange rates in nigeria. this implies that fiscal policy variables play a significant role in determining exchange rate movements in nigeria. consequently, the study recommended prudent management of revenue, expenditure, and debt to reduce exchange rate depreciation and ensure exchange rate stability. sanusi and akinlo (2016) explored the potential presence of fiscal dominance in nigeria spanning from 1986 to 2013, employing structural var analysis. the study's findings indicated that shocks to government fiscal deficits did not elicit a response from the growth of the monetary base. furthermore, the results revealed the absence of causality running from fiscal deficits to the growth of the monetary base in nigeria. as a conclusion, the study inferred that there was no evidence of fiscal dominance in nigeria during the investigated period. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 6 | p a g e osuka and achinihu (2014) investigated whether a long-run relationship exists between budget deficits and other macroeconomic variables in nigeria over the period 1981-2012. the macroeconomic variables considered were gross domestic product (gdp), interest rate, nominal exchange rate, and inflation rate. employing the granger causality test, the study's findings unveiled a unidirectional granger-causality between budget deficits and gdp, with gdp granger-causing budget deficits. however, the test for causality revealed no causality between deficits and interest rate, budget deficits and inflation, and budget deficits and nominal exchange rate. virkola (2014) examined the effects of discretionary fiscal policy shocks under various exchange rate regimes, utilizing a structural vector autoregressive (svar) model. the study disclosed that discretionary fiscal policy exhibits greater effectiveness under a fixed exchange rate regime compared to a floating exchange rate regime. additionally, the study's results indicated evidence that unanticipated fiscal policy shocks have a larger expansionary effect on output than in the baseline scenario. this study tried to unravel if there is a strong and statistical relationship between budget deficit and exchange rate unification in nigeria. however, this study will deviate from other studies that have mainly examined the impact of budget deficit on exchange rate by examining the effect of using the official exchange rate on budget deficit in nigeria. the study also used a dummy as a fixed regressor dividing exchange rate periods (assigned as 1) and single exchange rate periods (assigned as 0) into multiple exchange rate periods – (assigned 1) and single exchange rate period –(assigned 0), to examine how budget deficit responds to the periods in nigeria. this is different from studies that have mostly used the real exchange rate without assigning such fixed regressor. moreover, the study treatment of the subject matter differs from past studies with a sample which comprises broad longitudinal data set spanning 1981-2022. this is because this period produced bouts of large fiscal deficits and mixture of single and multiple exchange rate systems. the study period also corresponds to and witnessed regimes of economic reforms in nigeria. 3. methodology 3.1. data sources and description of variables the study uses time series annual data covering the period 1981–2022, obtained from the central bank of nigeria statistical bulletin (cbn, 2022). the dependent variable is the ratio of budget deficit to gdp, the independent variables are official exchange rate (naira per us dollar) the official exchange rate is used to represent exchange rate unification, growth rate of gdp, trade to gdp ratio, debt service to gdp ratio and a dummy variable indicating periods of dual exchange rate system and period of single exchange rate system. 3.2. model specification and estimation procedure in other to capture the effect of exchange rate unification on budget deficit in nigeria, the study adopted a modified form of the model of (eldepcy, 2022) and is specified as: bdeft = β0 +β1dum+β2exch+β3top+ β4gdpgr + µt (1) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 7 | p a g e where bdef represents budget deficit; dum stands for dummy representing exchange rate system – 1 for years of dual system and 0 for years of single system. exch denotes official real exchange rate; top represents trade to gdp ratio (trade openness); gdpgr denotes growth rate of gdp (a control variable); and µ the error term, respectively. a priori, favourable exchange rate will decrease the budget deficit, while an unfavourable exchange rate will increase the deficit. the study adopted the autoregressive distributed lag (hereafter ardl) bounds testing approach (pesaran et al., 2001) for the analysis of the data in nigeria. one of the advantages of the ardl model, according to (iyoboyi, okereke & musa-pedro, 2018) is that it does not require pre-testing the variables. however, it is important to make sure that the variables are not integrated of order 2, which violates the use of the ardl technique, (iyoboyi, okereke & musa-pedro, 2018). this necessitated the test for stationarity of the series using the augmented dickey fuller (adf). thus, the ardl model of the specification in equation 1 is presented as follows: ∆bdeft = β0 +   n i 1 β1i∆bdeft-1 +   n i 1 β2i∆excht-1 +  n i 1 β3i∆topt-1 +   n i 1 β4i∆gdpgrt-1 + β5idumt+ µ (2) where n is the lag length. the unrestricted error correction model arising from equation 2 is specified as follows: ∆bdeft = β0 +   n i 1 β1i∆bdeft-1 +   n i 1 β2i∆excht-1 +  n i 1 β3i∆topt-1 +   n i 1 β4i∆gdpgrt-1 + β5idumt+ δ1bdeft-1 + δ2excht-1 + δ3topt-1 + δ4gdpgrt-1 + β6ecmt-1+ µ (3) where the parameters βi = 1, 2,…,4 are the short-run dynamic coefficients, the parameters δi = 1, 2,…, 4 are the long-run multipliers, and ecm denotes the speed of adjustment. the tests confirming the reliability of the estimations in the study include the goodness-of-fit, the joint significance of the independent variables, serial correlation, and tests for heteroskedasticity, specification error (bias), and stability. 4. results and discussion table 1: unit root test results source: authors’ computations variables augmented dickey fuller phillips perron levels test stat. 5% critical values test stat. 5% critical values bdeficit -1.909574 -1.949097 -1.913185 -1.949097 exch 4.716190 -1.949097 5.211985 -1.949097 openes -2.397300 -2.935001 -2.397300 -2.935001 gdpgr -3.203694 -2.936942 -4.333019 -2.935001 1st difference δbdeficit -7.010574 -1.949319 -6.978945 -1.949319 δexch -4.211353 -2.936942 -4.125444 -2.936942 δopenes -5.148831 -3.557759 -9.268690 -1.949319 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 8 | p a g e from table 1, the hypothesis of no unit root is rejected for budget deficit, exchange rate, and trade openness at levels but accepted for growth rate of gdp. thus, budget deficit, exchange rate, and trade openness have a unit root using both the adf and pp unit root test techniques and thus are integrated of order 1. this implies that budget deficit, exchange rate, and trade openness are i(1) variables while growth rate of gdp is i(0) variable, which necessitated the adoption of the ardl technique and the bound test for cointegration. to avoid spurious regression, the test of cointegration was conducted and the results shown in table 2. table 2: cointegration test result test statistics value k f-statistics 4.543206 3 critical bound values significance (%) lower bound upper bound 10 2.37 3.2 5 2.79 3.67 1 3.65 4.66 source: authors’ computations the hypothesis of no cointegration is strongly rejected for the series as shown from from table 2; the computed f-statistics (4.54) is higher than the upper bounds of the critical values at the 5% level of significance, respectively. the results suggest that there exists a long-run relationship between budget deficit and the independent variables employed in the study. thus, the bound test indicates a long-run equilibrium relationship. the estimated short-run effect of adopting the official exchange rate as a unified one and other independent variables on budget deficit is presented in table 3 table 3: short run ardl estimated coefficients variable coefficient std. error t-statistic p-value ∆cdef(-1) 0.548560*** 0.116536 4.707223 0.0001 ∆exch -0.006075 0.009123 -0.665840 0.5116 ∆exch(-1) 0.035947*** 0.009608 3.741228 0.0010 ∆opnes -0.074105*** 0.021204 -3.494927 0.0018 ∆opnes(-1) -0.041852* 0.021535 -1.943481 0.0633 ∆opnes(-2) -0.062911*** 0.020397 -3.084300 0.0049 ∆opnes(-3) -0.045188** 0.019596 -2.305998 0.0297 ∆gdpgr 0.014112 0.040888 0.345133 0.7329 ∆dummy -0.847607** 0.295989 -2.863647 0.0084 ecm(-1) -0.451440*** 0.087944 -5.133283 0.0000 diagnostics test r2 0.608346 dw: 2.20747 bg lm test: 1.269827(0.5300) bpg test: 12.41963(0.4126) j-b test: 2.450821 (0.293637) source: authors’ computations mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 9 | p a g e 4.2 discussion of results one period lagged value of budget deficit has a statistically significant positive impact on budget deficit at the 5% significant level. this means that past levels of budget deficit tend to contribute to the current level of budget deficit in nigeria, which is expected; given that the deficit accumulates unless it is cleared. current official exchange rate (unified exchange rate) has no significant effect on budget deficit at the 5% level, but has negative relationship with budget deficit. however, and one period-lagged coefficients of official exchange rate exert a negative influence on budget deficit in nigeria. thus, a one unit rise in past official exchange rate (depreciation of domestic currency) leads to 0.03 increases in budget deficit in nigeria. increase in past official exchange rate has been contributing to increase in budget deficit which could be attributed to the dual exchange rate practiced in these past periods. as shown in table 3, current values of trade openness and past trade openness all have significant negative effect on budget deficit. this is consistent with a priori expectation. thus, higher openness to trade will have a decrease in official exchange rate (appreciation of domestic currency). a unit rise in trade openness is associated with approximately 0.074 decrease in exchange rate. the fixed regressor which is the dummy variable representing periods of single and dual exchange rate practices is negative and significant. given that the coefficient of the dummy is negative, it means that the country suffered more budget deficit during periods of dual exchange rate than periods of single (unified) exchange rate system. the speed of adjustment (ecm) is correctly signed and significant at 5% level, which affirms the existence of cointegration between budget deficit and exchange rate unification and alongside other variables employed in the study. the speed of adjustment is low (approximately 45%). the postestimation diagnostics indicate that about 61% variation in budget deficit is accounted for by changes in the independent variables used in the study. the f-statistic indicates that all the regressors employed in the study are jointly statistically significant at 5% in explaining changes in budget deficit. the ardl requires the lagged of the dependent variable appears as regression in the model, necessitated the interpretation of the breusch-godfrey (bg) statistic for the test of autocorrelation. from the estimated results in table 2, the null hypothesis of no serial autocorrelation is accepted, given the non-statistically significant value of the bg test. moreover, the residuals in the estimated model are normally distributed, as shown by the jb test statistic which is not statistically significant. also, the residuals are homoscedastic, as shown by the non-significant bpg test result; in addition the model passes the test for specification bias as indicated by the reset test statistic. 4.3 stability tests testing the stability of the estimated model, the paper used the cumulative sum of recursive (cusum) and the cumulative sum of the squares of recursive residuals (cusumsq). the results are presented graphically in figures 1 and 2. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 10 | p a g e -15 -10 -5 0 5 10 15 98 00 02 04 06 08 10 12 14 16 18 20 22 cusum 5% significance figure1: the cumulative sum of recursive (cusum) -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 98 00 02 04 06 08 10 12 14 16 18 20 22 cusum of squares 5% significance figure2: the cumulative sum of the squares of recursive residuals (cusumsq) figures 1 and 2 indicate that the curves do not cross the 5% critical lines, implying that the estimated coefficients within the period covered in the study are stable. thus, meaning that the estimated parameters are stable and consistent. thus, the empirical results would be reliable for policy recommendation and base on the findings of this paper, the paper made the following recommendations. the study revealed that nigeria experienced higher budget deficits during periods characterized by multiple exchange rate regimes compared to times when a single, unified exchange rate system was in place. consequently, there is a pressing need to promote local manufacturing to reduce reliance on imported goods that could be domestically produced. initiating structural reforms in areas such as power, infrastructure, and taxation is crucial to enhance the competitiveness of the manufacturing sector. this strategy would diminish the demand for foreign currency, particularly in the informal mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 11 | p a g e (black) market, as importers seek to import goods. ultimately, such measures would augment revenue for the economy and reduce budget deficit. furthermore, the research identified that a one-period lag in the exchange rate had a detrimental impact on nigeria's budget deficit, suggesting that the existence of multiple exchange rates may have undermined investor confidence. therefore, nigeria requires a substantial influx of foreign currency into the official foreign exchange market to fulfill the demand for foreign currency. encouraging efforts to unify the exchange rate is imperative to attract foreign investors to nigeria, thereby injecting foreign currency into the market and ultimately generating revenue that could alleviate deficits in the economy. 5. conclusions the paper examined the effect of exchange rate unification on budget deficit in nigeria. using time series data from secondary sources covering the period 1981 and 2022 and the ardl bound test technique, the study found evidence of a long-run equilibrium relationship between budget deficit and the official exchange rate. the estimated unrestricted ardl error correction model revealed that current official exchange rate which served as the unified exchange rate in the paper has a negative but insignificant effect on budget deficit. however, one period lagged (past) value of official exchange rate exert a negative influence on budget deficit in nigeria. implying that increase in past official exchange rate (depreciation of domestic currency) compounded the problem of budget deficit in nigeria. also, the country suffered more budget deficit during periods of dual exchange rate than periods of single (unified) exchange rate system. based on the results, there is the need to unify the exchange rate in nigeria and attract the needed appreciation and loss of revenue if the country is poised towards reduction of budget deficit experienced in the country. references abeng, m. o and alehile, k. s (2012), macroeconomic shocks and fiscal deficit behaviour in nigeria: a vecm approach. central bank of nigeria economic and financial review. 50 (1): 2758. aladejare, s. a (2014), evaluation of government income-spending hypothesis nexus in nigeria: application of the bound test approach. american journal of business, economics and management; 2(1): 28-40. ayinde, t. o. & bankole, a. s. (2021). fiscal dominance and exchange rate stability in nigeria. future business journal, 7(1)34:1-15. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 12 | p a g e central bank of nigeria (2023). operational changes to the foreign exchange market, central bank of nigeria publication. available at https://www.cbn.gov.ng/out/2023/ccd/operational%20changes%20to%20fx%20marke t.pdf. eldepcy, m. a. (2022). the budget deficit financing impact on the real exchange rate in egypt (19752020). international journal of economics and finance, 14(3): 84-99. ezeabasili v.n, mojekwu j.n and herbert w.e, (2012). an empirical analysis of fiscal deficits and inflation in nigeria. international business and management. 4(1): 105-120. fleming, j. m. (1962). domestic financial policies under fixed and under floating exchange rates. staff papers, 9(3), 369-380. gray, m. s. t. (2021). recognizing reality-unification of official and parallel market exchange rates. international monetary fund (imf) working papers, wp/21/25 mundell, r. (1968). inflation and real interest. journal of political economy, 71(3), 280283. nwosa, p. i. (2017). fiscal policy and exchange rate movement in nigeria. acta universitatis danubius. œconomica, 13(3): 115-127 oladipo, s. o. and akinbobola, t. o. (2011) budget deficit and inflation in nigeria: a causal relationship. journal of emerging trends in economics and management sciences (jetems) 2 (1): 1-8. onafowokan, o. a., & owoye, o. (2006). an empirical investigation of budget and trade deficits: the case of nigeria. journal of developing areas, 39(2), 153174. osuka, b. o and achinihu, j.c (2014), the impact of budget deficits on macro-economic variables in the nigerian economy (1981 – 2012). international journal for innovation education and research,2(11). ozili, p.k. (2024). exchange rate unification in nigeria: benefits and implications. recent developments in financial management and economics. igi global. pesaran, m. h., shin, y. & smith, r. (2001). bound testing approaches to the analysis of level relationship. journal of applied econometrics, 16(3), 289-326. mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.cbn.gov.ng/out/2023/ccd/operational%20changes%20to%20fx%20market.pdf https://www.cbn.gov.ng/out/2023/ccd/operational%20changes%20to%20fx%20market.pdf american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 13 | p a g e sabr, s. g., ahmed, y. a. & khan, t. m. n. (2021). government budget deficit and economic growth: evidence from iraq 1980-2018. arab journal of administration, 41(1): 227-242. sanni, g. k., gaiya, b. a., ipinjolu, o. a., aliyu, v. o., and okafor, s. n. (2022). twin deficits in nigeria: where does the exchange rate fit? central bank of nigeria economic and financial review 60(1): 67-91. sanusi, a. r. (2010). successful exchange rate unification in a high inflation environment: lessons from the ghanaian economic reforms of 1983-2006. abuja journal of administration and management, 7(2). sanusi, k. a & akinlo, a. e. (2016) investigating fiscal dominance in nigeria. journal of sustainable development; 9(1): 125-131. virkola, t. (2014). exchange rate regime, fiscal foresight and the effectiveness of fiscal policy in a small open economy. etla reports no 20. http://pub.etla.fi/etlaraportit-reports20.pdf world bank group (2022) nigeria development update, december 2022. available at https://thedocs.worldbank.org/en/doc/74e2f8585c426106f79f30a7b5fbc8790360012022/o riginal/world-bank-nigeria-development-update-december-2022 mailto:contact@americaserial.com mailto:contact@americaserial.com http://pub.etla.fi/etla-%60 american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 69 | p a g e sustainable banking practices and environmental performance: insights from sri lanka 1dr. shaumy fernando and 2prof. anton arulrajah 1specialization in hrm, eastern university, sri lanka 2department of management, eastern university, sri lanka abstract: in recent decades, global awareness of environmental issues has surged, drawing attention from governments, policymakers, advocacy groups, businesses, and the public worldwide. these concerns encompass a wide range of issues, including environmental degradation, climate change, ethical considerations, social responsibility, marginalization, and the emergence of influential activist groups. this growing societal focus on environmental performance has transformed environmental protection from a concern primarily for households and communities into an imperative for businesses. environmental responsibility is now seen as adding value to organizations, attracting investors and shareholders who take pride in supporting environmentally responsible activities. the industrial development of the past has significantly contributed to global environmental challenges such as global warming, ozone depletion, air and water pollution, soil erosion, and deforestation. recognizing the urgency of these global environmental problems, organizations are increasingly prioritizing environmental performance alongside their social and economic goals. international and local environmental standards, environmental regulatory bodies, and environmentally conscious consumers exert pressure on organizations to enhance their environmental performance. compliance with strict environmental norms and obtaining environmental protection licenses (epl) have become mandatory for industries seeking to operate in today's environmentally conscious landscape. keywords: environmental performance, sustainability, corporate responsibility, environmental standards, environmental protection license 1. introduction in the last few decades, the awareness of environmental issues by governments, policy makers, advocacy groups, business firms, and the public is given much importance in all over the world (banerjee, 2002). there have been numerous debates about the issues of environmental degradation, climate change, ethics, social responsibility, marginalization and formation of strong voices of groups, radicalism and protest on capitalism since the society is more concerned about the environmental performance (jabbour & santos, 2008). environment protection activity that was limited to households and community in the past has now become a compulsion on commerce (gunathilaka, gunawardana, & push pakumari, 2015). it adds value to businesses. so investors and shareholders take pride in being associated with such activities. the industrial development which has enhanced global warming, ozone depletion, air and water pollution, soil erosion, and deforestation are now widely mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 70 | p a g e recognized as global environmental problems demanding immediate solutions (banerjee, 2001). hence, organizations are seriously focused on the environmental performance in addition to the social and economic performance. moreover, several international and local environmental standards, environmental authorities and environmental oriented customers emphasize on the environmental performance of the organizations. environmental authorities have given organizations very strict norms to follow and are much more vigilant as this issue has caused much uproar in the recent past with the society. further, environmental protection license (epl) is mandatory today for an industry to operate. hence, organizations are focusing much attention to protect the environment in their day to day activities. as society is more concerned about the environmental performance, it has led companies to adopt environmental management practices. so, companies voluntarily implement environmental management system (ems) for this purpose. an environmental management system is a set of management processes that requires firms to identify the measures and controls their environmental impact (bansal & hunter, 2003). it provides a management framework for achieving environmental performance. hence, companies insist on implementing environmental management systems to enhance control over the company’s negative environmental impact. it helps the company in preventing pollution and saving company’s money by reducing wastes, reducing energy consumption, carrying recycling activities and overall enhancing the corporate image. moreover, some authors suggest that environmental management may be a tool, which helps and cited by organizations to improve their competitiveness (hart, 1995; porter & linde, 1995). in order to achieve competitive advantage, commitment to safeguard natural environment has become an urgent issue within the current competitive scenarios. further, miles and covin (2000) stated that environmental performance of an organization improves its reputation and goodwill. it contributes to environmental and economic benefits to the organizations. it reveals that environmental issues (e.g. climate change, pollution and energy crisis etc.) create not only challenges but also opportunities for business organizations (thevanes & arulrajah, 2016a and 2016b). for a long time, these environmental issues were regarded as hardly relevant to the financial sector. within the last few decades this view has changed, and banks have recognized that the sector is increasingly affecting, and is affected by, environmental issues (kiernan, 2001; mckenzie &wolfe, 2004). since banking sector is one of the major sources of financing to the many industries and businesses, it creates huge responsibility and accountability to the banks because, this may indirectly lead to environmental pollution if banks fail to exercise strong verification measures regarding the negative environmental impact of those industries and businesses prior to financing. so, encouraging environmentally accountable investments and lending must be the prime responsibilities of banks (thombre, 2011). if a bank finances environmental polluting industries and businesses, that particular bank will definitely contribute to the environmental degradation. on the other hand, banks should play a pro-active role to oblige industries for mandated investment for environmental management, use appropriate technologies and management systems (masukujjaman & aktar, 2013). thus, banks can act as an ethical organization by the disbursement of loans only to those organizations, which have environmental concerns (muhamat, jaafar, &azizan, 2011; goyal & joshi, 2011; thombre, 2011). in this way, banks can contribute to improve the overall environment, the quality and conservation of life, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 71 | p a g e level of efficiency in using materials and energy, quality of services and products even though environmental protection is not a primary goal of banking industry. in the industrialized nation of developing countries, the issues related to the environment have become very critical and their dependence on natural resources for the growth and development underline the need of implementing policy and plans for sustainable use of resource (stockholm environment institute report, 2013). paying greater attention on the environmental issues across the globe has exerted pressure on all industries, including financial services particularly banks to go green which are till now considered as environmental friendly. banks have to address environmental issues, both in terms of their obligations and opportunities by virtue as a responsible corporate entity. usually banking activities are not physically related to the environment, but the external impact of their customer activities is substantial. so, there is a need for banks to adopt green banking practices into their operations, buildings, investments and financing strategies. thus, green banking contributes in reducing carbon footprints by providing assistance to companies involved in renewable and clean energy technology (sahoo&nayak, 2007; bihari & pradhan, 2011). the ultimate objective of green banking is to protect and safeguard the natural environment. basically, it can take place in two ways. they are: (1) technological innovation in banking, (2) behavioral and management innovations in banking practices (shaumya & arulrajah, 2016a and 2016b). technological innovation in banking can help banks to reduce their negative environmental impact or to improve their positive environmental impact. for example, using online banking instead of traditional banking system, online bills payment system instead of manual payment system, and etc. similarly, behavioral and management innovations in banking practices can also contribute to reduce negative environmental impact of the banks. for example, energy saving behavior of bank staff in their respective branches, waste reduction efforts of bank employees, environmental friendly initiatives of bank employees, providing loans to the environmental friendly project and etc. according to rashid (2010), banks should prioritize in providing loans to the sectors that promote various environmental protection activities. so, it can be concluded that green banking approach involves using environmentally friendly practices at every level from adapting environment friendly practices within the banking organizations and also considering the environmental aspect of the projects while funding and investing in commercial projects. therefore, green banking has gained unique position in the recent research since it advances towards achieving bank’s environmental performance. today, many sri lankan banks are making efforts to “go green” through offering various green products and services to their customers and taking initiatives in their day to day business operations for the environmental concerns. so in this context, it is very imperative to study the green banking practices towards bank’s environmental performance. apparently, there are lacunas in empirical studies undertaken in sri lankan context regarding green banking practices together with bank’s environmental performance. in order to fulfill this gap, this study was conducted theoretically and empirically in sri lankan banks. hence, the objective of this paper is to measure the impact of green banking practices on bank’s environmental performance. to empirically find the impact of green banking on bank’s environmental performance, the paper is divided into following sections, section 1 presents insights of environmental performance, green mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 72 | p a g e banking and its current needs, section 2 provides a brief review of literature, section 3 gives methodology, followed by analysis and interpretations of results contained in section 4. finally, section 5 indicates conclusions, implications and future directions. 2. literature review 2.1 green banking the concept of green banking was established in 1980 at triodos bank from dutch origin which started the environmental sustainability in the banking sector from the very first day. in 1990, the bank launched ‘green fund’ for funding environment friendly projects and all the other projects followed later (dash, 2008). taking this bank as example, the banks all over the world are motivated to proceed with green banking initiatives. moreover, the first green bank commenced its operations in mt. dora, florida, united states in 2009. green can be defined as an area of land covered with grass, plants and trees without buildings. generally, it can be referred as something that is related with natural environment. “green” in green banking principally indicates banks’ environmental accountability and environmental performances in business operations (bai, 2011). a green banking is an ethical banking/social banking (banks with a conscience) as there is a strong building block which is corporate social responsibility (csr) within the agenda of green banking (benedikter, 2011). it is a kind of banking conducted in selected area and technique that helps in the reduction of internal carbon footprint and external carbon emissions (bahl, 2012). banks can reduce their carbon footprints by adopting the following measures such as paperless banking, energy consciousness, using mass transportation, green building, go online, save paper, use of solar and wind energy (chaurasia, 2014). green banks’ intention is to use resources, avoid waste and give priority to environment and society (habib, 2010). green banking has many benefits and advantages (ragupathi & sujatha, 2015). they are: (1) basically green banking avoids paper work and all the transactions are done through online banking, (2) creating awareness to business people about environmental and social responsibility enabling them to do an environmental friendly business practice, and (3) banks follow environmental standards for lending, which is really an excellent idea and it will make business owners to change their business to environmental friendly which is good for the future generations. ginovsky (2009) stated that banks should launch new banking products which promote the sustainable practices and also need to restructure their back office operations in order to implement ecologically friendly practices. the author suggested two strategies which banks should follow to go for green banking. they are: (1) use of paperless banking which results in reducing the carbon footprint from internal banking operations and cost saving to banks, and (2) adoption of green street lending, which means offering low rate of interest to consumers and businesses for installing solar energy systems and energy-saving equipments. according to dharwal and agarwal (2013), green banking is a key in mitigating the credit risk, legal risk and reputation risk. the authors had suggested some green banking strategies like carbon credit business, green financial products, green mortgages, carbon footprint reduction, energy consciousness, green buildings and social responsibility services towards the society. based on the above literature, the researchers define green banking as an environmental oriented banking practice that safeguards the environment from the negative impact to achieve environmental goals of the banks. in this perspective, banks implement several green banking practices such as environmental training, usage of energy mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 73 | p a g e efficient equipments, constructing green buildings, and etc. therefore, through these practices banks can achieve their environmental goals. in this context, the green banking practices can be considered as good evidences to prove that, banks are very keen in reducing their carbon footprint and energy consumptions. it is seen that banks around the world have started giving high priority and attention to green banking. however, several literatures and studies have been found regarding ‘green banking’ in usa, europe, china, india and bangladesh (shakil, azam, &raju, 2014), if these factors hold true for other countries and contexts need further investigation. 2.2 environmental performance environmental performance is not just a corporate environmental protection; it is something much broader to include a proactive, transparent and long-term administration to meet certain well defined objectives in corporate planning to protect natural resources and competitiveness of firms. corporate environmental performance defines the sustainability targets that articulate the goals of the companies by achieving set targets to satisfy shareholders, creditors, employees, customers, suppliers and community and to comply with the regulatory compliance and legal requirements in organizations. as suggested by karagozoglu and lindell (2000), environmentally proactive strategies promote ecological innovation and can lead to competitive advantage. environmental performance is a matter of output in environmental management, which refers to the firm’s activities and products on the natural environment (klassen & whybark, 1999). it reflects an output demonstrating the degree to which firms are committed to protecting the natural environment. horvathova (2010) identified environmental performance by ratio of toxic wastes, penalties paid for the violations of environmental regulations, adoption of iso 14001 and environmental efficiency score. qi, zeng, shi, meng, lin, and yang (2014) adopted the emission intensity to measure the environmental performance. hence, it is found that the environmental impact of the firm can be measured by rating, index or environmental score. further, tung, baird, and schoch (2014) pointed out that the efficient use of material is the best metrics to measure the environmental performance of the firms. 2.3 green banking and bank’s environmental performance the term green banking is now very popular worldwide. it is for preventing the environmental degradation and making this planet habitable. as it is an environmental friendly practice, banking sector is started to practice green banking concept recently. because, banking is never considered as a polluting industry, the present scale of banking operations have considerably increased the carbon footprint of banks due to their massive use of energy (e.g., excessive usage of lighting, air conditioning, electronic/electrical equipments, it, etc.), high paper wastage, lack of green buildings, and etc. in sri lanka, banking sector has started practicing green banking concept recently. this sector consists of 25 licensed commercial banks (lcbs) and 7 licensed specialized banks (lsbs) in sri lanka (central bank of sri lanka-cbsl, 2015). these banks are the pioneering banks in adopting green banking concept in sri lanka. hence, green banking has become an issue of concern in sri lanka’s banking sector. many authors state that green banking is environmental concern practice and it reduces the negative environmental impact (bai, 2011; azam, 2012; singh & singh, 2012). according to azam (2012), green banking is an eco-friendly or environment friendly banking to stop environmental degradation to make this planet more habitable. it signifies encouraging environment friendly practices and plummeting mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 74 | p a g e carbon footprint by banking activities through various environment friendly acts (singh & singh, 2012). green banking includes promoting social responsibility where banks consider before financing a project whether it is environment friendly and has any future environmental implications (bihari, 2011).bhardwaj and maholtra(2013) state that it makes the industries grow green and restore the natural environment. hence, it is visible that green banking is the way of conducting the banking business along with considering the social and environmental impacts of its activities (jha & bhome, 2013; mishra, 2013; biswas, 2011). therefore, the green bank is known to focus entirely on environmentally friendly banking practices.by greening the business operations, banks started to take various initiatives for the concern of environmental protection and sustainability. the degree to which firms are committed to protecting the natural environment reflects environmental performance. lober (1996) mentioned that environmental performance can be evaluated by a set of indicators such as low environmental releases, prevention of pollution, waste minimization, and recycling activities. these indicators are addressed by green banking by creating an effective and far reaching market based solutions. hence, green banking practices in the banks lead to improve the environmental performance of the banks by reducing negative environmental impact (reducing paper usage, reducing the energy conservation, reducing fuel consumption and emission) and improve the positive environmental impact (improving environmental training and awareness of employees, establishing green building and usage of solar and wind energy) of the banks. since environmental issues are emerging rapidly in banks, their dire need, now, is to adopt green banking practices, so that it would ultimately result in saving the environment and enhancing environmental performance of banks. the literature review reveals that with the exception of a few, no wide-ranging study deals with the impact of green banking on environmental performance around the world. especially in sri lanka, this study needs to be explored thoroughly. so, the present study is an attempt to take a step forward towards the analysis of the impact of green banking practices on bank’s environmental performance. hence, this study has been initiated in sri lankan context in order to fill this empirical knowledge gap. based on the above cited literature evidences, hypothesis for this study has been developed as: hypothesis 1: green banking practices have positive and significant impact on bank’s environmental performance. 3. conceptual model the research model of this paper was shaped from two comprehensive variables including green banking practices and bank’s environmental performance. based on theoretical background and review of the previous literature, a conceptual model was developed to examine the impact of green banking practices on bank’s environmental performance. figure 1 presents the research model. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 75 | p a g e figure 1: conceptual model 4. method the objective of this study is to measure the impact of green banking practices on bank’s environmental performance. the study was done in the natural environment where work was preceded normally. none of the variables were controlled or manipulated. hence the study was a non-contrived study. this study depended on the primary data. the primary data were collected through self-administrated questionnaire. the structured questionnaire of this study consists of three parts. part i: data on employee profile. part ii: regarding green banking practices. finally, in part iii: employees were asked to provide their views on environmental performance of their banks. five point likert scale was assigned to measure the variables of the study and all are closed questions. the survey was carried out among the sample of 155 employees of selected commercial banks in batticaloa region of sri lanka. the sample method of the survey was disproportionate stratified sampling, because to assure representation of employees belonging to different grades in the selected banks. the primary data collected from the sample were analyzed using the computer based statistical data analysis package, spss (version 19.0) to measure the descriptive statistics, simple regression and multiple regression analysis. the data analyses include univariate, bivariate and multivariate analyses. 5. measures shaumya and arulrajah (2016b) developed a 16 items instrument with four key dimensions to measure the green banking. this tested instrument was used in this study.the dimensions are:(1) employee related practice was measured by three items such as environmental training and education, green performance evaluation and green reward system, (2) daily operation related practice was measured by using four items such as reduce paper usage, energy efficient equipments, e-waste management and eco-friendly banking practices, (3) customer related practice was measured by four items such as green loan, green projects, facilitate green enterprises and green credit evaluation, and (4) bank’s policy related practice was measured using five items such as green branches, green policy, green partnership, green strategic planning and green procurement. each item of this instrument was rated using a five points likert scale (1 = strongly disagree to 5 = strongly agree) to indicate how respondents agree or disagree regarding availability of green banking practices in their banks. the instrument had a good degree of reliability with a cronbach’s alpha of 0.94. table 1 shows the quality of the four dimensions of their instrument mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 76 | p a g e table 1: the reliability analysis of the 4 dimensions of green banking employee related practice daily operation related practice customer related practice bank’s policy relatedpractice a ave (average variance extracted) b cr (composite reliability) (source: shaumya &arulrajah, 2016b) the bank’s environmental performance (dependent variable) was measured by an opinion question through five point likert scale (1 = very low to 5 = very high) that was the perceived level of bank’s environmental performance. this study has used only a single item question to measure the bank’s environmental performance. hence, its alpha value is 1. 6. results and discussion the profile of sample consists of bank, job position, gender, age, educational qualification and working experience of 155 employees of selected commercial banks in batticaloa region of sri lanka. the frequencies and percentages are shown in table 2. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 77 | p a g e table 2: sample profile sample profile category frequency percentage banks commercial bank of ceylon plc 13 8.4 hnb plc 29 18.7 seylan bank plc 15 9.7 sampath bank plc 20 12.9 people’s bank 27 17.4 dfcc bank plc 7 4.5 ndb plc 15 9.7 ntb plc 11 7.1 union bank plc 11 7.1 pan asia banking corporation plc 7 4.5 job position manager 12 7.7 assistant manager 15 9.7 officer 33 21.3 banking assistant 61 39.4 banking trainee 21 13.5 other 13 8.4 gender male 92 59.4 female 63 40.6 age 18-28years 87 56.1 29-38years 53 34.2 39-48years 11 7.1 over 49years 04 2.6 educational qualification ordinary level advance level 117 75.5 graduate 30 19.4 postgraduate 08 5.2 working experience 3 years and below 49 31.6 4-5 years 33 21.3 above 5 years 73 47.1 (source: survey data) the result shows, the coefficient of correlation (r) is 0.769. based on the decision rule, there is a strong positive correlation between green banking practices and bank’s environmental performance. the significance level is 0.000 which is below 0.05 (p < 0.05). therefore, we conclude that there is a positive relationship between green banking and bank’s environmental performance. this means that the extent of implementation of green banking has positive effect on the level of bank’s environmental performance. this implies that banks that implement green banking practices tend to improve the environmental performance of banks. based on the objective and hypothesis of the study, the researchers applied the simple regression analysis. tables 5 and 6 represent the test of the hypothesis by using simple regression analysis, based on the significant level of (0.05). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 78 | p a g e it could be indicated from table 2 that among the respondents, 8.4% are from commercial bank, 18.7% are from hnb, 9.7% are from seylan bank, 12.9% are from sampath bank, 17.4% are from people’s bank, 4.5% are from dfcc, 9.7% are from ndb, 7.1% are from ntb, 7.1% are from union bank and 4.5% are from pan asia bank. out of 155 respondents, 7.7% are managers, 9.7% are assistant managers, 21.3% are officers, 39.4% are banking assistants, 13.5% are banking trainees and 8.4% are other staffs. among the respondents, 59.4% are males and 40.6% are females and 56.1% of the respondents are between 18 to 28 years of age, 34.2% are between 29 to 38 years of age, 7.1% are between 39 to 48 years of age and 2.6% of the respondents are above 49 years of age. based on the educational qualification, 75.5% of the respondents are advance level, 19.4% of the respondents are graduates and 5.2% of the respondents are post graduates. and based on the working experience, 31.6% of the respondents have 3 years and below 3 years of experience, 21.3% have 4 to 5 years of experience and 47.1% of the respondents have above 5 years of experience. the results of univariate analysis for green banking and bank’s environmental performance are presented in table 3. table 3: univariate analysis n mean standard deviation green banking 155 3.99 0.65 bank’s environmental p 155 4.10 0.82 (source: survey data) mean and standard deviation for green banking is 3.99 and 0.65 respectively and mean and standard deviation for environmental performance is 4.10 and 0.82 respectively. correlation between the green banking and bank’s environmental performance is shown in table 4. table 4: correlations between the green banking and bank’s environmental performance green banking bank’s environmental performance green banking pearson correlation sig. (2-tailed) 1 .769** .000 n 155 155 bank’s environmental performance pearson correlation .769** 1 sig. (2-tailed) .000 n 155 155 **. correlation is significant at the 0.01 level (2tailed). (source: survey data) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 79 | p a g e the result shows, the coefficient of correlation (r) is 0.769. based on the decision rule, there is a strong positive correlation between green banking practices and bank’s environmental performance. the significance level is 0.000 which is below 0.05 (p < 0.05). therefore, we conclude that there is a positive relationship between green banking and bank’s environmental performance. this means that the extent of implementation of green banking has positive effect on the level of bank’s environmental performance. this implies that banks that implement green banking practices tend to improve the environmental performance of banks. based on the objective and hypothesis of the study, the researchers applied the simple regression analysis. tables 5 and 6 represent the test of the hypothesis by using simple regression analysis, based on the significant level of (0.05). table 5: model summary of impact of green banking practices on bank’s environmental performance model r r square adjusted r square std. error of the estimate 1 .769a .592 .589 .528 a. predictors: (constant), green banking practices b. dependent variable: bank’s environmental perform ance (source: survey data) table 6:coefficientsof green banking practices on bank’s environmental performance model unstandardized coefficients standardized coefficients t sig. b std. error beta (constant) .250 .262 .952 .343 green banking practices .965 .065 .769 14.892 .000 dependent variable: bank’s environmental performance (source: survey data) the impact of green banking practices on bank’s environmental performance has been studied using simple regression analysis. the results revealed r at 0.769, which represents positive correlation between green banking practices and bank’s environmental performance and r square at 0.592, which implies that 59.2% of variability in bank’s environmental performance is accounted by the green banking practices. in other words, 40.8% of variance of bank’s environmental performance is affected by other variables (table 5). the t-value (14.892, sig. <0.001) further confirms that green banking is associated with the improved environmental performance and thus leads to the acceptance of the hypothesis i.e. green banking practices have positive and significant impact on bank’s environmental performance (table 6).moreover, to analyze the impact of each dimensions of green banking on bank’s environmental mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 80 | p a g e performance stepwise multipleregression analysis was used. the results are shown in tables7, 8, and 9. table 7: model summary of the impact of each dimensions of green banking on bank’s environmental performance model r r square adjusted r square std. error of the estimate change statistics r square change f change df1 df2 sig. f change 1 .743a .552 .549 .570 .553 .552 188.818 1 153 .000 2 .759b .575 .540 .023 8.251 1 152 .005 3 .769c .591 .583 .532 .016 5.768 1 151 .018 a. predictors: (constant), bank’s policy related practice b. predictors: (constant), bank’s policy related practice, employee related practice c. predictors: (constant), bank’s policy related practice, employee related practice, daily operation related practice (source: survey data) table 8: anova model model sum of squares df mean square f sig. 1 regression residual total 57.641 1 57.641 188.818 .000a 46.707 153 .305 104.348 154 2 regression residual total 60.046 2 30.023 103.008 .000b 44.302 152 .291 104.348 154 3 regression residual total 61.676 3 20.559 72.749 .000c 42.672 151 .283 104.348 154 a. predictors: (constant), bank’s policy related practice b. predictors: (constant), bank’s policy related practices, employee related practices c. predictors: (constant), bank’s policy related practices, employee related practices, daily operation related practices d. dependent variable: environmental performance (source: survey data) as shown in table 7, the extent to which these individual dimensions have contributed separately to the bank’s environmental performance. among these dimensions, bank’s policy related practices have an impact on 55.2%, employee related practices have an impact on bank’s environmental performance was 2.3%, and daily operation related practices have an impact of 1.6% on bank’s environmental mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 81 | p a g e performance. finally, out of four dimensions, these three dimensions totally contribute 59.1% to the bank’s environmental performance. table 8 indicates that this prediction model was statistically significant, f(3,151) = 72.749, p < .001. the final model included bank’s policy related practice, employee related practice and daily operation related practice. however, the final model has excluded customer related practice. table 9: coefficient model model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) bank’s policy related practice .715 .251 2.854 13.741 .005 .856 .062 .743 .000 2 (constant) bank’s policy related practice employee related practice .600 .248 2.420 4.995 2.872 .017 .576 .115 .499 .000 .311 .108 .287 .005 3 (constant) bank’s policy related practice employee related practice daily operation related practice .241 .286 .843 3.806 2.415 2.402 .401 .466 .122 .404 .000 .262 .108 .242 .017 .235 .098 .185 .018 a. dependent variable: environmental performance (source: survey data) table 9 depicts that bank’s policy related practice (beta = 0.404), employee related practice (beta = 0.242) and daily operation related practice (beta = 0.185) have positive and significant impact on bank’s environmental performance. at the same time, customer related practice was not a significant predictor of bank’s environmental performance. hence, it was excluded from the model. 7. conclusion green banks are at startup mode in sri lanka. they should expand the use of environmental information in their business operations, credit extension and investment decisions. the endeavor will help them proactively to improve their environmental performance. as green banking is becoming an urgent need for banks in order to eliminate or reduce environmental degradation, both researchers and practitioners have called for more research works. although, many research works have been done on green banking, however, exploring the impact of green banking on bank’s environmental performance has not been done so far. hence, researchers have conducted this study in order to fulfill this empirical gap. the present study examined the impact of green banking practices on bank’s environmental performance. so, the analysis has made use of descriptive statistics, correlation, and regression analyses. based on hypothesis testing, this research has confirmed a statistically significant and positive impact of green banking practices on bank’s environmental performance. as such, higher the green banking practices the higher would be the bank’s environmental performance. similarly, the simple regression mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 82 | p a g e analysis showed green banking could be significantly explained by the variance of bank’s environmental performance. this result provides a support to the hypothesis of this study. further, stepwise multiple regression analysis proved that bank’s policy related practice, employee related practice, and daily operation related practice were found to have positive and significant impact on bank’s environmental performance however, customer related practice was not a significant predictor of bank’s environmental performance. even though customer related practice is one of the green banking practices, it does not directly contribute to the environmental performance of banks, as it deals directly with customers’ or general environmental performance. this may be the reason to exclude it from the final model of this study. at the same time, bank’s policy, employee and daily operations related practices are directly contribute to reduce the negative environmental impact and to improve the positive environmental impact of banks. due to that they contribute to the final model of the study. banking sector is generally considered as environmental friendly in terms of emissions and pollutions. based on the results of the study, green banking has significant impact on bank’s environmental performance. so, through the green banking practices, banks can improve their environmental performance. it enables the banks to safeguard the environment and build an image as the good corporate citizens. hence, green banking can be an avenue to reduce pollution and save the environment. 8. implications of the study the study has implications for both academicians and practitioners. for the academics, this study contributes to understand the impact of green banking practices on bank’s environmental performance and findings of the study also contribute to green banking literature. and this study is useful to banks that are intended to become greener banks as well as to achieve environmental goals. firstly, it helps other banks which may have plans to implement green banking practices in future more effectively. secondly, the banks which are practicing green banking concept can compare with other green banks and understand the strength and weakness of their own green practices and performance through this study. thirdly, this study also promotes and motivates green banking practices of banking sector in sri lanka. through this study, the employees of the banks will become knowledgeable about green banking practices and successfully achieve environmental performance of banks by involving in implementation of green banking practices in future. finally, this study may contribute to environmental protection and management. further, taking care about environmental performance would help the banks to get subsidies from the government for implementing green banking practices. also this study may guide the banks to use modern plants and machineries which save energy, generate low co2 emission and ensure water conservation for the better environmental performance. these practices would help the banks to practice sustainable practices and improve their competitiveness. the better environmental performance of the bank would help to attract the socially responsible investors across the globe to invest their investments and create investment opportunities. in the light of these implications, this study is considered to be important for the sustainability of banks. 9. limitations and future directions there are some limitations that exist in this study. firstly, the current study is carried out based on the information collected only from the selected commercial banks in batticaloa region of sri lanka. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 83 | p a g e secondly, data were collected at one point of time, applying a cross sectional design. thirdly, sample size of the study is limited. fourthly, this study is mainly conducted based on the data collection through the questionnaire. finally, antecedent variables are not taken into consideration. despite these limitations, it is believed that this study makes a significant contribution to the existing literature on green banking. the current study is a cross-sectional study. therefore, it is important for future studies to validate the current findings in a longitudinal designs could be more appropriate than cross-sectional ones. the current study only applies a quantitative research design. therefore, future studies may consider collecting deeper data from the respondents. in addition to that, future studies have the further opportunities to consider the antecedent variables related to this study. and the findings of this study are methodologically limited into batticaloa region of sri lanka, which not permit the generalization of findings. hence, it is suggested that it is possible to conduct the study in the public and private sector banks in sri lanka and all over the island. in order to overcome these limitations, further studies are needed. references azam, s. 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(2014). the relationship between organizational factors and the effectiveness of environmental management. journal of environmental management, 144, 186196. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 87 | p a g e appendix-1: questionnaire part i: personal information 1. bank commercial bank of ceylon plc hnb plc sampath bank plc seylan bank plc people’s bank 2. job position manager assistant manager officer 3. gender male 4. age 18-28years 29-38years 5. educational ordinary level qualification advance level 6. working 3 years and below above 5 years experience 4-5 years please mark "x" in appropriate boxes or fill the details in the space provided. part ii: information regarding green banking practices please mark "x" to show to what extent you agree with the following statements. no statements 1 2 3 4 5 01 my bank provides training and education to the staff on environmental protection, energy sa v 02 my bank has environmental (green) performance evaluation practices (environmental sustain 03 my bank implements environmental (green) reward system in the branches who support the 1 2 3 4 5 04 my bank has initiatives to reduce paper usage and other wastage of materials. 05 my bank has introduced energy efficient equipments, system solutions and practices (atms, pan asia banking corporation plc ntb plc ndb plc dfcc bank plc union bank plc banking assistant banking trainee other female 39-48years over 49years graduate postgraduate mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 88 | p a g e 06 my bank uses e-waste management practices. 07 my bank has environmental friendly banking practices (e-mail, intranet, e-statements, online a 1 2 3 4 5 08 my bank provides loan to environmental protection and energy saving related projects. 09 my bank implements certain independent and unique green initiatives, projects, and etc. (e.g. 10 my bank promotes and facilitates environmental oriented enterprises through special grants, 11 my bank uses social and environmental management system or any other mechanisms to eva 1 2 3 4 5 12 my bank involves in setting up green branches (energy efficient buildings/green buildings). 13 my bank has environmental (green) policy. 14 my bank has environmental related agreements with relevant parties/stakeholders (suppliers, 15 in my bank, head office level or top management involves in environmental protection relat e 16 my bank purchases its stationeries, equipments and other items from environmental friendly part iii: information regarding environmental performance 1 strongly disagree 2 disagree 3 uncertain 4 agree 5 strongly agree please mark "x" to show to what extent you agree with the following statements. 1 very low 2 low 3 moderate 4 high 5 very high n o statements 1 2 3 4 5 01 my bank provides training and education to the staff on environmental protection, energy sa v mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 75 | p a g e the impact of trade union membership on wage levels in benin 1aimee mahougbe and 2achille assouto 1faculty of economics and management (faseg), university of abomey-calavi (uac), 2orléans economics laboratory (leo), university of orléans, cnrs, fre 2014 abstract: the labor market, particularly the role of trade unions, has garnered significant attention in developed countries. this research explores the impact of trade unions on wage levels and wage inequality, drawing from established literature. trade unions play a crucial role in advocating for higher wages, better working conditions, and increased job security for their members, which in turn has implications for wage disparities. this study aims to shed light on the strategies employed by trade unions to improve the well-being of their members, including negotiation processes with employers and public authorities, as well as the use of strike actions. by delving into the functioning of labor markets and the influence of trade unions, this research contributes to our understanding of wage dynamics and inequality in developed economies. keywords: labor market, trade unions, wages, wage inequality, negotiation, strike actions 1. introduction the functioning of the labor market, in particular the role of institutions such as trade unions, has been the subject of much work in developed countries in recent decades (schmidt, 2021; card et al., 2020). since the seminal work of dunlop (1944), ross (1948) and lewis (1963), it has been accepted that trade unions contribute to the increase in the wages of their members and are therefore likely to reduce any increase in the wages of their members. wage inequalities. the main objective of trade unions is to improve the well-being of union members by negotiating higher wages, better working conditions and increased tenure (manda et al., 2005). to achieve this, trade unions use many legal means at their disposal, ranging from platforms for discussions with employers and/or public authorities to strike action. however, restrictions on union activities limit their ability to use strikes to gain benefits from employees. however, unions can influence the level of pay and working conditions of their members through collective bargaining. it is noted that these unions sometimes lack the resources to hire negotiators whose skills and capabilities are comparable to those of full-time employer negotiators. despite the difficulties, union leaders were required to insist on workers' demands for substantial results in order to continue to enjoy the support of their rank and file (sandbrook, 1975). despite the ever-increasing body of research on the impact of unions on wages and wage inequality in developed countries, empirical evidence of the impact of unions on incomes in developing countries, particularly in africa, is still scarce (kerr and wittenberg, 2021; manda et al, 2005). worldwide, most empirical studies on the influence of trade unions on wages are based on the experiences of mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 76 | p a g e industrialized countries, and few attempts have been made to estimate the relationship for less developed countries, particularly in sub-saharan africa. freeman (2010) argues that there has been relatively little research on the impact of trade unions in developing countries. better still, he believes that the few works available are mainly based on small, unrepresentative samples. benin is an interesting context for studying the impact of trade unions on wages. indeed, several changes have been made in recent years to the regulatory framework, including the labor code and the law on the exercise of the right to strike. périsse (2014) notes that these changes often stem from endemic labor disputes that stem from the existence of a concentration of industries and lowor unskilled workers that cannot be regulated by the labor code focused on the individual employment contract. thus, recent policy reforms in benin's labor market are expected to both promote private sector expansion and ensure the continuity of public services. however, it is believed that the new environment thus defined seems to have caused a weakening of trade union power because of the right to strike abolished for some trades and reframed for others. the relevance of the role of trade unions in improving working conditions must therefore be questioned. torm (2018) questions the effectiveness of trade unions due in part to their marginal independence, employer dominance, and the generally low incidence of collective agreements. amendments to labor regulations in benin in recent years reinforce the beninese context, which is becoming a relevant case study for analyzing the functioning of labor markets. in addition, the evolution of the guaranteed interprofessional minimum wage (smig) since 1994 reflects a certain upward rigidity in wages. indeed, it has increased annually by an average of cfaf 1,150 from 1994 to 2022. in a context where benin’s economy is dependent on exogenous shocks, the most recent of which are the covid-19 pandemic and the russian-ukrainian conflict, the erosion of purchasing power is likely to exacerbate tensions between workers and employers. the objective of this article is to assess the wage impact of unionization of workers in benin. the contribution of the article is twofold. first, it is one of the few studies exploring the effects of workers' union membership in the west african sub-region. less is known, therefore, about the gains from union membership for the worker in africa. the countries dealing with this theme are mostly developed countries (keune, 2018; borland, 1996) or developing regions other than africa (liu et al, 2020; torm, 2018). the work of manda et al. (2005) in kenya and ngom (2021) in senegal are exceptions. but this article differs from the study by manda et al (2005) in that it deals with all sectors of activity from primary to tertiary. similarly, unlike ngom (2021), this study uses a methodology to correct for potential problems of endogeneity and unobserved heterogeneity that may occur in these regressions. the decision to join a trade union is voluntary or prompted by the existence of trade union organizations in the branch of activity. in addition, awareness of the benefits inherent in union struggle could be associated with the worker's level of education and experience. this results in self-selection that generates endogeneity problems, the failure to take into account of which can lead to biased results. second, we consider duality, which is characteristic of labor markets in the majority of african countries where the formal and informal sectors coexist. taking this aspect into account is of particular importance because the informal sector occupies a prominent place in developing economies, particularly in africa (freeman 2010). for example, in benin, about 80% of workers work in the informal sector (yedomon, 2016). the methodological approach used to achieve the objective relies on mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 77 | p a g e regime-change regression models to address potential issues of selectivity and endogeneity bias. the results show that membership of a trade union organization positively affects the level of pay. there has been a 33.06% increase in average hourly wages associated with unionization. in addition, this remuneration is influenced by the skill levels of the workers as well as the length of time spent in work. on the other hand, employees in the formal sector are the most likely to unionize. the rest of the article is organized as follows. section 2 presents benin's institutional framework, while section 3 summarizes the available literature on the effects of trade union membership. the fourth section is devoted to the description of the methodological approach as well as the data. the results and discussions are discussed in section 5 while the last section concludes. 2. institutional framework of the trade union movement in benin the trade union movement in benin is historically linked to the main characteristic phases of the country's political history, from the pre-independence period to the post-conference of the nation's vital forces of february 1990, marked by multiple structural reforms (friedrich ebert stiftung, 2015). the beninese trade union landscape underwent a major upheaval in the 1990s with the emergence of trade union pluralism, thanks to the full multiparty system devoted to the national conference of february 1990. trade union pluralism is in harmony with benin’s labor regulations, which recognize the right of workers to form or join trade unions. in the era of democratic renewal, there was an increase in the number of trade unions organized into federations or confederations. the danish trade union development agency counts in 2019, eight trade union confederations for more than 500 affiliated unions. trade unions operate in both formal and informal sectors. the formal sector is characterized by strong unionization. environ 75% of employees in this sector belonged to a union in the early 2010s. however, formal employment accounted for only 10% of total employment. as for the informal sector, trade union action began by covering workers in this sector with the existence of a confederation dedicated to informal workers, namely the “centrale des syndicats du privé et de l’informel du bénin” (cspib) even if the latter has seen a decline in the number of its members. in addition, 23% of unions affiliated to the national union of workers' unions of benin (unstb) operate with organized workers from the informal economy (dtuda, 2022). the public sector has a strong unionization characterized by a preponderance of organizations in the education subsector followed by the health subsector. the education subsector alone accounts for nearly 40 per cent of rank-and-file unions in the public sector. the importance of unionization in education is explained both by the large proportion of teachers out of all public sector workers and by the visibility of their union actions. indeed, the staff of the ministries of the three levels of education, as shown in figure 1, represented in 2017 more than 50% of the civil staff of the state (ministry of labor and the public federation (mtfp), 2018). in addition, the strike movements usually called in the education subsector have the particularity of affecting most beninese households that have their children enrolled in public education. the health subsector comes in second place with a total of fortythree (43) rank-and-file unions divided into corporatist unions, national unions or representative unions of departmental and university hospitals. in addition to these two main subsectors, there are a significant number of trade unions in the public administration, particularly in the various ministerial departments. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 78 | p a g e figure 1: number of civilian government employees between 2011 and 2017 in the three levels of education in contrast to the public sector, there is low unionization in the private sector. in this private sector, a distinction must be made between the informal and the formal. in the formal private sector, trade unions are mainly concentrated in the cement industry, the banking sector, the press and the service sector. on the other hand, in the informal private sector, they are made up of actors from the agricultural and craft sectors (friedrich ebert stiftung, 2019). the low visibility of trade union action in the formal sector can be explained either by a relative success of social dialogue or a lack of knowledge of the texts governing workers' rights. although the beninese state has adopted a political and regulatory framework favorable to their development, trade unionism in the informal sector is unsuccessful. this is due to illiteracy, the strong presence of women and the lack of awareness of workers' rights. however, the informal sector remains the main sector providing employment, with more than 80% of the workforce employed. it should be noted, however, that the informal economy is experiencing slow but increasing unionization with the emergence of large unions, even if they have limited influence (friedrich ebert stiftung, 2019). all in all, benin's economy has seen an increase in the membership of rank-and-file unions in recent decades. there are eight (08) confederations that took part in the 2021 professional elections for more than 674 rank-and-file unions. three of the eight confederations were elected to be interlocutors in negotiations with the state. however, the unionization rate of employment fell by four percentage points during the 2010s, falling to 11% in 2019, a relatively high level compared to other west african countries. there is also a proliferation of trade unions sometimes operating in the same sector with the same objectives. the result is a war of leadership, political clientelism and internal governance problems that relegate to the background the mission of defending workers' rights. despite problems of organization and governance, trade union struggles have for decades produced significant social and economic results in some sectors. for example, in the public sector, education workers have been granted an increase in the index point through negotiations with the government. for example, the salary index for kindergarten, primary and secondary school teachers increased 1.25fold from january 2011. since october 2010, higher education teachers have benefited from an improvement in their index point, which has been multiplied according to grade by coefficients ranging from 1.5 to 3 (general directorate of the economy, 2014). similar benefits were also granted to workers in the ministry of finance as well as to the corporation of magistrates. the positive results have been achieved following source: authors, based on mtfp data (2018) 44903 44811 44811 44688 43611 44542 47912 66144 70475 70494 69041 73090 72285 77546 0 50000 100000 2011 2012 2013 2014 2015 2016 2017 trois ordres d'enseignement total mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 79 | p a g e numerous strikes that reduce the performance of the economy. in 2014, the general directorate of the economy estimates the losses induced by the 2010 strike at around 94,189,680,000 fcfa and 33,747,624,076 fcfa respectively for gdp and tax revenues. following an inventory of the trade union struggle, the public authorities undertook a reform with a view to reorganizing trade union action in benin. the reform consisted of the adoption of new laws to regulate the right to strike as well as the scope of action of the various trade union organizations. for example, the national council for social dialogue (cnds) was created by decree in 2017 to ensure the organization and management of social dialogue on socio-economic issues of common interest to the state, employers and trade unions. the cnds introduced changes in hiring, placement of labor and termination of the employment contract. it was dissolved in 2022 and replaced by the national commission for consultation, consultation and collective bargaining. another reform concerns the law on the exercise of the right to strike has been amended, limiting the maximum duration of a strike to 10 days per year for all employees. several groups are banned from strikes, such as the military, paramilitaries (police, customs, water, forests, hunting, etc.) and health personnel. another provision provides that strikes motivated by the violation of universally recognized trade union rights may not be deducted from wages (danish trade union development agency, 202-2). the reforms thus implemented can be interpreted as the consequence of potential adverse effects on economic performance. but analyzed fromthis point of view, it would obscure the ability of trade unions to improve the living conditions of workers, who can in turn be encouraged to increase their productivity. such reforms then raise questions about the usefulness of trade union organizations in the various sectors of activity in benin. the idea is to compare the effects of these trade union organizations on the lives of beninese workers with the results provided by the literature. 3. literature review recent research has failed to identify a general law on the effects of institutions on labor market outcomes, but it has led to new, sometimes surprising, conclusions about how institutions affect outcomes (kerr and wittenberg, 2021; card et al., 2020; ge, 2014; liu et al., 2020; yao and zhong, 2013). economic circumstances and institutions probably vary too much from country to country to allow for a single generalization, may be the reason. the absence of such a general law leads to a more measured view of what institutions do. the synthesis of previous work proposed here first examines the general theoretical framework before highlighting the main results obtained in the empirical literature. economists use three types of theories to analyze labor institutions. the first, which freeman (2010) calls distortions, suggests that institutions disrupt the equilibrium of a competitive market. union-led wage negotiations would result in higher labor costs, which in turn leads unionized companies to reduce employment. as a result, some workers turn to lower-paying and less productive non-unionized jobs, reducing economic efficiency. the higher the elasticity of labor demand, the greater the distortion in resource allocation. in contrast to the first theory, the second type of theory views institutions as effective negotiation mechanisms that promote optimal resource allocation. in an effective negotiation model, the consensus reached benefits both managers and employees, thus avoiding the waste of resources. this is coase's theorem at work in the world of labor institutions (freeman, 1993). as a result, rules determined by the institutions, such as employment protection legislation, affect the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 80 | p a g e distribution of resources but not production. the third theory focuses on the idea that institutions eliminate information asymmetries and facilitate cooperative behavior, which increases productivity. freeman and lazear (1995) view work councils as institutions that increase communication within firms and enable management and workers to make more informed decisions. on the other hand, where there is pronounced wage inequality due to lack of competition, as is the case in monopsony (manning, 2013) or due to information failures or other factors, collective bargaining or government regulations may bring wages closer to the market equilibrium level. there are theoretical arguments that unions increase, reduce or do not affect the well-being of workers. freeman (1980) and freeman and medoff (1984) argued that in addition to increasing their members' wages, unions reduced inequality and had other non-wage benefits, which they argued stemmed from the collective voice/institutional response aspect of union activity. these include solidarity and impacts on wage inequality, improving firms' productivity by providing a voice for workers that facilitates communication between workers and management, and a voice in broader societal debates. the reduction in wage inequality was achieved through the "standard rates" that unions negotiated both within and between companies. freeman (1980) called the reduction of inequality in the union sector the intra-sectoral effect. he showed that this intra-industry effect was large and negative in the united states in the 1970s, meaning that the overall impact of unions was to reduce inequality, particularly in the manufacturing sector. empirical work is also part of the same logic but emphasizes more the benefits of union membership for workers (card et al., 2020; ge, 2014; bryson, 2014; laroche, 2004; coutrot, 1996; najem and paquet, 2007). research to estimate the extent to which unions raise their members' wages has indeed stimulated a growing literature on causal inference (card et al., 2020; ge, 2014; yao and zhong, 2013; read et al., 2010). but the work in general is more the responsibility of developed countries or developing countries (dcs) other than those of africa. for example, lu et et al. (2010) using firm-level data, find that unions lead to better benefits and more contract signings. however, workers in unionized companies do not enjoy higher wages and bonuses than their counterparts in non-unionized companies. zhang et al. (2011) also conclude that trade unions in china do not play a significant role in the incidence of industrial labor income. for its part, ge (2014) notes that unions in the workplace significantly improve wage and non-wage compensation, as well as employee training. based on company data, the author shows that the presence of unions within the same region and industry generates positive spin-offs for employee compensation. yao and zhong (2013) found that unionized firms were associated with significantly higher average wages and a larger fraction of employees covered by a pension. in contrast, budd et al. (2014) found that union density does not affect average wage levels, even though it is positively associated with employee productivity and overall output. when it comes to work in developing countries, particularly in africa, very few are interested in the effects of unionization (kerr and wittenberg, 2021; ngom, 2021; manda et al., 2005). manda et al. (2005) report a positive wage effect of trade union membership in kenya. in other words, the unionization of the worker generates a wage premium. the study further shows that elite workers tend to refrain from unionizing. more recently, kerr and wittenberg (2021) note extremely high union wage premiums in south africa leading to a slight increase in pay inequality in recent years. but unlike manda et al. (2005), kerr and wittenberg (2021) find that union membership has become increasingly mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 81 | p a g e concentrated at the top of the wage distribution and in the public sector. kerr and wittenberg (2021) nevertheless argue that unions do more for those at the bottom than for those at the top. card et al. (2004) note that this result could be generated by positive selection in unions at the bottom and negative selection at the top, so that unions appear to reduce inequality more than they actually do. ngom (2021), for his part, highlights the lack of a correlation between the unionization rate and labor productivity in senegal. however, unionization has positive effects in terms of wage levels. it emerges from this literature that the effects of affiliation lead to rather contrasting results in terms of wages or working conditions. overall, the empirical literature supports a positive effect of union membership, although in some cases the authors highlight a lack of correlation. in benin as in the west african region, few studies have focused on the impact of unionization. this study attempts to examine the role of unionization in improving workers' wages in benin. it is based on an adapted methodology for estimating the impact of unionization on wages. 4. methodology and data used in this section, we describe the estimation strategy adopted and then present the data used. 4.1. estimation method since the purpose of this article is to examine the effects of membership of a trade union organization on the level of wage compensation, it is important to consider the methodological problems associated with such an analysis. estimating the effects of unionization on wages comes up against the problem of endogeneity which, if not taken into account, would lead to biased results. indeed, membership of a trade union is either voluntary or induced by the existence of a trade union in the branch of activity and the awareness of the advantages inherent in the trade union struggle. knowledge of the interests of union membership can be improved through education and experience. for example, workers with a high level of education have a deeper knowledge of the issues associated with unionization and are likely to join than workers with no or low levels of education. thus, selfselection in union membership is an important source of endogeneity. moreover, the literature has shown that affiliation to a union depends not only on the observable characteristics of workers, but also on certain unobservable characteristics (laroche, 2017). failure to take these into account can lead to overestimating, underestimating or reporting the impact where it does not exist at all. several methods have been developed and proposed in the literature to address potential self-selection bias and to allow comparability of the two groups. these are heckman selection methods, instrumental variables, propensity score matching and regime-change regression. in addition to the limitations specific to each method, they are, for the most part, unable to correct selection biases related to the endogeneity of the treatment variable (heckman et al., 1997; khonje et al., 2015), resulting in biased results. a suitable method for such situations is regression with regime change (lokshin and sajaia, 2004; maddala, 1983; lee, 1978). nahm et al. (2017) also draw attention to these methodological issues in the analysis of the effects of unionisation. the approach used in this article to estimate the gain from union membership is therefore based on a regression model with regime change. to do this,we start from two earnings functions, one for unionized workers (equation 1a) and the other for non-unionized workers (equation 1b). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 82 | p a g e where is the log hourly earnings of unionized workers and the log hourly earnings of non-unionized workers. the vector includes the standard explanatory variables, while and are the error terms. equation 2 represents the choice of union membership si ( ) si where is a latent variable determining whether union membership, , is observed, and is our estimate of union premium is a vector of instrument variables which do not directly influence the worker's wage level but which intervene in the decision on union membership. in this study we use as an instrument the availability or absence of trade union organization in the company. theavailability of trade union organization determines the decision to join, but has no effect on the level of wages unless the workers join and are active in it. , and are parameters to be estimated. the error terms in both regimes ( , , ) are assumed to follow a trivariate normal distribution with a zero mean and a covariance matrix equal to . the earnings equations and the choice equation are a regime change regression model and can be used to estimate the determinants of union membership and its effect in terms of wage premiums. it is highly likely that the error terms in equations 1 and 2 are correlated, resulting in selectivity bias. indeed, in equations 1 and 2, represents a vector of variables likely to influence both membership of a trade union organization and wage level. these are the characteristics of the worker such as qualification, age, sex, level of education, length of employment, etc. unobserved factors such as skill and motivation that affect the selection system could also affect the employee's level of compensation. for example, more skilled workers might be those who are more likely to join the union in the belief that they are asserting their rights. the same workers are those who are more likely to have high productivity and therefore high pay. lee (1978) and maddala (1983) note that the terms of errors and can be correlated and render inconsistent the estimators resulting from the application of ordinary least squares (olm). to address this problem posed by the regime change regression model, the selection and wage equations are estimated simultaneously using the full-information maximum likelihood method. this method has the advantage of providing robust standard error estimates in contrast to step-by-step methods by estimating equations separately (guirkinger and boucher, 2008; lee, 1978). under the assumptions made about the distributions of the error terms of equations 1 and 2, and according to lokshin and sajara (2004), the likelihood log function of the regression model with change of regime is given by: where is a cumulative normal distribution function, is a density distribution normal function and: mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 83 | p a g e , avec with the correlation coefficient between and ; the correlation coefficient between and , with and respectively the covariances of and , and . , and represent the respective standard deviations of , and . the estimation results of equation 4 using the full-information maximum likelihood method will be used to determine the potential gains or losses from union membership or the level of compensation that could be obtained by non-unionized employees if they had been unionized. the procedure will therefore consist of estimating for non-unionized employees. according to maddala (1983), conditional expected gains are calculated using equation 6. where and are parameters to be estimated from the regime change regression model. the higher the value of the differential forecast, the greater the loss due to non-affiliation. if necessary, it would then be urgent to set up a mechanism to better organize the social partners that are the trade unions. 4.2. data used and descriptive statistics the data used in this article come from the integrated regional survey on employment and the informal sector (irs-eis) in the member states of the west african economic and monetary union carried out in 2017. the integrated regional survey on employment and the informal sector was conducted using a two-stage area probability survey with first-stage stratification. the objective of the survey was to produce statistically reliable estimates of indicators, at the national level, for urban and rural areas, and for each of the twelve departments of the country. a total of 23 survey strata were defined. within each stratum, the samples of zones of enumeration (zd) and households were divided according to the largest entities of the administrative division of the country and the place of residence. at first level, 680 zds were selected out of the 13,000 defined during the census cartographic work as part of the fourth rgph (general population and housing census) carried out in 2013. the zds were drawn with a probability proportional to the number of households. at the second level, a fixed number of fifteen (15) households was selected in each of the zds selected at the first degree with three (3) replacement households. the sample size of the eri-esi is 10,200 households. the eri-esi survey covers two parts, the first of which concerns the collection of data on the sociodemographic characteristics and employment of the population and the second relates to the collection of data from informal non-agricultural production units identified in the first component. four types of questionnaires were used, including an employment questionnaire administered in each household to all individuals aged 10 and over. the individual employment questionnaire comprises several modules including employment status, main activity, general job satisfaction, social protection, vocational training and further training, unemployment, trajectory and prospects, income outside employment, etc. the employment database obtained from the information collected using this mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 84 | p a g e questionnaire includes 22,027 observations. 1,775 individuals declared themselves employees while 10,318 declared themselves self-employed. 1,184 receive family help. we extracted from the employment database, the observations relating to the 1,775 employees spread throughout the national territory. after clearance, a total of 1 135 employees were retained on whom the analyses were carried out. the remaining observations were suppressed for reasons related to the lack of declared salaries. the workers surveyed are concentrated in the littoral and atlantic department with 21.76% and 12.69% respectively. the importance of workers on the coast is justified by the fact that this department is home to the municipality of cotonou, the main metropolis and generally referred to as the economic capital of the country. the variables included in the analysis are composed of the dependent and independent variables. the dependent variables are union status for the probit model, and log hourly wages for earnings functions. union status is a binary variable that takes the value 1 if the worker declares that he belongs to a trade union or similar association of employees who can defend his labor rights or participate in collective bargaining and 0 otherwise. hourly wages are calculated by dividing monthly wages by the total number of hours worked in a month (that is. hours worked in a week multiplied by 4.3 weeks in a month). explanatory variables include socio-demographic characteristics such as age, sex, marital status and education level. other variables used to determine wage levels and unionization were mobilized. these are sectors of activity (public/private and formal/informal), vocational qualification, length of service and number of working hours per month. table 1 shows the differences in the socio-economic characteristics of workers according to whether they belong to a trade union organization or not. the average comparison tests show that the two groups of employees differ fundamentally in terms of socioeconomic characteristics such as age, salary, sex, marital status and length of service. table 1: socioeconomic characteristics of employees by affiliation variables together unaffiliated affiliated t-test average hourly wage 535,554 515,892 616,419 -1,269*** age 36.165 35.398 39.315 4.795*** formal sector 36.39 % 26.51 % 77.03 % 15.421*** female sex 23.00 % 24.10 % 18.47 % 1.788* educational attainment none 27.05 % 29.24 % 18.02 % 3.391*** primary 14.71 % 16.32 % 8.11 % 3.108*** secondary 35.68 % 34.50 % 40.54 % -1.685* upper 22.56 % 19.93 % 33.33 % -4.316*** mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 85 | p a g e marital status bachelor 13.04 % 14.56 % 6.76 % 3.110*** polygamous married 10.40 % 9.64 % 13.51 % -1.697*** monogamous married 65.81 % 64.73 % 70.27 % -1.561 widowed/divorced 10.75 % 11.06 % 9.46 % 0.691 length of service 15 to 24 years 3.35 % 3.40 % 3.15 % 0.180 10 to 14 years 12.69 % 11.17 % 18.92 % -3.121*** 5 to 9 years 17.71 % 15.22 % 27.93 % 4.482*** 2 to 5 years 25.90 % 27.93 % 17.57 % 3.172*** less than 2 years 40.35 % 42.28 % 32.43 % 2.688*** actual 1 135 913 222 note: ***, ** and * indicate significance levels at thresholds 1%, 5% and 10%, respectively. source: authors using eri-esi data, 2017 the average hourly wage of unionized workers is higher on average than that of their non-unionized counterparts. in addition, unionized employees appear to be older and more in the formal sector. on the other hand, women are less prone to unionization, as are single people and workers with no level of education or those with a primary level. it should be noted, however, that employees who have reached secondary and higher levels are more likely to join trade unions. in addition, we realize that the proportion of unionized workers decreases with seniority measured by duration in work. as the worker spends more time in the company, he or she is less likely to join a trade union organization. no doubt that the employee over time, manages to develop a relationship with the employer and has a mass of information about the company that reduces information asymmetries. 5. results and discussions the results presented are of two kinds. first, we analyze the determinants of union membership and wage compensation depending on whether the individual is unionized or not. it should be noted that this result is intermediate which leads us, in a second step, to estimate the gain in remuneration associated with union membership that is the impact of membership of a trade union organization. 5.1. analysis of the determinants of union membership and compensation table 2 presents the main econometric results for the effects of union membership on workers' compensation. the estimates lead to two main results. on the one hand, they make it possible to identify the main determinants of workers' trade union membership. the main factors explaining wage remuneration, depending on whether or not a trade union is affiliated to a trade union, are also highlighted. the results essentially show that industry, level of education, marital status, duration of employment or seniority and the existence of trade union organization in the enterprise affect the likelihood of union mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 86 | p a g e membership. the coefficient associated with the variable "existence of union organization" is positive and significant, supporting the idea that this variable is a valid instrument in this model. a first interesting result concerns the higher tendency of workers in the formal sector to join trade unions compared to their peers in the informal sector. such a result is not surprising in view of the beninese context where most unions recruit more in the formal sector, particularly the public sector, as we have shown in section 2 above. with regard to employment status, our results show that workers with more than 25 years' experience are less likely to join a trade union organization than their counterparts with less than 10 years' seniority. one explanation for the higher probability of older workers joining a union may be explained by the desire of entrylevel workers to engage in organizations in order to improve their employment experience and fully enjoy their rights. the significant effect of job tenure is at odds with the results of manda et al. (2005). manda et al. (2005) realizes that the probability of being unionized increases with seniority. table 2: regime change regression model estimation results independent variables dependent variable: average hourly wage selection equation unaffiliated affiliated formal (ref.: informal) 0.097 -0.364** 0.461*** (0.059) (0.159) (0.159) public sector (ref: private sector) 0.186*** -0.012 0.062 (0.058) (0.177) (0.193) female (ref.: male) -0.001 0.047 0.001 (0.051) (0.101) (0.122) log age 0.121 -0.069 0.144 (0.088) (0.203) (0.208) marital status (ref.: widowed/divorced) bachelor 0.206** 0.115 -0.095 (0.102) (0.144) (0.189) polygamous married 0.240** -0.374** 0.555*** (0.117) (0.179) (0.197) monogamous married 0.206** 0.004 0.180 (0.100) (0.108) (0.146) level of education (ref, : none) primary 0.126* 0.068 -0.151 (0.071) (0.157) (0.191) secondary 0.147** 0.139 0.083 (0.062) (0.109) (0.137) upper 0.143* 0.268** 0.017 (0.081) (0.131) (0.165) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 87 | p a g e length of service (ref.: less than 10 years) 10 to 25 years 0.028 0.010 0.057 (0.057) (0.097) (0.116) over 25 years -0.315* 0.328 -0.505* (0.162) (0.232) (0.282) qualification (ref.: unskilled or semi-skilled employee) qualified employee 0.440*** 0.289** -0.090 (0.052) (0.127) (0.121) middle or senior management 0.911*** 0.865*** 0.083 independent variables dependent variable: average hourly wage selection equation unaffiliated affiliated (0.072) (0.127) (0.153) number of hours worked in the month -0.006*** -0.005*** (0.000) (0.000) existence of trade union organization (ref, : yes) 1.396*** (0.281) constant 6.156*** 7.738*** -2.674*** (0.305) (0.810) (0.725) 0.711*** 0.760** (0.058) (0.139) 0.860*** -0.966*** (0.196) (0.281) wald test of indep, eqns, (chi2(2)) 88.430 prob 0.000 log pseudolikelihood -1371.007 pseudo r2 n 1.135 * p<0.1; ** p<0.05; p<0.01 source: authors using eri-esi data, 2017 with respect to the determinants of the average hourly wage, the estimation results show that the wage level of affiliates is significantly determined by the level of education. however, only the coefficients of the modalities related to secondary and higher education are significant at the 10 percent and 5 percent thresholds, respectively. for non-union members, we note that the coefficient increases with the level of education, corroborating the idea of an increase in the average private return to education highlighted by manda et al (2005). similarly, among affiliates, workers in the formal sector earn less than those in the informal sector in hourly terms. the difference can be explained by the absence of mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 88 | p a g e taxes in the informal sector affecting wage compensation. the same result is obtained for polygamous marriages, which appear to have a lower average hourly wage than widowed or divorced marriages. not surprisingly, the level of qualification significantly affects the wage remuneration of workers for both affiliated and non-affiliated workers. it appears that the average hourly wage increases with the worker's qualification. thus, laborers and other semi-skilled workers are paid less than middle or senior managers. 5.2. gain from unionization table 3 shows the average effect of treatment on the treaties, that is the difference in the average hourly wage of affiliated workers and their wage level if they had not been affiliated. the results show that the wage premium associated with unionization is positive and significant. in other words, workers' membership of trade unions allows them to increase their wage remuneration level by an average of 33.06%. the positive impact of trade union membership highlighted confirms the predictions of previous work (schmidt, 202-1; ngom, 2021; nahm et al., 2017). for example, schmidt (202-1) shows that membership of a local union for expatriate workers results in a reduction in the wage gap between expatriate workers and national workers. similarly, nahm et al. (2017) also estimate a positive gain associated with unionization. using a gender analysis, the authors show that unionized men and women earn 12% and 18% more respectively than their nonunionized counterparts. maleka et al. (2021) argue that union membership has a dampening effect on satisfaction levels. the explanation for this is that unions negotiate higher wages, which ultimately leads to greater job satisfaction. table 3: wage differential (en fcfa) by union affiliation or not affiliated unaffiliated effect of treatment unionized workers (a) 539,962 (b) 405,808 134,154*** non-unionized workers (c) 1241,077 (d) 1119,158 121,919*** note: (a) and (d) represent the average hourly wage. (b) and (c), the expected counterfactual average hourly wage. source: authors, based on estimation results 5.3. analysis of robustness of results to test the sensitivity of results from regime-change models, we use propensity score matching (psm) methods typically used in impact assessment studies. impact analysis using msp is preceded by the estimation of propensity scores for treatment variables from the probit model, the results of which are presented in tableau a1 in the appendix. propensity scores, as lee (2013) points out, are useful for balancing the distribution of observed covariates between treated and untreated groups. in general, most variables in the model have the expected signs. the figure 2 presents the distribution of estimated propensity scores and the region of common support. visual analysis of density distributions for both groups reveals that all treated and untreated individuals are in the common support region. in other words, each individual had a positive mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 89 | p a g e probability of being either a union affiliate or a non-affiliate. thus, the common support hypothesis that requires each treated individual to have a corresponding untreated individual as a match, is satisfied. the results of the model of the impact of union membership on the level of wage compensation estimated with the kernel matching (km) method, the nearest neighbor matching (nnm) method and the radius matching (rm) method are presented in table 4. all three matching methods indicate that union membership has a positive and significant impact on the hourly level of wage compensation. these results confirm those obtained from the regression method with regime change in the previous section. they are also consistent with those obtained by manda et al. (2005), bryson (2014) and ngom (2021). manda et al. (2005) showed the existence of a positive effect of trade union membership on wage compensation. bryson (2014) concludes that workers organized in unions benefit from higher wages called union wage premiums. for his part, ngom (2021) also finds that employee compensation increases with the existence of a union in a company. in other words, unionized workers have higher wages than non-unionized workers. our results also corroborate those found by laroche (2004), coutrot (1996) and, najem and paquet (2007). for example, coutrot (1996) reported a 3% wage increase in organizations where there was at least one union representative. it thus confirms the existence of a causal link between the presence of a trade union in the undertaking and the level of salary. najem and paquet (2007) highlight the difference in hourly wages between unionized and nonunionized employees in favour of the former. table 4: impact of union membership on hourly wages matching methods that kernel matching (km) 0,164*** (0,069) nearest neighbor matching (nnm) 0,092** (0,078) radius matching (rm) 0,326*** (0,062) figure 2: distribution of estimated propensity scores and common support region source: authors using eri esi data, 2017 0 .2 .4 .6 .8 propensity score untreated treated mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 90 | p a g e note: standard errors are in parentheses. p<0.01; ** pp<0.05; * pp<0.1. source: authors using eri-esi data, 2017 overall, it seems reasonable to conclude that the effects of trade unions on wages in benin are positive. such a result is very important in a beninese context where the role of trade unions in corporate governance has been the subject of multiple reforms. public authorities must consider labor organizations as privileged institutional partners in the service of the well-being of their union members. the advantages inherent in trade union action ultimately prove beneficial to the companies themselves because they are sources of motivation and commitment to work (christian et al., 2011). however, the effect is not systematic and depends on several factors (bryson, 2014). ngom (2021) also notes for senegal that productivity was relatively low in companies with a strong union presence. 6. conclusion the objective of this article is to empirically assess the impact of unionization of workers in benin. to do this, we used a methodological approach that allows us to take into account the potential problems of endogeneity of the decision to join a workers' trade union organization and unobserved heterogeneity. the results show that the probability of union membership is significantly influenced by industry, level of education, marital status, duration of employment or seniority and existence of trade union organization in the enterprise. the level of wage compensation is determined by the sector of activity, the level of education and the level of qualification. more interestingly, unionization produces positive effects in terms of wage compensation. concretely, we show that membership of a trade union organization allows the worker to increase his average hourly wage by about 33.06%. it is inferred that union membership promotes higher workers' wages. the existence of a wage premium associated with unionization suggests that trade unions play an important role in improving working conditions. in a beninese context where wage levels are quasirigid regardless of exogenous shocks that erode workers' purchasing power, it seems necessary for trade union organizations to fully invest their mission of negotiating with the state and private employers. the results obtained can help umbrella organizations anticipate behavioral responses by paying attention to salary levels and union membership. it can also influence collective bargaining processes. the union wage premium can have a positive impact on employers when they induce an increase in worker productivity through the worker selection mechanism, that is. if the best workers are attracted to wages above the market rate. similarly, the positive effects of union membership benefit employers provided that workers increase the effort through efficiency wages. firms can also benefit by becoming more capital-intensive in response to increases in the relative price of labor. in any case, this is an avenue of research to be explored in the context of developing countries. an additional dimension to be taken into account in this evaluation is the impact of union membership on individual employee satisfaction. salary is a component of job satisfaction. future analyses should investigate the potential effect on worker satisfaction. such a line of research is interesting to explore because joining a union has a cost in terms of union dues and lost wages due to write-offs related to possible strikes. 7. references borland, j. (1996). union effects on earnings dispersion in australia. british journal of industrial relations, vol. 34, no 2, p. 237-248. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 91 | p a g e bryson, a. (2014), union wage effects, iza world of labor. budd, j. w., chi, w., wang, y., & xie, q. (2014). what do unions in china do? provincial-level evidence on wages, employment, productivity, and economic output. journal of labor research, vol. 35, no 2, p. 185204. card, d., lemieux, t., & riddell, w. c. (2004). unions and wage inequality. journal of labor research, vol. 25, no 4, p. 519-559. christian, m. s., garza, a. s., & slaughter, j. e. (2011). work engagement: a quantitative review and test of its relations with task and contextual performance. personnel psychology, vol. 64, no 1, p. 89-136. coutrot, t. (1996). relations sociales et performance économique : une première analyse empirique du cas français : les relations sociales en entreprise. travail et emploi, vol. 66, p. 39-58. danish trade union development agency (2021), labor market profile benin – 2021/2022, labor market profile benin – 2021/2022 (ulandssekretariatet.dk). friedrich ebert stiftung (2015), etude sur le paysage syndical au bénin, p. 90, isbn 978-99919-0-6393. friedrich ebert stiftung (2019), analyse de la dynamique de l’économie informelle au bénin, p. 47, isbn : 97899982-55-28-9. freeman, r. b. (1993). labor markets and institutions in economic development. the american economic review, vol. 83, no 2, p. 403-408. freeman, r. b. (2010). labor regulations, unions, and social protection in developing countries: market distortions or efficient institutions? handbook of development economics, vol. 5, p. 4657-4702. freeman, r. b., & lazear, e. p. (1995). an economic analysis of works councils. in works councils: consultation, representation, and cooperation in industrial relations. university of chicago press, p. 27-52. freeman, r. b., & medoff, j. l. (1984). what do unions do. indus. & lab. rel. rev., vol. 38, p. 244. ge, y. (2014). do chinese unions have “real” effects on employee compensation? contemporary economic policy, vol. 32, no 1, p. 187-202. guirkinger, c. and boucher, s. r. (2008). credit constraints and productivity in peruvian agriculture. agricultural economics, vol. 39, no 3, p. 295 308. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 92 | p a g e kerr, a., & wittenberg, m. (2021). union wage premia and wage inequality in south africa. economic modelling, vol. 97, p. 255-271. keune, m. (2018). opportunity or threat? how trade union power and preferences shape occupational pensions. social policy & administration, vol. 52, no 2, p. 463-476. laroche, p. (2004). présence syndicale et performance financière des entreprises : une analyse statistique sur le cas français. finance contrôle stratégie, vol. 7, no 3, p. 117-146. lee, l. (1978). unionism and wage rates: a simultaneous equations model with qualitative and limited dependent variables. international economic review, vol. 19 no 2, p. 415-433. lee, w. s. (2013). propensity score matching and variations on the balancing test. empirical economics, vol. 44, no 1, p. 47-80. lewis, h. g. (1963). unionism and relative wages in the united states: an empirical inquiry. chicago: university of chicago press. liu, j., xing, c., & ge, y. (2020). does union membership reduce gender earnings differentials? evidence from employer–employee matched data in china. pacific economic review, vol. 25, no 1, p. 102-117. lokshin, m. & sajaia, z. (2004). maximum likelihood estimation of endogenous switching regression models. the stata journal, vol. 4, no 3, p. 282-289. lu, y., tao, z., & wang, y. (2010). union effects on performance and employment relations: evidence from china. china economic review, vol. 21, no 1, p. 202-210. maddala, g. (1983). limited-dependant and qualitative variables in econometrics. cambridge: cambridge university press. maleka, m. j., schultz, c. m., van hoek, l., paul-dachapalli, l., & ragadu, s. c. (2021). union membership as a moderator in the relationship between living wage, job satisfaction and employee engagement. the indian journal of labor economics, vol. 64, no 3, p. 621-640. manda, d. k., bigsten, a., & mwabu, g. (2005). trade union membership and earnings in kenyan manufacturing firms. applied economics, vol. 37, no 15, p. 1693-1704. manning, a. (2013). monopsony in motion ». in monopsony in motion, princeton university press. nahm, d., dobbie, m., & macmillan, c. (2017). union wage effects in australia: an endogenous switching approach ». applied economics, vol. 49, no 39, p. 3927-3942. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 93 | p a g e najem, e. & paquet, r. (2007). l’impact syndical sur l’entreprise canadienne et sa main-d’œuvre. revue internationale sur le travail et la société, vol. 5, no 3, p. 52–73. ngom, a. (2021). trade unionism and enterprise performance in senegal. aerc research paper, vol. 420, p. 32. périsse, m. (2014). le droit du travail et les migrants ruraux : instituer un nouveau salariat en chine. revue de la régulation, capitalisme, institutions, pouvoirs, vol. 15. sandbrook, r. (1975). proletarians and african capitalism: the kenyan case, 1960-1972. cambridge: cambridge university press, vol. 21. schmidt, t. d. (2021). local institutions, union wage effects and native–foreign wage gaps. regional studies, p. 114. torm, n. (2018). does union membership pay off? evidence from vietnamese smes. micro, small, and medium enterprises in vietnam. p. 230-252. yedomon, b. (2016). travail informel au bénin : expositions professionnelles et conséquences sanitaires chez les forgerons-ferblantiers à cotonou (doctoral dissertation, université de limoges) ». zhang, y., chen, j., & wong, p. (2011). effect of trade unions on industrial labor income in china. asian politics & policy, vol. 3 no 1, p. 95-114. appendix table a1: proscript regression for estimating propensity scores variables coefficient dependent variable trade union membership formula 0.690*** (0.241) female (ref. man) -0.208 (0.264) level of education (ref. none) primary -0.789** (0.401) secondary -0.204 (0.292) upper -0.414 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 94 | p a g e (0.304) age -0.028 (0.062) age squared 0.000 (0.001) marital status (widowed/divorced ref.) bachelor -0.581 (0.453) polygamous married 0.909** (0.436) monogamous married 0.227 (0.338) union availability 5.342*** (0.629) constant -5.002*** (1.286) observations 1,135 note: standard errors are in parentheses. p<0.01; ** pp<0.05; * pp<0.1. source: authors using eri-esi data, 2017 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 1 | p a g e determinants of labor migration from egypt: an indepth empirical analysis dr. eva m. schmidt and prof. markus h. müller faculty of mathematics and economics, university of ulm, germany abstract: international labor migration is a multifaceted and evolving phenomenon in the contemporary globalized world. the forces of globalization, driven by advancements in technology, information dissemination, business expansion, and education, have transcended traditional political and geographical boundaries. however, migration itself is not a recent development; it has been a persistent human endeavor driven by economic, technological, and social factors. these factors have prompted individuals to seek improved living conditions by relocating within or across geographic regions and even across international borders. this paper explores the intricate dynamics of labor migration, drawing on a wealth of previous studies that have examined migration patterns and behavior within developing countries. the analysis encompasses both macro and micro perspectives. at the macro level, the research delves into the determinants of international migration flows, considering factors such as wage differentials, unemployment rates, destination country gdp, and geographical distance between sending and receiving countries. in contrast, the micro-level analysis investigates individual and household characteristics that influence migration decisions, including income, gender, family status, race, poverty status, educational attainment, assets, marital status, and access to credit. through a comprehensive examination of these factors, this study contributes to a deeper understanding of the intricate tapestry of international labor migration, shedding light on both macro-level trends and micro-level determinants. keywords: labor migration, globalization, macro analysis, micro analysis, migration patterns. 1. introduction international labor migration is a growing force that is becoming more complex and dynamic in today‟s globalizing world. globalization has become a common name in the world today as technology, information, businesses and education expands beyond the borders of politics and geography (adams & page, 2005). still, migration is not a recent phenomenon; people have always migrated in search of food, shelter and fortune, but over the years, migration has undergone numerous changes depending on various economic, technological and social factors. these factors have encouraged people to move from one geographical area to another, from even one country to another, in search of better living conditions (postelnicu, 2012). several previous studies have been conducted to study behavior and migration trends of the labor force in developing countries. the study of migration could be tackled from a macro or a micro perspective. macro-level analysis is concerned with explaining trends and flows of international migration using aggregate country-wide (davanzo, 1980). for example, ortega and peri (2009) attributed flows of mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 2 | p a g e international migration to wage differentials between receiving and sending countries, bukenya, schaeffer, and gebremedhin (2003) attributed the number of international migrants to unemployment differentials in different counties, mayda (2010) related migration to the destination country‟s gdp, and greenwood, ladman, and siegel (1981) explained international migration by the distance between sending and receiving countries. micro-level analysis is concerned with understanding individual or household characteristics that affect the decision to migrate (davanzo, 1980). for example, cushing (1993) attributed the migration decision to the individual‟s income group, gender and family status, kaluzny (1975) used race and poverty status, and several other studies such as mincer (1971), polachek and horvath (1977), and arenas, conroy, and nobles (2009) explore the relationship between individual or household characteristics, such as age, gender, educational attainment, assets, marital status and access to credit, and migration decisions. this research tackles migration from a micro-level perspective with the purpose of identifying the factors that affect and determine international migration and return decisions among the labor force. the study analyzes migration from the perspective of the source country (egypt) and specifically focuses on temporary and return migration. the aim is to understand the characteristics that influence individuals‟ decision to migrate and then distinguish between the characteristics of those who migrated and eventually returned to egypt compared to those who remain abroad. the clear understanding of such factors and their effect on migration decisions could play an important role in the socio-economic progress of egypt, especially that a survey conducted by egypt‟s central agency for public mobilization and statistics (capmas, 2014) showed that 17% of egyptian youth want to live abroad. considering the current and continuing economic transition in egypt, identifying the factors influencing egyptians‟ decision to emigrate/return and noting how those factors change over time could provide insights into the characteristics of potential future migrants and so aid in managing the egyptian labor market more efficiently. the paper is divided in to four chapters. the first chapter is a review of the literature on forms of migration and a description of egypt‟s migration history and past trends. the second chapter covers the methodology and data used to analyze egyptian migration. the third chapter shows the results of the study with a detailed description of egyptian migrants‟ characteristics, determinants of the migration decision, and determinants of the return decision. the final chapter covers the conclusion of the research with recommendations for future research possibilities. 2. migration overview migration refers to the movement of individuals from one geographic location to another for various reasons, most prominent of which is the search for better living conditions (özden and schiff, 2006; hagenzanker, 2008). in 1932, nobel prize holder john hicks proposed that “differences in net economic advantages, chiefly differences in wages, are the main causes of migration.” practically all modern analysis of migration decisions uses this hypothesis as a starting point, where migration is viewed as a consequence of a utilitymaximizing choice (borjas, 2012). workers calculate the value and cost of employment opportunities available in alternative labor markets and choose whichever option maximizes their earnings (gaston & nelson, 2013). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 3 | p a g e as new economic opportunities arise, the number of those who leave their place of origin in search of better opportunities increases. in 2015, migrants constituted 3.9% of the total global population aged 15 years and above (ilo, 2015) and according to the international organization for migration (2010), if migration flows continue to increase at the same pace as the last 20 years, the total number of migrants worldwide by 2050 will slightly exceed 405 million as compared to 214 million in 2010. migration occurs at a variety of scales, one of which is location, which determines whether migration is internal or international. internal migration refers to the movement of individuals within a country without crossing its external borders. the most common form of internal migration is rural-urban migration however the magnitude and patterns of such movement is poorly documented where data collection methods are not thorough or not published with sufficient details (van der gaag & van wissen, 2008). that is why this research focuses on international migration, which refers to the external movement of individuals from their home country to a foreign country in search of a better life (adams & page, 2005). such vast movement of people across international boundaries has economic, social, and cultural implications in both origin and destination countries (özden and schiff, 2006) and so is the main focus of this study. the nature of the migration decision distinguishes between involuntary and economic migration. some forms of international migration could be involuntary, such as that of refugees and asylum seekers, typically to flee military conflicts, civil wars, political turmoil, and ethnic and religious repression (özden & schiff, 2006). the migration decision in this case is determined by circumstances external to the individual that forced the move however, the term migrant is usually understood to refer to cases where the decision to migrate is taken freely by the individual for personal convenience (vogler & rotte, 1998). in this case, the decision to migrate is viewed as an economic choice, which is the focus of this paper. economic migration refers to the transfer of some factors of production, namely labor, from one geographical location to another (gaston & nelson, 2013). there is a great deal of mobility in labor markets around the world driven by workers‟ need to improve their economic situation and firms‟ desire to hire more productive and skilled labor (borjas, 2012). finally, the duration the migrant intends to spend abroad determines whether migration is temporary or permanent. permanent migration refers to the movement of a national to a foreign country for an unlimited period of time. it is viewed as a single transition that involves a lasting relocation of migrants to a new place of residence with no intention to return to their country of origin. that is why such permanent change of residence usually involves the movement of the entire household (bell & ward, 2000; longino, marshall, mullins, & tucker, 1991). as for temporary migration, which is the main focus of this study, it refers to the movement of a national to a foreign country for a set duration which is limited to the time required to achieve the goal the individual migrated to fulfill (piper, 2009; porumbescu, 2015). one of the main goals of temporary migration is saving for future consumption, which is why a lot of migrants return to their country of origin despite higher earnings in the destination country. hill (1987) and djajić and milbourne (1988) attribute return migration to a preference for consumption in the country of origin; where individuals find it more satisfactory to consume goods at home rather than at the destination country. so, temporary migration is viewed as a means to accumulate sufficient savings abroad in order to finance higher and more enjoyable consumption at home (dustmann & görlach, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 4 | p a g e 2016; lucas, 2008). another reason for temporary migration could be the high purchasing power of the destination country‟s currency, which, from the migrant‟s perspective, makes price levels lower in the country of origin. thus, by saving in the destination country‟s currency, migrants can increase their consumption upon their return due to the higher purchasing power of their savings even if earnings were the same in both origin and destination countries( dustmann, 1995; dustmann & görlach, 2016). human capital accumulation also acts as a motive for temporary migration, especially if skills are scarce in the country of origin. in this situation, high wages abroad initially attract migrants however as skills accumulate, migrants have an incentive to return as their newly acquired skills will be met with a higher rate of return at home (borjas & bratsberg, 1996; dustmann & görlach, 2016). this is especially prevalent when skills can be acquired faster in the destination country than in the country of origin. in this case, skills and knowledge that are more valuable at home can be acquired easily abroad due to the exposure to advanced technology and highly skilled colleagues in the destination country. thus, migrants increase their earnings potential in their skills-scarce countries of origin by migrating temporarily and so raising their level of human capital (dustmann, fadlon, & weiss, 2011; dustmann & görlach, 2016). temporary migrants are often referred to as guest workers who are employed in a foreign country for a limited period of time that depends on fulfilling specific jobs. they mostly migrate individually, unaccompanied by their families and work in fields such as financial services, teaching, construction or seasonal agriculture (freeman, 2006; porumbescu, 2015). in most cases, the length of stay is not determined by the migrant, but depends on the type of work contract and the economic conditions of the host country (dustmann & görlach, 2016). however, some countries, namely gulf cooperation council states, allow migrants to renew/terminate their work permits, provided the request is supported by the employer (djajić & vinogradova, 2015). 3. egyptian migration egypt is one of the world‟s top emigrating countries, with nearly 10% of the labor force living abroad (wahba, 2015). most egyptian migrants have chosen neighboring arab countries as their destinations which is why migration in egypt can be largely attributed to changing international conditions and labor market needs in the arab region (zohry, 2007). table 1 demonstrates the share of egyptian migrants in top destination countries over time. table 1: total migrants’ destination countries over migration phases phase 1: expansion (1974-1989) phase 2: deterioration (19902003) phase 3: recent (2004-2012) total observations 521 554 824 destination saudi arabia 0.17 0.38 0.40 jordan 0.12 0.16 0.14 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 5 | p a g e libya 0.05 0.20 0.16 kuwait 0.05 0.08 0.12 iraq 0.55 0.03 0.006 uae 0.03 0.04 0.08 other 0.03 0.19 0.15 source: elmps, 2012 the migration expansion phase in egypt started in the 1970s when, after the oil boom of 1973, the gulf oil exporting countries found their development programs constrained by labor shortages and so started importing large numbers of workers from neighboring countries (nassar, 2011; wahba, 2015). this phase also witnessed high demand for educators and healthcare workers needed for the development of their respective sectors in several arab countries. being the most populous country in the arab world, egypt became a major source of migrant labor. migration was encouraged by the government with the purpose of sending doctors, pharmacists, teachers, and construction workers to help the gulf states in their development plans as well as relieve the pressure on the government in facing internal economic issues (sell, 1988; wahba, 2015; zohry & harrell-bond, 2003). this rapid increase in egyptian migration continued into the early 1980s reaching 3.3 million egyptian migrants in oil-rich countries by 1983. iraq was the most popular destination for egyptian emigrants during the 80‟s due to its liberal immigration policies towards fellow arabs. however, by the second half of the 80‟s, the contraction phase began as political and economic developments in the arab oilproducing countries caused a cutback in employment opportunities. the decline in oil prices due to the iran-iraq war forced the gulf oil industry into a recession, which cost many egyptian construction workers their jobs. moreover, egyptian migrants started facing competition from low-paid asian workers that started migrating to oil-rich countries as well (paton, 2015; zohry, 2007). such migratory contraction pushed egyptian migration into a deterioration phase, which was fueled by the gulf war in 1990. this phase witnessed a significant flow of return migrants from iraq and kuwait, temporarily reducing the number of egyptian emigrants to about 1.4 million (paton, 2015; zohry, 2007). after the war, egyptian emigration rates went up again raising the number of egyptian emigrants to more than 2.8 million by 1996 (paton, 2015)and contracts with saudi arabia and libya pushed egyptian emigration to a steady pace over the 90‟s (nassar, 2011; zohry & harrell-bond, 2003). migration in egypt is viewed as not only a response to the oil boom in arab gulf countries, but also as a consequence of numerous economic difficulties that egypt has continued to experience over the years. in 2008, it was estimated that around 6.8 million egyptians were living abroad (paton, 2015). such increase in egyptian emigration can be considered a natural response to poverty, uneven distribution of economic activities, income and wealth as well as overpopulation and high unemployment rates which plagued egypt over the 2000‟s building up to the uprising in 2011 (paton, 2015; zohry, 2007; zohry & harrell-bond, 2003). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 6 | p a g e figure 1: number of current and return migrants leaving egypt each year over 1974-2012 source: elmps, 2012 figure1 demonstrates the number of egyptians who temporarily emigrated and eventually returned (return migrants) compared to those who emigrated but stayed abroad (current migrants) over the period 19742012. the plot greatly matches the migration trends defined by egyptian migration phases. the expansion phase witnessed the largest number of egyptian workers temporarily emigrating in response to the high demand for labor in the gulf countries. but, since they were mostly “guest workers,” more migrants from this phase have returned compared to those who stayed abroad. the deterioration phase exhibited a low number of both temporary and current egyptian emigrants due to the political and economic turmoil in the gulf region during that phase. the most recent phase exhibited the largest number of egyptians who migrated and are still abroad compared to those who returned. it is interesting to note that the largest number of migrants of the third phase left egypt specifically during 2011, the year in which the 25th of january revolution took place. this raises a lot of questions regarding whether such a large number of emigrants can be attributed to the political instability in egypt brought on by the revolution. also, since migration during that phase was mainly fueled by the adverse social, political, and economic conditions of the egyptian market, it is unknown whether such migrants have eventually returned -or still plan to returnto egypt at some point past 2012. still, despite the growth in egyptian migration over decades, the majority of egyptian emigrants are expected to return home eventually (zohry, 2007). figure 1 illustrates that by showing that very few of mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 7 | p a g e the egyptians who migrated in the first and second phase were still abroad by 2012. during the 70‟s and 80‟s, secondment policies established by the egyptian government encouraged temporary migration through bilateral contracts where public sector employees were allowed to take leaves of absence, for years at a time, to work abroad with the guarantee that their positions would remain available upon their return (sell, 1988; zohry & harrell-bond, 2003). moreover, most arab countries accept migrant labor under the “kefala” system, where foreigners must be "sponsored" for admission, making permanent residency and citizenship impossible for foreigners (jureidini, 2010). such system was developed with the purpose of preventing permanent immigrant settlement by depriving them of political, social or economic rights in their destination country and stipulating that the migrant leave the country upon termination of employment (sell, 1988; wahba, 2015). table 2 highlights the most prominent reasons for egyptian migration and return. table 2: return migrants’ reasons for migration/return reason for migrating found a better job abroad 0.67 unemployed and seeking work 0.19 higher wages 0.08 reason for return poor working conditions 0.26 contract ended 0.18 to get married 0.14 to care for family 0.10 war in iraq/kuwait. desire to return. bad weather 0.10 source: elmps, 2012 focusing on return migrants only, figure 2 illustrates the number of temporary migrants who left compared to those who returned to egypt in each phase. the expansion phase naturally had more people emigrating from egypt compared to those returning, while the deterioration phase had more migrants returning to egypt compared to those leaving during that phase. the year 1990 in particular had a large number of returnees due to the political and economic turmoil that pushed migrants out of iraq. the most recent phase witnessed a lot more egyptians returning compared to those temporarily leaving egypt during that period which could be because by that time, many of those who had migrated mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 8 | p a g e in phase 1 and 2 had already been abroad for about 10-20 years, thus had completed their migratory purpose and returned home. it could also be attributed to the 2011 revolution which might have encouraged a lot of egyptians to return from abroad; either to actively partake in such national event or because of tense relations that the revolution sparked with some countries. figure 2: number of return migrants leaving and returning to egypt each year over 1974 2012 source: elmps, 2012 3. data and specifications this research gives an overview of the characteristics of egyptian migrants by identifying the factors that affect and determine international migration decisions among the egyptian labor force. given that egyptian migration is mostly temporary, the analysis is extended to differentiate between the characteristics of those who migrated and eventually returned to egypt compared to those who still remain abroad. both migration and return decisions are analyzed from a micro level perspective with the purpose of identifying the characteristics that influenced the worker‟s individual decision to migrate/return. the study is conducted using data from the egyptian labor market panel survey (elmps), which is a longitudinal survey that has been carried out by the economic research forum (erf) in cooperation with egypt‟s central agency for public mobilization and statistics (capmas) since 1998. elmps 2012, the third and most recent round of the survey is used in this analysis. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 9 | p a g e since the focus of this research is to identify the factors that affect migration decisions among the egyptian labor force, only respondents aging between 20-60 years are considered. the sample was also restricted to include only males since preliminary results showed that females only represent about 5% of total migrants. the small percentage is not surprising given the relatively low female labor force participation rate in egypt discussed in hosney's (2016) study as well as the social and cultural norms of the egyptian society. based on the questionnaire design, respondents can be classified as migrants or non-migrants. migrants can be categorized as either current or return migrants. current migrants are workers who were abroad at the time the survey was conducted while return migrants are workers who have worked abroad for more than 6 months but were residing in egypt in 2012. separate models will be estimated for the 2 types of migrants to compare their characteristics and distinctions respondents are then further grouped, based on the migrants‟ year of emigration, into to 3 phases which correspond to egypt‟s history of migration described in the literature. the first phase is when egyptian migration began to flourish, so is referred to as the expansion phase, taking place during 19741989. the second phase, referred to as the deterioration phase, is the period during which egyptian migration slowed down due to the political and economic turmoil in the region from 1990-2003. the third phase is the more recent phase, taking place during 2004-2012, where egyptian migration became not just a matter of pull factors abroad but also push factors at home. for the migration model, each phase group includes migrant workers who first emigrated during that phase and non-migrant workers aged between 20-60 years who stayed in egypt during that time. for the return model, each phase group includes only migrant workers who first emigrated during that phase, some are still abroad so are categorized as current migrants, while others have eventually returned so are categorized as return migrants. for both models, each phase group only includes migrants who first emigrated in that phase, so for example, a worker who first migrated in 1980 is included only in the phase 1 group and not any other. that way, by running a separate estimation for each phase, any distinction between migrant characteristics and their influence on migration/return probability over phases can be observed. the models used in this paper is based on the hierarchical regression approach developed by chi and voss (2005). the model and variables used in the chi and voss‟ study were modified in order to better suit the micro level, individual specific, analysis intended in this study and the egyptian labor force‟s characteristics. in order to determine the factors influencing workers‟ decision to migrate, probit regression model (1) is used with “migrate” as a dependent variable classifying the worker as either a migrant or nonmigrant. it is a qualitative binary variable so is expressed by a dummy variable representing the worker‟s decision to migrate. the sample for this model is all male individuals within the specified age range so includes both, migrants and nonmigrants. pr (migrate) = f (age, educational attainment, region) (1) the regressions then estimate the factors that influence a worker‟s probability of migrating which are represented by a set of continuous and dummy individual specific variables, listed in table3 that are hypothesized to influence a worker‟s decision to migrate. starting with age, for migrants, the age considered is that when they first emigrated from egypt. as for non-migrants, age is calculated at a mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 10 | p a g e median reference year depending on the phase used in the estimation. so, for example, the age variable of the first phase‟s estimation considers the age of the migrants when they first emigrated during that phase while the age of non-migrants in 1981. that way, the comparison between migrants and nonmigrants is estimated at a relatively similar point in time. based on the human capital theory, the worker‟s age is hypothesized to have a nonlinear relationship with the probability to migrate (chi & voss, 2005). it is expected that since younger people have more to gain from migrating and are more willing to take the risks associated with migration than older people, they are more likely to migrate (ghoneim, 2010). as for educational attainment, it refers to the highest educational level an individual has reached and is represented by dummy variables for 3 main educational categories: primary education, secondary education and higher education. it is hypothesized that the higher the individual‟s educational attainment, the more likely they are to migrate due to their increased awareness of possible opportunities abroad (borjas, 2012; greenwood, 1969). finally, region refers to the region in egypt where the individual lives. egypt can be divided into 3 regions represented by the dummy variables metropolitan, rural and urban egypt. it is hypothesized that workers living in less developed regions are more likely to migrate than those living in developed regions because they have a stronger motive to seek better living conditions abroad (cushing, 1993; zohry, 2007). in order to determine the factors influencing migrant workers‟ decision to return, probit regression model (2) is used with “return” as dependent variable identifying the worker as a current or return migrant. it is a qualitative binary variable expressed by a dummy representing the worker‟s decision to return. the sample for this model is male migrants within the specified age range so includes only migrants, some of which are current migrants and some are return migrants. pr (return) = f (age, educational attainment, region) (2) the regressions then estimate the factors that influence a migrant‟s probability of returning using the same explanatory individual specific variables listed in table 3, which are hypothesized to influence a worker‟s decision to return. starting with age, it is hypothesized that the older the worker was when they first emigrated, the less likely they are to return. it is expected that if a worker had migrated at an older age, then they are likely to stay abroad for a longer period to reap the rewards of their late migration decision. as for educational attainment, it is hypothesized that the higher the worker‟s educational attainment, the less likely they are to return. this is expected because those with a higher education are more likely to find suitable jobs abroad and so would be less motivated to return compared to those with a lower education. finally, regarding region of residence, it is hypothesized that the more developed the region in which the migrant lived in before they migrated, the more likely they are to return. this expected because those from more developed or metropolitan regions have more opportunities to return to at home compared to those from less developed regions. table 3: variable description variable name variable description dependent variables mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 11 | p a g e migrate refers to workers‟ migration status = 1 if migrant = 0 if non-migrant return refers to migrant workers‟ return status = 1 if return migrant = 0 if current migrant independent variables age for migrants: age at emigration. for non-migrants: age at a median reference year depending on the estimated phase = the age of the respondent ranging 20 – 60 years educational attainment refers to the highest educational level reached with secondary used as the reference variable. primary = 1 if illiterate, literate, elementary, or preparatory = 0 otherwise secondary = 1 if general/vocational secondary or post-secondary institute = 0 otherwise higher = 1 if university or post-graduate = 0 otherwise region refers to the region in egypt where the individual lives with rural used as the reference variable rural = 1 if rural lower/upper egypt = 0 otherwise mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 12 | p a g e urban = 1 if urban lower/upper egypt, = 0 otherwise metropolitan = 1 if cairo, alexandria, or suez canal = 0 otherwise 4. results this chapter covers the results of the data analysis and model estimations. the first section covers descriptive statistics which demonstrate the different characteristics of current, return, and nonmigrants. the second section covers the output and discussion of the migration model. the third section covers the output and discussion of the return model. 4.1 table 4: descriptive statistics variable current migrants return migrants total migrants non migrants total observations 698 1,204 1,902 9,869 average age at migration 28 26 27 destination country saudi arabia 0.46 0.25 0.33 jordan 0.12 0.15 0.14 kuwait 0.15 0.05 0.09 libya 0.07 0.19 0.14 iraq 0.003 0.25 0.16 uae 0.05 0.008 0.02 average duration spent abroad 0.08 0.05 0.06 marital status 6 5 5 married unmarried 0.76 0.93 0.87 0.75 migration companions 0.24 0.06 0.13 0.24 alone with family members 0.92 0.95 0.94 position in household 0.08 0.05 0.06 male spouse mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 13 | p a g e son 0.59 0.91 0.58 0.70 educational attainment 0.35 0.08 0.21 0.28 primary secondary 0.29 0.42 0.37 0.39 higher 0.50 0.44 0.46 0.42 region of residence in egypt 0.21 0.14 0.17 0.19 rural urban 0.10 0.65 0.45 0.53 metropolitan 0.17 0.23 0.21 0.26 source: elmps, 2012 4.1 table 4 shows that 16% of the total sample are migrants, 63% of which have migrated and returned while37% were still abroad at the time the survey was conducted, and so are referred to as current migrants. the majority of both types of migrants first left egypt in their20schoosing neighboring arab countries, especially oil exporting countries suffering from labor shortages, as their destination with the majority residing in saudi arabia. interestingly, a large share of return migrants (25%) were residing in iraq during their migration years but their share dropped significantly among current migrants (0.3%), further demonstrating how the economic and political turmoil of the 90‟s pushed egyptian emigrants out of iraq even decades after the war. only about 5% of total migrants reside in usa and europe combined. regardless of the destination, the average duration migrants have lived abroad is 5-6 years. currently, most migrants are married, which explains why they are mostly described as spouses however, at the time of their migration, 94% stated that they had migrated alone. this indicates that for most households, the migrant is the husband or the male child. the highest educational attainment reached by the majority of migrants and non-migrants is a secondary education. it is notable though that a primary education is more dominant among return migrants (42%) compared to current migrants (29%) while a higher education is more prominent among current migrants (21%) compared to return migrants (14%). indicating that current migrants tend to be more educated than return migrants. also, most current migrants (73%) used to live in greater cairo and alexandria, the most developed metropolitan regions in egypt compared to only 12% of return migrants, who mostly lived in rural egypt (65%). indicating that current migrants tend to have lived in more developed regions of egypt before migrating than return migrants. table 5: education and region for all migrants over migration phases phase 1: expansion (19741989) phase 2: deterioration (1990-2003) phase 3: recent (2004-2012) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 14 | p a g e total observations educational attainment 521 554 824 primary 0.48 0.40 0.28 secondary 0.40 0.43 0.53 higher 0.13 0.17 0.19 region rural 0.62 0.66 0.74 urban 0.23 0.23 0.18 metropolitan 0.15 0.12 0.08 source: elmps, 2012 table 5 indicates that migration in egypt has been increasing over time with the highest number of migrants leaving egypt between 2004-2012. that is understandable since according to zohry (2007), emigration in egypt is not only a reflection of the oil boom in arab gulf countries, but also of economic difficulties and high rates of population growth that egypt has continued to experience over the years. table 5 also demonstrates how certain variables have changed across the different time periods. looking at migrants‟ educational attainment over migration phases shows that generally, migrants are becoming more educated. this is highlighted by the fact that over time, the share of migrants with a primary education has continuously declined while the share of migrants with a secondary and higher education has been on the rise. regarding region, across phases rural regions have constantly been the largest source of egyptian emigrants as opposed to metropolitan areas. figure3: current and return migrants average age at migration over 1974 2012 source: elmps, 2012 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 15 | p a g e as for age, figure 3 demonstrates that there is a general upward trend for age at migration among both types of migrants indicating that people are recently choosing to emigrate at an older age than when they migrated in the past. comparing current migrants and return migrants age at migration, it is clear that most migrants who remain abroad tend to have migrated at an older age than migrants who have eventually returned to egypt. 4.2 results: migration model this section covers results of the migration model estimation, highlighting the individual factors that determine a worker‟s decision to migrate. the regression was run using a sample of all respondents within the restricted age limit thus including all migrants and non-migrants. table 6: results model (2) total migrants’ variable coefficients over phases variable phase 1: expansion 1974 1989 phase 2: contraction 1990 2003 phase 3: recent 2004 2012 coeff. se coeff. se coeff. se ß0 12.25658*** 2.043937 6.458559*** 1.371105 3.595301*** 0.933242 age 1.272817*** 0.193426 0.507896*** 0.128631 0.222039*** 0.083993 age^2 0.040714*** 0.005797 0.013768*** 0.003876 0.005654*** 0.002410 age^3 0.000379*** 5.44e-05 0.000105*** 3.75e-05 3.82e-05*** 2.20e-05 primary 0.564164*** 0.070873 0.230097*** 0.055451 0.230645*** 0.043967 higher 0.362897*** 0.096087 0.106042*** 0.069974 0.060109*** 0.050271 urban 0.399391*** 0.074140 0.263744*** 0.059038 0.381961*** 0.047308 metropolitan 0.631297*** 0.081459 0.484893*** 0.070616 0.599451*** 0.059750 n with dep=0 2989 5699 9906 n with dep=1 521 554 824 probit regression estimates using elmps, 2012 sample: whole sample (migrant and non-migrant) males aging 20-60 years old (***) indicate significance at 1%, (**) indicate significance at 5%, (*) indicate significance at 10% looking at table 6, the age variable estimates indicate a nonlinear relationship between a worker‟s age and his probability of migration across phases. as an individual grows older, their probability to migrate increases but at a decreasing rate until reaching a certain age, in the case of phase 3 it is 28 years, after which the probability to migrate decreases as age increases. such relationship is displayed in figure 4. the resulting age relation is not surprising since, based on the human capital theory, migration is viewed as an investment in the future, so a younger person has a longer period over which they can collect the returns to their migration investment (borjas, 2012; chi & voss, 2005). also, youth, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 16 | p a g e especially at the beginning of their career, are more open to taking risks so they are more accepting of the risks associated with migration if it means getting a chance at a better life (ghoneim, 2010). age at migration phase 3 figure 4: relationship between probability of migration and age during phase 3 regarding educational attainment, estimates indicate that, during all phases, workers with a primary education have a consistently lower probability of migrating than those with a secondary education. this can be attributed to the fact that, over several decades, egyptians have migrated to cover labor shortages in their destination countries and a primary education, in most cases, is not sufficient to fulfill job requirements in industries such as construction, education or healthcare. however, the probability of migration for a worker with a higher education differs over phases. in the expansion phase (1), workers with a higher education were less likely to migrate than those with a secondary education. this could be because, during the expansion phase, there was an urgent need specifically for technically skilled workers in the gulf to contribute to building their oil industry. however, in the later phases (2 and 3), the probability of migration for a worker with a higher education is not significantly different from that of one with a secondary education, but both workers with a higher and a secondary education are more likely to migrate than a worker with a primary education. this supports the hypothesis that more educated workers are more likely to migrate than less educated workers. this stems from the fact that egypt is a country with relatively low returns to education, specifically higher education, which is made clear by the high unemployment rates present among university graduates in particular. ghoneim's (2010) and david and nordman's (2017) studies support these findings attributing them to a mismatch between the output higher education offers and what the egyptian labor market demands. so, more educated workers seek work abroad in order to fully utilize the benefits of their knowledge. finally, region estimates indicate that, over all phases, those residing in metropolitan and urban egypt are less likely to migrate than those living in rural egypt, supporting the hypothesis that workers living in less developed regions are more likely to migrate than those living in developed regions. since rural egypt is less industrialized and less influenced by trade than the rest of egypt (zohry, 2007), a worker mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 17 | p a g e living in that region has a higher probability of migrating in search of better living conditions than a worker from metropolitan cairo. 4.3 results: return model this section covers results of the return model estimation, highlighting the individual factors that determine a worker‟s decision to return, distinguishing between characteristics of migrants who eventually returned and those who remain abroad. the regression was run using a sample of all male respondents within the restricted age limit thus including migrants only. the estimation was initially run for each phase separately, however output showed no significant distinction in impact of the explanatory variables on the probability of return across phases. the estimation output with the phase distinction is included in appendix 1. table 7: results model (3) – return vs. current migrants’ variable coefficients variable coeff. se ß0 1.268437*** 0.141345 age 0.044034*** 0.005210 primary 0.504702*** 0.069962 higher -0.188767*** 0.086813 urban 0.396896*** 0.079167 metropolitan 0.457026*** 0.104686 n with dep=0 698 n with dep=1 1204 probit regression estimates using elmps, 2012 sample: only migrant (current and return) males aging 20-60 years old (***) indicate significance at 1%, (**) indicate significance at 5%, (*) indicate significance at 10% considering 4.3 results: return model this section covers results of the return model estimation, highlighting the individual factors that determine a worker‟s decision to return, distinguishing between characteristics of migrants who eventually returned and those who remain abroad. the regression was run using a sample of all male respondents within the restricted age limit thus including migrants only. the estimation was initially run for each phase separately, however output showed no significant distinction in impact of the explanatory variables on the probability of return across phases. the estimation output with the phase distinction is included in appendix 1. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 18 | p a g e , results show that generally, the older the migrant is at emigration, the less likely they are to return. this can be because workers that decided to emigrate at an old age have already had enough experience in the egyptian job market and so, given the chance to experience a new market with added benefits, prefer to stay longer abroad. the negative relationship is displayed in figure 5. age at migration figure 5: relationship between probability of return and age during phase 3 regarding educational attainment, primary education estimates indicate that those with a primary education are more likely to return than those with a secondary education. that is because less educated egyptian migrants face strong competition from cheaper and more qualified asian labor so are replaced and forced to return. as for higher education, estimates indicate that migrants with a higher education are less likely to return than those with a secondary education. which means that, despite the secondment policies the egyptian government adopted guaranteeing migrants with a higher education public jobs upon their return, highly educated migrants are still less likely to return than less educated migrants. supporting the claim that return migrants tend to be less educated than the average migrant, which can be attributed to the mismatch between the outcomes of the educational system and qualifications required in the egyptian job market that act as a disincentive for the return of the highly educated (david & nordman, 2017; ghoneim, 2010). as for region, estimates indicate that migrants who used to live in metropolitan and urban areas of egypt before they emigrated are more likely to return than those who lived in rural egypt. this can be because metropolitan and urban areas of egypt are not as poorly endowed as rural areas, so those who used to live in the more developed regions are more likely to return, because they have more possibilities to return to compared to those from rural egypt. 5. conclusion this paper tackled international migration analysis from a micro perspective by identifying the individual characteristics that affect each worker‟s decision to migrate and decision to return. it aimed to understand the characteristics that influence individuals‟ probability of migration, then distinguish between the characteristics of those who migrated and eventually returned to egypt compared to those who still remain abroad. so, also highlighting the characteristics that determine an individual‟s probability of return. the study covered the period 1974 – 2012 which was divided into phases, with mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 19 | p a g e the estimates of the migration model run for each phase separately. thus, noting how the effect of individual characteristics on migration decisions varied across migration phases. egyptian migration is mostly temporary; where emigrants are considered „guest workers‟ migrating to fulfill specific purposes. so, the majority return to egypt after their purpose is complete. most egyptian emigrants, both current and return, are married males who migrated alone, in their late 20s, in search of higher wages and better working conditions abroad. the majority of migrants have a secondary education and used to reside in rural areas of egypt before they migrated. most egyptian emigrants have chosen neighboring arab countries as their destinations, namely saudi arabia, jordan, and kuwait, due to the distance and language advantages as well as the gulf‟s need to cover domestic labor shortages. for all migrants, estimates indicate that migration is a selective process as different individual, family, and community characteristics affect the migration and return decision differently. regarding age, results indicate that older workers are less likely to migrate than younger workers, however, had they emigrated at an older age, then they are less likely to return. this is explained by the fact that migration is viewed as an investment in the future that younger individuals have more to gain from, but if a worker happened to migrate at an older age after having had more experience in the egyptian job market, then they prefer to stay longer abroad to experience the new market with its added benefits. as for educational attainment, there are distinctions between education levels‟ effect over time. primary education results are similar across phases. those with a primary education are consistently less likely to migrate and more likely to return than those with a secondary and a higher education. results for higher education differ over phases of the migration model though. in the earlier phase, those with a higher education were less likely to migrate than those with a secondary education. however, in the more recent phases, those with a higher education are just as likely to migrate as those with a secondary education but, both are more likely to migrate than those with a primary education. as for probability of return, those with a higher education are less likely to return than both, those with a primary and a secondary education. thus, indicating that, especially in the most recent period, the higher the individual‟s educational attainment, the more likely they are to migrate and the less likely they are to return. this can be attributed to the mismatch between the outcomes of the educational system and the qualifications required in the egyptian job market that acts as an incentive for the highly educated to seek work abroad and a disincentive for their return. regarding region, results indicate that workers residing in less developed areas of egypt, namely rural egypt, are more likely to migrate and less likely to return compared to those living in urban and metropolitan egypt. the lack of social and economic amenities in rural areas encourages individuals from those regions to pursue better living conditions abroad and discourages their return. still, there are some distinctions between emigrants who returned and those who remained abroad. return migrants tend to have migrated at a younger age compared to current migrants. they are generally less educated, based on the estimated negative relation between educational attainment and probability of return, which explains the smaller share of high educational attainment among returnees. they also used to reside in more developed areas before they emigrated, such as metropolitan cairo and urban egypt, which makes them more likely to return compared to those from rural egypt. there are a number of limitations to the empirical procedures and results that should be taken into mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 20 | p a g e consideration. one of the main limitations of the study is the exclusion of some egyptian emigrants from the sample. fully migrating families are not accounted for in the sample because all members of the household are abroad, so no one was present to respond to the survey questions. there is also the issue of illegal migrants who do reside outside of egypt but are excluded from the sample because there is no record of their movement. this study opens the door for several aspects of further research. outcome of the models lead to implications regarding the phenomenon of brain drain, which is one of the most hotly debated issues regarding the consequences of migration, referring to the emigration of highly skilled and qualified persons from developing countries to developed countries (wahba, 2015; zohry, 2007). even though it is not the focus of this study, the regression output suggests that egypt may be suffering from brain drain due to labor migration. especially during the more recent phase, where it was shown that those with a higher education have a high probability of migration and a low probability of return. thus, further research could be directed towards reaching a more concrete view regarding brain drain and adding insights to the long-standing debate on its consequences. 6. references adams, r. h., & page, j. 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(2015). defining the new economics of labor migration theory boundaries: a sociologicallevel analysis of international migration. revista de stiinte politice, 45, 55–64. postelnicu, c. (2012). some aspects concerning actual cross-border migration of labor force. review of economic studies and research virgil madgearu, 5(2), 163–183. vogler, m.&rotte, r. (1998). determinants of international migration: empirical evidence for migration from developing countries to germany. centre for economic policy research. discussion paper series, no. 1920(12), 1– 40. sell, r. r. (1988). egyptian international labor migration and social processes: toward regional integration . international migration review, 22(3), 87–108. van der gaag, n., & van wissen, l. (2008). economic determinants of internal migration rates: a comparison across five european countries. tijdschrift voor economische en sociale geografie, 99(2), 209–222. wahba, j. (2015). through the keyhole: international migration in egypt. in the egyptian labor market in an era of revolution (pp. 198–217). zohry, a. (2007). migration and development in egypt, project group meeting on migration as a potential and risk: europe and the mena region. osnabruck university and robert bosch foundation. zohry, a., & harrell-bond, b. (2003). contemporary egyptian migration: an overview of volontary and forced migration. development research center on migration, globalization, and poverty, university of sussex., c3. appendix 1 return model with phase distinction this section demonstrates results of the return model estimation with phase distinction, highlighting the individual factors that determine a worker‟s decision to return, differentiating between characteristics of migrants who eventually returned and those who remain abroad. results model (3) – return vs. current migrants’ variable coefficients over phases variable phase 1: expansion 1974 1989 phase 2: contraction 1990 2 003 phase 3: recent 2004 – 2012 coeff. se coeff. se coeff. se mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 10 issue 2, april-june 2022 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 24 | p a g e ß0 3.002069*** 0.567672 0.887101*** 0.277456 0.010648** * 0.200163 age 0.052333*** 0.022887 0.014977*** 0.010366 0.014587** * 0.007121 primary 0.036995*** 0.227342 0.276347*** 0.136462 0.186891*** 0.107900 higher 0.327042*** 0.282485 0.094537*** 0.174340 -0.267679** 0.127790 urban 0.338885*** 0.278071 0.450739*** 0.156091 0.169932** * 0.121297 metropolitan 0.370837*** 0.242047 0.172476*** 0.196504 0.301252** * 0.172418 n with dep=0 30 138 529 n with dep=1 491 416 295 probit regression estimates using elmps, 2012 sample: only migrant (current and return) males aging 20-60 years old (***) indicate significance at 1%, (**) indicate significance at 5%, (*) indicate significance at 10% mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 49 | p a g e navigating the waves: comparative analysis of american and chinese marine economies 1dr. keren sun and 2dr. xiaoming li 1keren sun, professor of qingdao huanghai university, china, phd of university of utah, 2department of finance, university of shanghai for science and technology, shanghai, china abstract: the relationship between humanity and the ocean has a deep historical significance, particularly in the context of the economic dimension. the concept of ocean gross domestic product (gdp) was introduced in 1974 to quantify the wealth generated from ocean-related activities (colgan, 2013). pontecorvo et al. (1980) and pontecorvo (1988) estimated the ocean sector's contribution to the u.s. economy in the late 20th century. collaborative efforts by the bureau of economic analysis (bea) and the national oceanic and atmospheric administration (noaa) have resulted in prototype statistics for u.s. ocean gdp (nicolls et al., 2020). in 2011, china's marine economic gdp surpassed that of the united states, marking a significant shift in global maritime economic dynamics (zhang et al., 2016). this milestone ignited a sense of national pride and ambition in china as a maritime powerhouse. to gain a comprehensive understanding of the maritime economic development in both china and the united states, it becomes imperative to analyze their respective paths and disparities. the recently proposed four eras theory of ocean utilization (sun, 2021) provides a promising analytical framework to dissect these differences and chart the developmental trajectories of maritime economies. this framework serves as a valuable tool for examining the maritime accomplishments and challenges faced by china and the united states. keywords: ocean gdp, maritime economy, economic development, china, united states. 1 introduction from a historical perspective, the relationship between mankind and the ocean is extremely close, among of these relationships, the economic relationship between humans and the ocean is the most important one. it is well known that gdp is the best indicator to measure the amount of human wealth produced and created. therefore, 1974 nathan associates proposed the concept of ocean gdp (colgan, 2013). “pontecorvo et al. (1980) and pontecorvo (1988) estimated the contribution of the ocean sector to the u.s.a economy for the years 1977 and 1987.” (park &kildow, 2014, p5). bureau of economic analysis (bea) cooperates with the national oceanic and atmospheric administration (noaa) to develop prototype statistics of u.s. ocean gdp (nicolls, et al, 2020). in 2011, china's marine economic gdp surpassed that of the united states of america (zhang, et al., 2016), then china began to have the feeling and mind of a great maritime country and a powerful maritime country. this feeling and mind are reflected in some speeches and reports. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 50 | p a g e in such a situation, it is necessary to analyze the development path and differences between china and the united states of america in the maritime economy, in order to have a clearer understanding of the development status of the maritime economy in china and the united states of america, and to find a better development path. however, above analysis needs to be carried out with the help of a framework, the four eras theory of the use of the ocean by mankind was put forward in 2021 (sun, 2021), we think the four eras theory of the use of the ocean by mankind could be used as a good analysis frame to analyze the development path and differences between china and the united states in the maritime economy. through a comparative analysis of the composition of the united states and china’s marine gdp, as well as an analysis of the development path of the world’s marine economy, we believe that there is still a clear gap between china and the united states of america in terms of marine economic development. china still needs to learn from and imitate the united states of america. 2 literature review the concept of ocean gdp was proposed in 1974 (colgan, 2013). “pontecorvo et al. (1980) and pontecorvo (1988) estimated the contribution of the ocean sector to the u.s. economy for the years 1977 and 1987.” (park &kildow, 2014, p5). lou, et al. (2005) analyzed the quantity, composition, and geographical distribution of china’s marine resources, as well as analyzed the degree of correlation between various marine subindustries and the total marine output value, then found that the china marine resources are rich; marine aquaculture industry, coastal tourist industry, ship construction industry, are the pillar industries of china economy, and have the greatest contribution to china’s economy. he (2011) described the development achievement in china marine economy statistics over twenty years from 1990 to 2010. its development characteristics are the upgrade from decentralized statistics to centralized statistics, the upgrade from partial statistics to comprehensive statistics, the upgrade from loose management to institutionalized management. song, et al. (2011) did a comparative analysis of the marine economic development of china and the united states from the angles of development scale, economic contribution, trends, industrial structure, and productivity. they found that, the u.s. marine economy is highly developed, the u.s. tertiary marine industry accounts for a high proportion in the u.s. marine economy, the marine economy’s contribution share to the u.s. economy is stable, and the labor productivity of u.s. marine industry is high. china's marine economy is showing a trend of rapid development, the proportion of china tertiary marine economy industry in china marine economy is showing an increasing trend, the contribution of the marine economy to the chinese economy is increasing, the labor productivity of china marine economy is low. colgan (2013) combines the industry and geographic location features to measure the ocean economy activity of the usa, at the national, state, and county levels. the national ocean economy of the u.s. is about 2% of u.s. employment and 1.7% of gross domestic product. colgan (2013) also argues that the ocean economy of the usa will have a larger share in rural areas. wang (2013) constructed the marine economic competitiveness evaluating indicators, and utilized the dea analysis method to evaluate the china main marine economic zones’ competitiveness. zhang, et al. (2016) analyzed the evolution of china’s marine industry surpassing the united states in the period of 2005 to 2012, they think china has taken the first step towards becoming a powerful mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 51 | p a g e country of maritime economy and will be a leading country headed by marine gdp in the world. yan (2018) focused on how china coastal cities can make better use of the direct economic contribution of the marine economy in the national maritime silk road strategy of china. yan (2018) also pointed out that the development of china marine economy must adhere to the concept of ecological harmony and innovative development. sun (2021) from the perspective of human use of the ocean, proposes four era theories on the relationship between humans and the ocean, i.e., in the first era, the ocean is a geographic barrier for mankind; in the second era, the ocean is a road for human transportation; in the third era, the ocean is a granary for mankind; in the fourth era, the ocean is a treasure house of mankind’s natural resources, and gets the following conclusion: every era has the most significant feature of this era; change of the eras is accompanied by the continuous improvement process of human influence and utilization of the oceans; historically, once a country has maritime hegemony, this country would become wealthy, powerful, and the leaders of maritime civilization. 3 compared with china, the united states of america has taken the lead out of the era of geographical barriers of the ocean ocean was a natural safety barrier for human beings. china has a long history of using the ocean as a barrier. there is a poem in the classic chinese book titled the bible of poetry, which is translated into english as “xiangtu is brave and talented, so that overseas people also submit to him”. there is a sentence in another chinese classic book titled noble book, which is translated into english as “walk all over the earth, until the sea”. the first poem means that a country or region could be conquered even if this country or region has sea as barrier, the second sentence means that sea is a barrier for human beings. the ming dynasty of china implemented sea ban policy, the purpose of which was to protect oneself via the natural barrier of the sea, mainly to resist armed smuggling, looting and harassment in coastal areas of china from the japanese warriors, merchants, and ronin. the qing dynasty also used the ocean as barriers many times and for a long time: the sea ban was implemented at the beginning of the qing dynasty, the purpose of which was to deal with the attack from the sea by zheng chenggong, the remnant force of the ming dynasty; the qing dynasty lifted the sea ban after zheng chenggong was suppressed; due to increasingly serious pirate activities and the potential threats from western culture, western civilization, and western industrial products in east asian waters, the policy of fully opening the sea began to shrink after more than 30 years. people's liberation army navy was established on 23 april 1949, the pla navy had been mainly responsible for offshore defense work for decades, and was largely a riverine and littoral force (brownwater navy) until the late 1980s. plan has developed rapidly after entering the 21st century, seeking to build a navy with both offshore defense and ocean-going escort capabilities. now plan is the second largest navy in the world in terms of tonnage, and has the largest number of major combatants of any navy. i think that since china’s reform and opening up in the 1980s, china has stepped out of the era of using the ocean as a barrier function. the united states of america has also experienced the era of using the ocean as a barrier function. at the beginning of the founding of the united states, the us naval power was also very weak. october 13, 1775 was the date of the united states navy official establishment, but the continental navy was mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 52 | p a g e disbanded with the end of the war of independence. due to the threats to american merchant shipping from barbary pirates, the naval act of 1794 and a resolution to reestablish a permanent standing u.s. navy were passed by congress in 1794. the war with the british in 1812 made the united states feel weak in its navy. in the american civil war, the u.s. navy fought the small confederate states navy with both sailing ships and ironclad ships to shut down the confederacy's civilian coastal shipping. after the civil war, most of its ships were laid up in reserve, and by 1878, the navy was just 6,000 men. the publication of mahan’s work titled “the influence of sea power upon history, 1660–1783” in 1890 marks the transformation of american ocean strategy. the united states began to walk out of the era of using the sea as a barrier and finally gained the hegemony of the sea in 1939, as 1939 was marked as the year of end of britain's cycle of hegemony by robert gilpin (spiezio, 1990). therefore, it is obvious that, compared with china, the united states has taken the lead out of the era of geographical barriers of the ocean. 4 the united states of america is the last owner of maritime hegemony of the era of sea channel of trade and transportation the human needs for transportation belong to the category of means (sun &philips, 2020), transportation is a means for humans to satisfy their needs. roads are infrastructures that match human transportation. the sea provides vast roads for mankind, which can be extended to all directions. although sea roads are natural, human use of sea roads requires two abilities, one is the capacity for maritime transport, the other is the ability to protect the safety of maritime transport and the smooth flow of sea routes. the first ability is relative to maritime navigation technique &knowledge, the courage and passion of the navigator, ship building technology and level, etc. the second ability is relative to the military strength of a country’s navy. it is clear that there are differences in the possession of these two capabilities by different countries, and that the countries with the highest combined capabilities have easy access to maritime hegemony. history also proves that maritime hegemony is constantly alternating: from portugal's maritime supremacy, to spain's maritime supremacy, to the united provinces' maritime supremacy, to the united kingdom's maritime supremacy, to the u.s.'s maritime supremacy. the united states is the last owner of maritime hegemony of the era of sea channel of trade and transportation. if a country has maritime hegemony, it can form a monopoly on the sea road, and if a country has the monopoly on the sea road, it can form a monopoly on the world commodity trade and transportation, as the monopoly on the world commodity trade and transportation can bring huge economic benefits, therefore, the control and monopoly of ocean transportation channels can bring huge economic benefits. so, before 1800, monopoly dominated in the overseas expansion and colonial trade of europe: “it is inconceivable that any country would have willingly shared access to such fabulous riches as the spices of the eastern seas or the gold and silver of mexico and peru. following the example of the iberian kings, every other european monarch refused to permit any other power to trade with his colonies before the end of the eighteenth century.” (hamilton, 1948, p51). interestingly, under british maritime hegemony, the united kingdom implemented an inclusive and open maritime policy, i.e., freedom of navigation and free trade policies. it is economic ideas rather than the pressure of interests that were central to repeal the corn laws (irwin, 1989). to maintain the international trade order is the ultimate goal of the united kingdom by holding sea power. during the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 53 | p a g e maritime hegemony process “britain as the hegemon can be seen to have provided a 'public good' to the international economy in the form of a liberal ideology” (o'brien, et al., 1992, p.110). the united states does not seem to show a diligent pursuit of maritime hegemony. 1939 was marked as the year of end of britain's cycle of hegemony (spiezio, 1990), that means the world entered the era of the u.s.'s maritime supremacy. all this is due to the occurrence of world war i and world war ii, and the accumulation of u.s. economic, political, military and technological strength. the united states has always pursued the policy of the freedom of the seas, which has been followed after entering the era of american maritime hegemony: “generation after generation, america has battled for the general policy of the freedom of the seas. and that policy is a very simple one – but a basic, a fundamental one. it means that no nation has the right to make the broad oceans of the world at great distances from the actual theater of land war unsafe for the commerce of others.” (franklin d. roosevelt, fireside chat on the greer incident, september 11, 1941). “upon our naval and air patrol – now operating in large number over a vast expanse of the atlantic ocean – falls the duty of maintaining the american policy of freedom of the seas – now.” (franklin d. roosevelt, fireside chat on the greer incident, september 11, 1941). 1979 united states launched freedom of navigation program. the u.s. maritime strategy is influenced by mahan's theory. mahan’s work titled “the influence of sea power upon history, 1660–1783” was published in 1890, in his this book mahan argued that: (1) national greatness was associated with the sea; (2) the importance of strategic locations, such as choke points, canals, and coaling stations, had been emphasized; (3) states should increase production and shipping capacities and acquire overseas possessions; (4) the primary mission of a navy was to secure the command of the sea by destroying or neutralizing the enemy fleet and not by destruction of commerce. mahan’s sea power theory provided the basis for the strengthening of the u.s. navy. america's powerful naval and military forces have given the united states enough power to control the world's strategic maritime passage. the u.s. control over the world's maritime strategic passages is mainly manifested in the following aspects: (1) the u.s. won two major battles during the 1898 spanish–american war, eventually the us drove the spanish out of the pacific ocean, and occupied all the important islands in the pacific ocean, including guam, hawaii. (2) strategic locations of the islands of the ocean are the key points for controlling the ocean, by the end of world war ii, most of the islands in the pacific, most of southeast asia, were occupied by the united states, then the u.s. for the first time effectively controlled the pacific, indian and atlantic oceans. (3) via the us global military base networks to control the world's maritime strategic passages. according to pentagon property portfolio, the united states has a military presence or a base in over 500 locations overseas, which have been spread across 80 to 160 nations. the u.s. has also paid a substantial economic price for maintaining maritime hegemony and maintaining control over the world's strategic maritime corridors. “as per us defence budget proposals for 2019, the dod requested for $686.1 billion. this is more than $74 billion over the 2018 defence budget. however, as per the rand survey report, the annual defence budget hovers around $150 billion, with an annual increase of $20 billion.” in 1902 president theodore roosevelt said that: “a good navy is not a provocation to war. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 54 | p a g e it is the surest guaranty of peace.” because the power and benefits of maritime hegemony and control over strategic maritime corridors can only be fully demonstrated in non-peaceful times, in times of peace there is no obvious power and benefits. therefore, under the current control structure of ocean hegemony and world ocean strategic channels, and state of peace, china's best strategy is to make great use of the ocean passages rather than to change the current control structure of the ocean hegemony and strategic passages. the most important sign of vigorously using the ocean passages for peaceful purposes is to vigorously develop the ship manufacturing industry, marine construction industry, and the marine transportation industry; another important sign of vigorously using the ocean passages for peaceful purposes is the construction of “maritime silk road 21st century”, which is a strategic measure to build a peaceful and stable surrounding environment, to open up new areas of cooperation and deepen mutually beneficial cooperation with association of southeast asian nations, and will be helpful for china and the countries along the maritime silk road to carry out all-round cooperation in the fields of port shipping, marine energy, economic and trade, scientific and technological innovation, ecological environment and human exchanges. table 1 gdp of china's three marine industries and their annual growth rates unit: ten percent of billions (current price) and % marine ship manufacturing industry (current price) column 2’s growth rate marine engineering industry (current price) column 4’s growth rate marine transportation industry (current price) column 6’s growth rate 2019 1182 11.3% 1732 4.5% 6427 5.8% 2018 997 -9.8% 1905 -3.8% 6522 5.5% 2017 1455 -4.4% 1841 0.9% 6312 9.5% 2016 1312 -1.9% 2172 5.8% 6004 7.8% 2015 1441 3.4% 2092 15.4% 5541 5.6% 2014 1387 7.6% 2103 9.5% 5562 6.9% 2013 1183 -7.7% 1680 9.4% 5111 4.6% 2012 1331 -1.1% 1075 12.7% 4802 6.5% 2011 1437 17.8% 1096 14.9% 3957 7.1% 2010 1182 19.5% 808 14.5% 3816 16.7% 2009 828 15.8% 658 31.9% 3748 -2.4% 2008 762 36.4% 411 -9.0% 3858 16.1% 2007 448 17.6% 342 28.0% 3414 21.1% 2006 252 32.4% 135 20.4% 1060 10.4% 2005 176 11.8% 103 17.2% 1145 5.0% 2004 141 54.4% 852 21.9% 2003 32.1% 30.0% source: china marine economic statistics bulletins from ministry of natural resources of the people’s republic of china. industry year mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 55 | p a g e based on the data in table 1, the average annual growth rate of china gdp of marine ship manufacturing industry from 2002 to 2019, i.e., x1, can be calculated as the following: (1+x1)17 =1*(1+32.1%) *(1+54.4%) *(1+11.8%) *(1+32.4%) *(1+17.6%) *(1+36.4%) *(1+15.8%) *(1+19.5%) *(1+17.8%) *(1-1.1%) *(1-7.7%) *(1+7.6%) *(1+3.4%) * (1-1.9%) *(1-4.4%) *(1 9.8%)*(1+11.3%) x1=11.89% based on the data in table 1, the average annual growth rate of china gdp of marine engineering industry from 2004 to 2019, i.e., x2, can be calculated as the following: (1+x2)15 =1*(1+17.2%) *(1+20.4%) *(1+28.0%) *(1-9.0%) *(1+31.9%) *(1+14.5%) *(1+14.9%) *(1+12.7%) *(1+9.4%) *(1+9.5%) *(1+15.4%) *(1+5.8%) *(1+0.9%) * (1-3.8%) *(1+4.5%) x2=10.41% based on the data in table 1, the average annual growth rate of china gdp of marine transportation industry from 2002 to 2019, i.e., x3, can be calculated as the following: (1+x3)17 =1*(1+30.0%) *(1+21.9%) *(1+5.0%) *(1+10.4%) *(1+21.1%) *(1+16.1%) *(1-2.4%) *(1+16.7%) *(1+7.1%) *(1+6.5%) *(1+4.6%) *(1+6.9%) *(1+5.6%) * (1+7.8%) *(1+9.5%) *(1+5.5%) *(1+5.8%) x3=9.72% table 2 real gdp of the u.s.'s three marine industries and their annual growth rates unit: dollar and % ship and boat building sector column 2’s growth rate marine construction sector column 4’s growth rate marine transportation sector column 6’s growth rate 2005 $15,921,601,0 56 $6,377,378,9 17 $39,637,460,76 8 2006 $15,566,473,7 27 -2.23% $6,313,996,8 94 -0.99% $44,842,301,90 5 13.13% 2007 $18,194,173,2 46 16.88% $6,439,805,2 77 1.99% $47,234,742,54 2 5.34% 2008 $18,166,209,2 66 -0.15% $6,168,829,5 33 -4.21% $52,545,516,81 7 11.24% 2009 $16,731,589,7 52 -7.90% $5,886,597,4 14 -4.58% $54,623,846,70 9 3.96% 2010 $17,231,196,1 09 2.99% $5,717,259,3 26 -2.88% $54,539,331,70 6 -0.15% 2011 $16,862,861,7 72 -2.14% $5,277,055,3 52 -7.70% $54,454,853,54 5 -0.155% 2012 $16,975,720,9 24 0.67% $5,331,640,7 32 1.03% $55,656,428,69 8 2.21% 2013 $17,460,017,4 90 2.85% $5,168,480,3 02 -3.06% $59,087,473,89 2 6.16% 2014 $17,054,922,2 63 -2.32% $4,891,169,1 35 -5.37% $58,552,009,17 2 -0.91% industry year mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 56 | p a g e 2015 $18,725,492,4 27 9.80% $5,110,874,1 90 4.49% $60,912,169,54 0 4.03% 2016 $18,130,991,3 11 -3.17% $5,008,435, 2 36 -2.00% $58,967,090,9 2 3 -3.19% 2017 $18,406,473, 5 18 1.52% $5,248,299,8 95 4.79% $59,624,561,86 6 1.12% source: noaa office for coastal management https://coast.noaa.gov/digitalcoast/data/ based on the data in table 2, the average annual growth rate of the u.s. gdp of ship and boat building industry from 2005 to 2017 can be calculated, and this result =1.21%. based on the data in table 2, the average annual growth rate of the u.s. gdp of marine construction industry from 2005 to 2017 can be calculated, and this result = -1.62%. based on the data in table 2, the average annual growth rate of the u.s. gdp of marine transportation industry from 2005 to 2017 can be calculated, and this result =3.4%. by comparing the average annual growth rates of the united states and china in three sectors of ship and boat building sector, marine construction sector, and marine transportation sector, we can find that china is showing long-term high growth in above these three sectors in the 21th century, the united states is slow to grow in above these three sectors from 2005 to 2017, and even retrogression in the marine construction sector. due to china’s long-term high growth in above these three sectors, in 2003, china's shipbuilding industry accounted for more than 10% of the world's output for the first time; in the first half of the year 2007, china's new ship orders increased significantly, ranking first in the world for the first time; by the end of 2005, throughput of shanghai port had reached 400 million tons, making shanghai port the world's largest port. based on the above analysis, we can draw the following conclusion: the united states enjoys the prestige of controlling the strategic channel of the ocean, and china makes full use of the economic role of the channel. 5 the united states of america has no urgent need for blue granaries like land, the sea is an important source of human food. therefore, the sea is regarded as the blue granary for humans, fishing is one way for humans to get food from the ocean, and the other main way is fishing farming, but the size of the blue granary depends on the human's ability to exploit the sea. table 3 world fisheries and aquaculture production, utilization, unit: million tonnes, live weight 1986– 1995 average per year 1996– 2005 average per year 2006– 2015 average per year 2016 2017 2018 capture: inland 6.4 8.3 10.6 11.4 11.9 12.0 capture: marine 80.5 83.0 79.3 78.3 81.2 84.4 mailto:contact@americaserial.com mailto:contact@americaserial.com https://coast.noaa.gov/digitalcoast/data/ https://coast.noaa.gov/digitalcoast/data/ american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 57 | p a g e total capture 86.9 91.4 89.8 89.6 93.1 96.4 aquaculture: inland 8.6 19.8 36.8 48.0 49.6 51.3 aquaculture: marine 6.3 14.4 22.8 28.5 30.0 30.8 total aquaculture 14.9 34.2 59.7 76.5 79.5 82.1 total world fisheries and aquaculture 101.8 125.6 149.5 166.1 172.7 178.5 human consumption 71.8 98.5 129.2 148.2 152.9 156.4 non-food uses 29.9 27.1 20.3 17.9 19.7 22.2 population (billions) 5.4 6.2 7.0 7.5 7.5 7.6 per capita apparent consumption (kg) 13.4 15.9 18.4 19.9 20.3 20.5 source: fao, the state of world fisheries and aquaculture 2020, p. 3. from the data in table 3, we can see that 2016, 2017, 2018 per capita apparent consumption (kg) of fisheries and aquaculture production reached around 20 kg, and the amount of total marine capture has basically stabilized at around 90 million tonnes from 1986 to 2018, but the amount of aquaculture increased greatly, the ratio of the amount of total aquaculture to the amount of total capture was 17%, 37%, 66%, 85%, 85%, 85% in 1986-1995, 1996-2005, 2006-2015, 2016, 2017, 2018 respectively. the ratios above show that the contribution of farming and fishing to human food supply is almost evenly divided now, which also shows the huge development potential and space of farming. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 58 | p a g e table 4 real gdp of the u.s.'s living resources sector unit: dollar industry year fishing fish hatcheries and aquaculture seafood processing seafood markets total 2005 $1,352,756,15 7 $1,351,441,429 $3,701,772, 111 $754,048,420 $7,160,018,117 2006 $1,533,923,97 7 $1,211,674,218 $4,346,538, 693 $745,536,232 $7,837,673,120 2007 $1,325,989,67 2 $1,087,263,28 6 $4,450,159, 605 $711,446,677 $7,574,859,240 2008 $1,334,689,07 2 $937,645,095 $3,806,877, 134 $672,467,633 $6,751,678,936 2009 $1,275,761,26 2 $1,194,553,941 $4,067,153, 911 $677,594,805 $7,215,063,919 2010 $1,469,976,13 5 $1,173,572,800 $3,632,777, 994 $686,157,109 $6,962,484,038 2011 $1,701,047,74 2 $873,244,500 $3,692,549, 989 $705,099,949 $6,971,942,180 2012 $1,644,230,5 0 2 $871,029,822 $3,677,916, 284 $732,693,612 $6,925,870,221 2013 $1,361,659,36 2 $1,114,846,209 $3,858,639, 006 $744,927,561 $7,080,072,138 2014 $1,177,983,91 3 $1,099,161,739 $3,749,206, 774 $752,654,117 $6,779,006,543 2015 $1,234,288,79 8 $1,258,631,346 $3,986,420 , 563 $778,671,394 $7,258,012,101 2016 $1,228,651,78 6 $1,312,770,377 $3,577,149, 179 $3,983,887,23 5 $10,102,458,576 2017 $1,298,775,40 2 $1,359,976,163 $3,698,637, 115 $4,150,183,55 2 $10,507,572,23 3 source: noaa office for coastal management https://coast.noaa.gov/digitalcoast/data/ based on the data in table 4, we can calculate and get the data of table 5: mailto:contact@americaserial.com mailto:contact@americaserial.com https://coast.noaa.gov/digitalcoast/data/ https://coast.noaa.gov/digitalcoast/data/ american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 59 | p a g e table 5 the annual growth rate of real gdp of the u.s.'s living resources sector the growth rate of fishing sector the growt h rate of fish hatcheries and aquaculture sector the growth rate of seafood processing sector the gro wth rate seafood markets sector of the growth rate of living resources 2006 13.39% -10.34% 17.42% -1.13% 9.46% 2007 -13.56% -10.27% 2.38% -4.572 -3.35% 2008 0.66% -13.76% -14.46% -5.48% -10.87% 2009 -4.42% 27.40% 6.84% 0.76% 6.86% 2010 15.22% -1.76% -10.68% 1.26% -3.50% 2011 15.72% -25.59% 1.65% 2.76% 0.136% 2012 -3.34% -0.254% -0.40% 3.91% -0.66% 2013 -17.19% 27.99% 4.91% 1.67% 2.23% 2014 -13.49% -1.41% -2.84% 1.04% -4.25% 2015 4.78% 14.51% 6.33% 3.46% 7.07% 2016 -0.46% 4.30% -10.27% 2017 5.71% 3.60% 3.40% the data in table 5 show that the u.s. living resources sectors are at the intersection process of growth and retreat. based on the data in table 4 or table 5, the average annual growth rate of the u.s. gdp of fishing sector from 2005 to 2017 can be calculated, and this result = -0.339%; the average annual growth rate of the u.s. gdp of fish hatcheries and aquaculture sector from 2005 to 2017 is 0.052%, it is because that the u.s. did not take part in the blue revolution, “u.s. aquaculture production as a share of global aquaculture production has fallen steadily from a high of 10% in 1950 to the currently all-time low of 0.39% in 2017.” (shamshak, et al., 2019, p. 724); the average annual growth rate of the u.s. gdp of seafood processing sector from 2005 to 2017 is 0.0071%; the average annual growth rate of the u.s. gdp of seafood markets sector from 2005 to 2015 is 0.32%; the average annual growth rate of the u.s. gdp of total living resources sector from 2005 to 2015 is 0.136%. when we calculate the average annual growth rate of the u.s. gdp of seafood markets sector, we choose the time period from 2005 to 2015 rather than from 2005 to 2017, this change is due to “the addition of seafood wholesale activities to the seafood market industry, which only included seafood retail industry year mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 60 | p a g e activities before 2016.”1 above data show that the u.s. living resources sector has stagnated from 2005 to 2017. table 6 gdp of china's marine fisheries industry and its annual growth rates unit: ten percent of billions (current price) and % industry year gdp of marine fisheries industry (current price) marine fisheries industry’s annual growth rate 2019 4715 4.4% 2018 4801 -0.2% 2017 4676 -3.3% 2016 4641 3.8% 2015 4352 2.8% 2014 4293 6.4% 2013 3872 5.5% 2012 3652 6.4% 2011 3287 3.7% 2010 2813 4.4% 2009 2509 12.4% 2008 2216 3.3% 2007 1904 2006 1902 -6.1% 2005 2011 20.0% source: china marine economic statistics bulletins from ministry of natural resources of the people’s republic of china. based on the data in table 6, the average annual growth rate of china gdp of marine fisheries industry from 2007 to 2019, i.e., x4, can be calculated as the following: (1+x4)12 =1*(1+3.3%) *(1+12.4%) *(1+4.4%) *(1+3.7%) *(1+6.4%) *(1+5.5%) *(1+6.4%) *(1+2.8%) *(1+3.8%) *(1-3.3%) *(1-0.2%) *(1+4.4%) x4=3.99% compared the marine fisheries between the u.s. and china, we know that the u.s. living resources sector has stagnated from 2005 to 2017, china has maintained a steady long-term growth status, the average annual growth rate is 3.99 per cent. the main reason for this status is that the united states has no food pressure, while china has food pressure. 1 https://coast.noaa.gov/data/digitalcoast/pdf/econ-report-2016.pdf mailto:contact@americaserial.com mailto:contact@americaserial.com https://coast.noaa.gov/data/digitalcoast/pdf/econ-report-2016.pdf https://coast.noaa.gov/data/digitalcoast/pdf/econ-report-2016.pdf american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 61 | p a g e 6 the united states of america is the leader of the era of human natural resources treasure house economics has a basic premise: human desires/wants are infinite, but resources are limited. human beings are always seeking resources and places where they contain them. with the improvement of human science and technology, human beings are more and more aware of the abundance of marine resources, and the ocean is the treasure house of human natural resources. marine resources include marine mineral resources, sea chemical resources, marine biological (aquatic) resources and marine power resources. table 7 real gdp of the u.s.'s offshore mineral extraction industries and their annual growth rates unit: dollar and % limestone, sand and gravel sector column 2’s growth rate oil and gas exploration and production sector column 4’s growth rate offshore mineral extraction: total column 6’s growth rate 2005 $2,951,578,02 5 $86,085,932, 877 $89,037,510,90 1 2006 $3,102,101,18 3 5.10% $99,826,216, 046 15.96% $102,928,000,0 00 15.60% 2007 $3,059,804,4 7 1 -1.36% $111,112,000 ,000 11.31% $114,172,000,0 00 10.92% 2008 $2,288,374,74 1 25.21% $103,443,000 ,000 -6.90% $105,731,000,0 00 -7.39% 2009 $1,986,929,23 1 -13.17% $131,495,000 ,000 27.12% $133,482,000,0 00 26.25% 2010 $1,593,730,41 9 19.79% $101,110,000 ,000 -23.11% $102,704,000,0 00 23.06% 2011 $1,357,898,66 9 14.80% $104,645,000 ,000 3.50% $106,003,000, 0 00 3.21% 2012 $1,361,974,63 9 0.30% $127,670,000 ,000 22.00% $129,032,000,0 00 21.72% 2013 $1,477,413,08 1 8.48% $131,580,000 ,000 3.06% $133,057,000,0 00 3.12% 2014 $1,468,595,69 8 -0.60% $134,308,00 0 ,000 2.07% $135,776,000,0 00 2.04% 2015 $1,743,923,70 2 18.75% $164,671,000 ,000 22.61% $166,415,000,0 00 22.57% industry year mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 62 | p a g e 2016 $1,946,810,49 5 11.63% $163,953,000 ,000 -0.44% $165,900,000,0 00 -0.31% 2017 $1,831,713,46 6 -5.91% $145,275,461 ,903 -11.39% $147,107,175,3 70 -11.33% source: noaa office for coastal management https://coast.noaa.gov/digitalcoast/data/ based on the data in table 7, the average annual growth rate of the u.s. gdp of limestone, sand and gravel sector from 2005 to 2017 can be calculated, and this result = -3.98%. based on the data in table 7, the average annual growth rate of the u.s. gdp of oil and gas exploration and production sector from 2005 to 2017 can be calculated, and this result =4.36%. based on the data in table 7, the average annual growth rate of the u.s. gdp of total offshore mineral extraction sector from 2005 to 2017 can be calculated, and this result =4.18%. table 8 gdp of china's three marine industries and their annual growth rates unit: ten percent of billions (current price) and % marine oil and gas exploration industry (current price) column 2’s growth rate marine mining industry (current price) column 4’s growth rate marine chemical industry (current price) column 6’s growth rate 2019 1541 4.7% 194 3.1% 1157 7.3% 2018 1477 3.3% 71 0.5% 1119 3.1% 2017 1126 -2.1% 66 -5.7% 1044 -0.8% 2016 869 -7.3% 69 7.7% 1017 8.5% 2015 939 -2.5% 67 15.6% 985 14.8% 2014 1530 -5.9% 53 13.0% 911 11.9% 2013 1648 0.1% 49 13.7% 908 11.4% 2012 1570 -8.7% 61 17.9% 784 17.4% 2011 1730 6.7% 53 2.1% 691 2.5% 2010 1302 53.9% 49 -0.5% 565 12.4% 2009 748 8.5% 21 7.5% 611 26.0% 2008 874 -1.1% 9 21.3% 542 6.8% 2007 769 17.3% 5 -24.2% 209 16.3% 2006 683 29.2% 8 -24.2% 140 13.0% 2005 467 17.9% 8 -6.1% 79 -19.8% source: china marine economic statistics bulletins from ministry of natural resources of the people’s republic of china. based on the data in table 8, the average annual growth rate of china gdp of marine oil and gas exploration industry from 2005 to 2019, i.e., x5, can be calculated as the following: (1+x5)15 =1*(1+17.9%) *(1+29.2%) *(1+17.3%) *(1-1.1%) *(1+8.5%) *(1+53.9%) *(1+6.7%) *(1-8.7%) *(1+0.1%) *(1-5.9%) *(1-2.5%) * (1-7.3%) *(1-2.1%) *(1+3.3%) *(1+4.7%) x5=6.35% industry year mailto:contact@americaserial.com mailto:contact@americaserial.com https://coast.noaa.gov/digitalcoast/data/ https://coast.noaa.gov/digitalcoast/data/ american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 63 | p a g e the average annual growth rate of china gdp of marine oil and gas exploration industry from 2012 to 2019, i.e., x6, can be calculated as the following: (1+x6)8 =1*(1-8.7%) *(1+0.1%) *(1-5.9%) *(1-2.5%) * (1-7.3%) *(1-2.1%) *(1+3.3%) *(1+4.7%) x6=2.43% based on the data in table 8, the average annual growth rate of china gdp of marine mining industry from 2005 to 2019, i.e., x7, can be calculated as the following: (1+x7)15 =1*(1-6.1%) *(1-24.2%) *(1-24.2%) *(1+21.3%) *(1+2.1%) *(1-0.5%) *(1+7.5%) *(1+17.9%) *(1+13.7%) *(1+13.0%) *(1+15.6%) *(1+7.7%) *(1-5.7%) * (1+0.5%) *(1+3.1%) x7 =1.84% based on the data in table 8, the average annual growth rate of china gdp of marine chemical industry from 2005 to 2019, i.e., x8, can be calculated as the following: (1+x8)15 =1*(1-19.8%) *(1+13.0%) *(1+16.3%) *(1+6.8%) *(1+26.0%) *(1+12.4%) *(1+2.5%) *(1+17.4%) *(1+11.4%) *(1+11.9%) *(1+14.8%) *(1+8.5%) *(1-0.8%) *(1+3.1%) *(1+7.3%) x8=7.90% table 9 gdp of china's marine power industry and its annual growth rates unit: ten percent of billions (current price) and % industry year gdp of marine power industry (current price) marine power industry’s annual growth rate 2019 199 7.2% 2018 172 12.8% 2017 138 8.4% 2016 126 10.7% 2015 116 9.1% 2014 99 8.5% 2013 87 11.9% 2012 70 14.3% 2011 49 25.0% 2010 28 31.3% 2009 12 25.2% 2008 8 51.6% 2007 5 17.0% 2006 3.1% 2005 6.7% source: china marine economic statistics bulletins from ministry of natural resources of the people’s republic of china. based on the data in table 9, the average annual growth rate of china gdp of marine power industry from 2005 to 2019, i.e., x9, can be calculated as the following: mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 64 | p a g e (1+x9)15 =1*(1+6.7%) *(1+3.1%) *(1+17.0%) *(1+51.6%) *(1+25.2%) *(1+31.3%) *(1+25.0%) *(1+14.3%) *(1+11.9%) *(1+8.5%) *(1+9.1%) *(1+10.7%) *(1+8.4%) *(1+12.8%) *(1+7.2%) x9=14.50% viewing from above calculated results, china’s acquisition of marine resources is mainly reflected in renewable energy and low-value-added products: the average annual growth rate of china gdp of marine power industry from 2005 to 2019, i.e., x9, is 14.5%; the average annual growth rate of china gdp of marine chemical industry from 2005 to 2019, i.e., x8, is 7.9%. china is also striving to pursue the acquisition of high-value-added resources, such as oil and natural gas, however, such efforts have not achieved much: the average annual growth rate of china gdp of marine oil and gas exploration industry from 2012 to 2019, i.e., x6, is -2.43%; the average annual growth rate of china gdp of marine mining industry from 2005 to 2019, i.e., x7, is 1.84%. the u.s. focuses on acquisition of high-valueadded products: the average annual growth rate of the u.s. gdp of oil and gas exploration and production sector from 2005 to 2017 is 4.36%; the average annual growth rate of the u.s. gdp of limestone, sand and gravel sector from 2005 to 2017 is -3.98%, which means that the world has truly entered the era of treating the ocean as a treasure house of natural resources, and the united states is the leader in this era. 7 the u.s. marine economy industry has formed a reasonable regional division of labor compared with the marine economy of china, the marine economy of the u.s. has formed a relatively clear regional division of labor structure, and china's marine economy has not yet formed a clear regional division of labor structure. the u.s. marine economic geography has been divided into eight regions: great lakes, gulf of mexico, mid-atlantic, northeast, north pacific (alaska), pacific (hawaii), southeast, west coast. the great lakes is dominated by the freshwater fisheries, including the commercial fishing and recreation fishing; the gulf of mexico is dominated by offshore mineral extraction (primarily oil and natural gas); the mid-atlantic is dominated by marine tourism and recreation industry; the northeast is dominated by marine tourism and recreation industry, marine transportation industry and, boat and ship building; the north pacific (alaska) is dominated by commercial fishing; pacific (hawaii) is dominated by marine tourism and recreation industry; the southeast and the west coast are dominated by marine tourism and marine transportation industry. 8 conclusion in this paper, we analyze the development path and differences between china and the united states of america in the maritime economy, and have the following findings: (1) the united states of america has taken the lead out of the era of geographical barriers of the ocean; (2) the united states of america is the last owner of maritime hegemony of the era of sea channel of trade and transportation; (3) china has made great achievements in the blue granary; (4) the united states of america is the leader of the era of human natural resources treasure house; (5) the u.s. marine economy industry has formed a reasonable regional division of labor. the overall conclusion is that there is still a clear gap between china and the united states in terms of marine economic development. china still needs to learn from and imitate the united states in the development way of maritime economy. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 65 | p a g e references anderson, j. l. 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(2020). china marine economic statistics bulletin 2019. http://gi.mnr.gov.cn/202005/t20200509_2511614.html mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 66 | p a g e ministry of natural resources of the people’s republic of china. (2019). china marine economic statistics bulletin 2018. http://gi.mnr.gov.cn/201904/t20190411_2404774.html ministry of natural resources of the people’s republic of china. 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(2013). china marine economic statistics bulletin 2012. http://gc.mnr.gov.cn/201806/t20180619_1798490.html ministry of natural resources of the people’s republic of china. (2012). china marine economic statistics bulletin 2011. http://gc.mnr.gov.cn/201806/t20180619_1798489.html ministry of natural resources of the people’s republic of china. (2011). china marine economic statistics bulletin 2010. http://gc.mnr.gov.cn/201806/t20180619_1798488.html ministry of natural resources of the people’s republic of china. (2010). china marine economic statistics bulletin 2009. http://gc.mnr.gov.cn/201806/t20180619_1798487.html ministry of natural resources of the people’s republic of china. (2009). china marine economic statistics bulletin 2008. http://gc.mnr.gov.cn/201806/t20180619_1798486.html ministry of natural resources of the people’s republic of china. (2008). china marine economic statistics bulletin 2007. http://gc.mnr.gov.cn/201806/t20180619_1798484.html ministry of natural resources of the people’s republic of china. (2007). report on the operation of china's marine economy in the first half of 2007. http://gc.mnr.gov.cn/201806/t20180619_1798483.html ministry of natural resources of the people’s republic of china. (2007). china marine economic statistics bulletin 2006. http://gc.mnr.gov.cn/201806/t20180619_1798482.html mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 67 | p a g e ministry of natural resources of the people’s republic of china. (2006). china marine economic statistics bulletin 2005. http://gc.mnr.gov.cn/201806/t20180619_1798481.html ministry of natural resources of the people’s republic of china. (2005). china marine economic statistics bulletin 2004. http://gc.mnr.gov.cn/201806/t20180619_1798480.html ministry of natural resources of the people’s republic of china. (2004). china marine economic statistics bulletin 2003. http://gc.mnr.gov.cn/201806/t20180619_1798479.html ministry of natural resources of the people’s republic of china. (2003). china marine economic statistics bulletin 2002. http://gc.mnr.gov.cn/201806/t20180619_1798478.html national oceanic and atmospheric administration (noaa), office for coastal management. (2019). noaa report on the u.s. ocean and great lakes economy. https://coast.noaa.gov/data/digitalcoast/pdf/econ-report-2016.pdf nicolls, w., et al. (2020). defining and measuring the u.s. ocean economy. bureau of economic analysis, u.s. department of commerce. https://www.bea.gov/system/files/202006/defining-and-measuring-the-united-states-ocean-economy.pdf o'brien, p. k., & pigman, g. a. (1992). free trade, british hegemony and the international economic order in the nineteenth century. review of international studies, 18(2), 89-113. stable url: https://www.jstor.org/stable/20097288 park, k. s., & kildow, j. t. (2014). rebuilding the classification system of the ocean economy. journal of ocean and coastal economics, 2014(1). doi: https://doi.org/10.15351/2373-8456.1001 link to source pitcher, t. j., & lam, m. e. (2015). fish commoditization and the historical origins of catching fish for profit. maritime studies, 14(2). https://www.medievalists.net/2015/07/fish-commoditizationand-the-historical-origins-of-catching-fish-for-profit pulapaka, v. (2019). the expansion of us military bases overseas and how india finally surrenders its neutrality. ststw media, may 8, 2019. https://www.ststworld.com/us-military-bases/ qian, c., & xu, j. (2017). the history of england. shanghai academy of social sciences press. isbn: 9787807451280. robbins, l. (1932, 1935, 2nd ed.). an essay on the nature and significance of economic science, london: macmillan. link to 1932 html and link to 1935 facsimile. shamshak, g. l., anderson, j. l., et al. (2019). u.s. seafood consumption. journal of the world aquaculture society, 50(4), 715–727. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 3, july-september 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 68 | p a g e song, w., xu, c., & lin, x. (2011). preliminary analysis of the differences in marine economy between china and america. marine economy, 1(4), 57-62. spiezio, k. e. (1990). british hegemony and major power war, 1815-1939: an empirical test of gilpin's model of hegemonic governance. international studies quarterly, 34(2), 165-181. stable url: https://www.jstor.org/stable/2600707 sun, k. (2021). on the four eras of the use of the ocean by mankind. taylor, a. (2002). american colonies: the settling of north america. vol.1. new york: penguin. taylor, p. j. (1994). ten years that shook the world? the united provinces as first hegemonic state. sociological perspectives, 37(1), 25-46. stable url: https://www.jstor.org/stable/1389408 unger, r. w. (1981). dutch shipbuilding in the golden age. history today, 31(4). link to source unger, r. w. (1980). dutch herring, technology, and international trade in the seventeenth century. the journal of economic history, 40(2), 253-280. link to source (2011). dutch nautical sciences in the golden age: the portuguese influence. e-journal of portuguese history, 9(2). http://www.scielo.mec.pt/scielo.php?script=sci_arttext&pid=s164564322011000200003 wang, s. (2013). study on the comparison of marine economic competitiveness of main marine economic zone in china. east china economic management, 27(3), 70-75. yan, x. (2018). china-us marine economy benchmarking research and my country's countermeasures for developing marine economy. journal of zhejiang ocean university (humanities sciences), (2). http://aoc.ouc.edu.cn/29/26/c9821a207142/pagem.psp zhang, y., liu, k., wang, s., et al. (2016). a comparison of marine economy and marine industrial structure between china and the us: a pragmatic study based on the fact that china surpassed the us in marine economic output. scientia geographica sinica, 36(11), 1614-1621. doi:10.13249/j.cnki.sgs.2016.11.002. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 1 | p a g e impact of microfinance bank on growth of small and medium scale enterprises. 1eke robert i. ph.d., fca. 2ozabor lydia osatohanmwen and 3iriogbe cynthia bose 1&2department of accounting and finance, school of social and management sciences, wellspring university benin city, edo state. 3department of business administration, school of social and management sciences, wellspring university benin city, edo state. email: robbyeke19@yahoo.com; robert.eke@wellspringuniversity.edu.ng (+2348034712733). iozabor2@gmail.com (+2348061516532); boseiriogbe@gmail.com (+2347051930883). doi: https://doi.org/ 10.5281/zenodo.13961356 abstract: the broad objective of this study was to examine the impact of microfinance banks on growth of small and medium scale in nigeria. the study adopted the survey research design and data was gotten from owners and staff of smes operating in edo state via structured questionnaire. a total of three hundred and twenty three (323) copies of the questionnaire was used to perform the analysis. the chi-square statistical analysis was used to test the hypotheses of the study. the findings of the study revealed that microcredits granted by microfinance banks has positive and significant impact on growth of smes in nigeria. secondly, the study found that microfinance payment services has positive and significant effect on on growth of smes in nigeria. thirdly, the result of the study revealed that savings mobilization role microfinance banks has positive and significant impact on growth of smes in nigeria. the study recommended that government should create an enabling environment for microfinance banks to perform its primary role of savings mobilization, payment services and granting of microcredits to small and medium scale enterprises in nigeria. keywords: microfinance bank, microcredit, payment services, savings mobilization, small and medium scale enterprises. introduction in nigeria credit has been recognized as an essential tool for promoting the growth of small and medium scale enterprises ( ajagba and bolaji 2013). the introduction of microfinance bank in nigeria is as a result of the inability of nigerian deposit money bank (dmn) to provide sufficient financial service to the rural and urban poor people (central bank for nigeria 2005). microfinance banks’ lending has proven to be a potent tool for poverty reduction by helping the poor to becoming entrepreneurs. as mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 2 | p a g e entrepreneurs increasing their income, smooth consumption, build assets and minimizing their vulnerabilities in time of contingencies and economic shock (dauda 2007). despite the abundant natural resources, the country still finds it very difficult to discover her developmental bearing since independence (cbn 2001). most of the poor unemployed nigerians in a bid to improve their standard of living have resorted to the establishment of their own businesses and making entrepreneurship fast becoming a household name in nigeria (ogunleye and akanbi 2014). the impact of microfinance bank on small and medium scale enterprises (smes) have raised the bar of entrepreneurship in most sectors of the nigeria economy (central bank of nigeria,2005). nigeria has the largest population in sub-sahara africa with estimated population of about over 200 million out of total of 1.5 million in african (oluwuyii et al 2010). based on data provided by the nigerian bureau of statistics (nbs) the unemployment rate in nigeria has increased from 7.4% in first quarter to 8.2% in second quarter and 9.90% in third quarter of 2015, while 6.4% in the last quarter of 2014 and a decline of 24.7% in 2013, compared to 27.4% in 2012, 23.9% in 2011, 21.4% in 2010 and a decline of 24.8% in 2003, decline of 12.6% in 2002, 13.6% increase in 2001 and 13.1% in 2000 respectively. in order to boost employment in nigeria, the government has focused on the area of delivery to the poor and small and medium enterprise (smes (khandker 2013). efforts in this respect include developing policies and creating institutions for mobilizing and deploying capital funds to smes to encourage employment and productivity (akinboyo 2007) the population explosion in nigeria and the inability of government and the conventional financial institution (bank) to handle the ever increased demand for finance of businesses, gave birth to the micro-finance banking system. these micro finance bank policies are such that they are geared towards eliminating poverty by committing to the empowerment of low income nigerians through creation of access to responsive financial services on a suitable basis. this is transmitted to applicants in a cost effective and inventive way. the establishment micro finance banks, was created in the year 1987 to assist citizens of the country (nigeria) break out of the problem of poverty (okpara 2010). however, the extension for the creation of the institution is not being actualized due to some economic indices (inflation, eco-recession and depression) and the operation of the organization. generally micro finance banks require certain percentage of loan granted to be repaid monthly by borrowers in course of servicing their borrowings, e.g lapo will require 5% of loan disbursed to be returned monthly. in this situation, except there is so much profit made within the staggered period their deposit liabilities is expected to shrink with in the period, in the presence of inflation, this procedure portends trouble for the entrepreneurs. as a result most microfinance institutions will not be able to extent credit facilities to small and medium entrepreneurs which can affect their operation adversely. also, there are several cases of unserviced loans, while others totally default in their repayment. overall consequence is that, all this hinder the activities of the microfinance banks. while the above are problems exists, another issue is that the process of accessing loan is tedious and require guarantors to access the loan as by way of policy they may not demand collateral. experiences of the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 3 | p a g e past (loan collectors absconding after accessing loans) has made guarantors be in short supplies these days. inability to access loan and use them when required have serious effect on the smes and the economy in general. all these has led to question being raised on whether micro finance banks has been supporting smes in their quest to grow. this study is carried out to find out if the objective of setting up microfinance bank is still being achieved. objective of the study the objective of this study is to evaluate how micro finance bank can strengthen micro enterprise and encourage best practice among operators of small and medium scale enterprises (smes). the specific objectives are;  to investigate how micro credit extended to smes has impacted on smes growth.  to examine how micro finance banks assist smes in payment services.  to find out how micro finance banks assist smes in saving their surplus funds. literatuure review conceptual of microfinance microfinance is majorly envisioned to provide financial services for poor and low income enterprises offered by different types of service provided. microfinance institutions (mfis) commonly tend to use methods developed over the last 30 years to deliver very small loans to unsalaried borrowers, taking little or no collateral. these methods include group lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an implicit guarantee of ready access to future loans if present loans are repaid fully and promptly. from a global perspective, microfinance organizations envision a world in which low income households have permanent access to a range of high quality and affordable financial services offered by a range of retail providers to finance income producing activities, build assets , stabilize consumption, and protects against risks. microfinance is the provision of financial services adapted to the needs of low income people especially the provision of small loans, acceptance of small savings deposits, and simple payments services needed by micro and small entrepreneurs and other poor people (usaid, 2000). oluwuyi, et. al. (2010) noted that microfinance is about providing financial services to the active poor who are traditionally not served by the conventional financial institutions. the concept of microfinance was perceived as the provision of financial and non-financial services by mfbs/mfis to low income groups without tangible collateral but whose activities are linked to income-generating ventures (ogunrinola 2007). furthermore, ogunrinola (2007) viewed microfinance as an economic development approach intended to benefit low income women and men. it means that the purpose of microfinance is to reach the low income entrepreneurs with financial services that will enable them creates wealth without any discrepancy as to sex of such person (oguleye and akanbi, 2014). uche (2008) cited in babajide (2011) describes microfinance as banking the “unbankables”, bringing mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 4 | p a g e credit, savings and other essential financial services within the reach of people who are poor to be served by regular banks, due to lack of sufficient collateral. therefore, microfinance is the practice of offering small and short term loans to entrepreneurs who otherwise would not have access to capital to begin small business or other income generating activities. microfinance idea became popular in the development discourse of the early 1980s . in general, microfinance has five features that distinguish it from credit supplied by the conventional financial institutions. first, the loan size is small; however, this general feature differs from one country to another and depends upon the differences in the levels of the country’s socio-economic development. secondly, the primary customers of these loans are the people who have little access to conventional banking facilities. thirdly, the purpose of these loans is to create income-generating activities. fourthly, tangible collateral is not necessarily required for taking this kind of loan. finally, this is another aspect of micro credit program that distinguishes itself from conventional banking. but the microfinance ventures have integrated loaning and savings mobilization functions, in order words, regular savings are a pre-condition for granting loans (eke and idogun 2022). microfinance, with regard to this study, is the practice of offering financial and non-financial services, to entrepreneurs who hitherto cannot access the conventional financial institutions, at a fee that is affordable and economic to the users of such services. this will enable them to start or build up their own enterprises. the microfinance policy defined the framework for the delivery of these financial services on sustainable basis to the micro, small and medium enterprises (msmes) through microfinance banks (cbn, 2005). microfinance bank, according to the central bank of nigeria (cbn, 2009 & 2012), is a company licensed to carry out the business of providing microfinance services such as savings, loans, insurance, money transfer and other financial services that are needed by the economically poor, micro, small and medium enterprises. the concept of small and medium scale enterprises the concept and definition of small and medium scale enterprise is dynamic in nature and varies with time and also varies among institutions and countries. however, the basic definitional parameters are not the same. they include numbers of employees, assets and turnover. siebel (2011) stated that, it is evidence around the world that small and medium scale enterprise provide an effective means of stimulating indigenous entrepreneurship, enhancing greater employment opportunities per unit capital invested and aiding the developing of local technology. small scale enterprise: an enterprises with a labour size of 11-100 workers or a total capital of not more than 50 million including working capital but excluding cost of land while medium scale enterprises is an industry with a labour size of between 101-300 workers or a total cost of over 50 million, but not more than 200 million including working capital but excluding cost of land (berger, 2012). smes and nerfund (2004) define smes as an enterprise with an asset base not exceeding n200,000,000.00 excluding land and working capital with staff strength of not less than 10 and not mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 5 | p a g e more than 300. a cursory glance a the structure of smes in nigeria reveals that 50% are engage in distributive trade, 10% in manufacturing, 30% in agriculture and the rest 10% in services. a special feature of nigeria smes is that distributive trade component is generally considered more commercially viable than the manufacturing component hence they attract more funding from bank and other financial institutions (ibru, 2004). in summary smes can therefore be said to be conducted in the following terms: i. as a proprietorship: single ownership. ii. as a partnership: where (2-20) two to twenty people polled their resources together iii. as a legally, incorporated entity: having the characteristics of a legal person and this could be a private limited sole company. however, in nigeria more than 83% of the smes operate under the first two businesses type, while the third one operate mainly as family business (ibru, 2004). according to babajide (2012) smes and entrepreneurship are now recognized worldwide as key source of economic growth and development. okpara (2010) opined that small and medium scale enterprises play a very important role in developing economies. this view was also supported by ajagba and bolaji (2013) when they upheld that the promotion of micro enterprises in developing countries is justified in their abilities to faster economic growth, alleviate poverty and generate employment. according to the nigeria’s national council on industry; an sme is define in terms of employment i.e. as one with between 10 and 300 employees. the benefits of smes cannot be overemphasized as they include; contributions to the economy in terms of output of goods and services, and creation of jobs at relatively low capital cost.. it is a medium for the reduction of income disparities thus developing a pool of skilled or semi-skilled workers as a basis for the future industrial expansion; improve forward and backward linkages between economically, socially and geographically diverse sectors of the economy provide opportunities for developing and adapting appropriate technological approaches and also offer an excellent breeding ground for entrepreneurial and managerial talent. 2.2 theoretical underpinning this study in anchored on financial growth theory. the theory was developed by berger and udell (1998). according to them, as a business matures over the years, its financial obligations and financing options metamorphose having more information available to the public. according to them, firms that are smaller, younger and possess more ambiguous information must depend on initial internal funding, trade credit, or a type of financing called angel finance. (angel finance is one that occurs when an individual or organization provides a limited amount of financial backing for a startup business with more favourable repayment plan). as the firm grows, it qualifies for acquiring both venture capital and midterm loans as sources of both intermediate equity and intermediate debt respectively. further aging of the firm makes it to become bigger and less mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 6 | p a g e information ally murky. this thus qualifies the firm to have access to both public equity and long term loans as sources of both long term equity and long term debt respectively. the capital structure of smes is thus very different from that of bigger firms because smes rely more on informal financial market which limits the type of financing they are able to secure. the smes initial use of internal financing leads to a peculiar state of affairs whereby capital structure decisions are heavily dependent on the limited financing options. therefore, smes possess varying capital structures and are financed by various sources at different stages of their development (berger and udell, 1998). empirical review eke and idogun (2022) examined the impact of microcredit availability on the growth of small and medium scale enterprise in nigeria. the study adopted survey research design and a sample of 325 questionnaire was distributed. data collected was analyzed using both inferential and descriptive statistics. the findings confirmed a significant contribution of microcredit to smes in the area of asset acquisition, raw material acquisition and provision of working capital. the study recommended that central bank of nigeria should create enabling environment for microfinance banks to perform its primary role of providing microcredit to smes in nigeria. ajagba and bolaji (2013), access the impact of microfinance bank loans on the socioeconomic standard of living of commercial motorcycle riders in ilorin-west local government area of kwara state, nigeria. from the results obtained, the study concludes that there is a significant relationship between the microfinance bank loans and economic growth by improving the standard of living of commercial motorcycle riders in ilorin west local government area of kwara state, nigeria. oluyombo (2010) attempt to investigate the contributions of microfinance banks credit to nigeria’s economic growth and employs credits disbursed by the microfinance institutions as a proxy for their operational activities. the study employs the ordinary least squares (ols) regression technique and finds a weak, though positive relationship between nigeria’s microfinance banking operations and the nation’s economic growth. consequently, it recommends that microfinance institutions should channel very high proportion of their credits to the productive and real sectors of the economy for valuable impact of their operations on nigeria’s economic growth. babajide (2012) studied the effects of micro financing on micro and small enterprises (smes) in south west nigeria using diagnostic test kaplan-meier estimate, hazard model and multiple regression analysis. the study indicates that microfinance enhances survival of small business in south west nigeria; that microfinance does not enhance growth and expansion capacity of mses in nigeria; that microfinance impacts significantly on the level of productivity of mses operators in south west nigeria and that the provision of non-financial service by microfinance institutions enhances the performance of micro and small enterprises (mses) in south west nigeria. okpara (2010) examines the critical factors that induce poverty among the enterprising poor in nigeria and the extent to which micro credits have assisted in alleviating poverty. the study’s selected causative mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 7 | p a g e factors for poverty include low profit, high cost of start-up or expansion funds for business and low rate of business growth. employing two-stage regression technique within a quadratic equation framework, the study finds that in the first or take-off stage of microfinance banking, poverty was observed to have increased, though at a declining rate with increase in micro credits. in the second stage of the study which started from the year 2001, persistent increases in disbursed micro credit facilities are observed to have significantly lowered the poverty index in nigeria. consequently, the study calls for policy measures to establish microfinance institutions in every community in nigeria. microfinance bank investment and economic growth olakojo and olanipekun (2011) empirically examined the impact of microfinance bank investment on the nigerian economy. they employed pooled regression and ordinary least square econometric technique on annual time series data for the period 1992-2008. the empirical findings show that the current level of sectoral output is positively influenced by loans and advances from the banking sector. however, a sectorial analysis using ols reveals that while loans and advances from microfinance banks positively affect output of manufacturing, building and construction, mining and quarrying sector, the same could not be established for the agricultural sector. they concluded that microfinance banking investment is very critical to the well-being of the economy as it does not only provide financial assistant to small and medium scale enterprises but also to the real sector of the economy, thereby fast tracking economic growth in nigeria. taiwo (2015) empirically investigated the role of microfinance bank investment to financial sector development and economic growth in czech republic. he employed panel data approach in addition to granger causality test for 103 countries for the period 19952008 in order to determine the causality between microfinance banks and economic growth. from the review of these prior studies, it is being observed that most of the studies found a positive relationship between microfinance bank investment and economic growth. while some had significant impacts, others had insignificant impact. methodolgy research design this study employed a survey research design. the target population of this study comprise of owners of smes and senior staff of microfinance bank operating in edo state, nigeria. since the population of sme owners and microfinance bank staff cannot easily be determined and researcher’s inability to reach out to the entire population, and in order to gain the advantage of an indepth study and effective coverage, cochran formula was used for determining the sample size in an infinite population was used. thus, the sample size is determined using the cochran formula as follows; n=z2pq e2 n= sample size; z= the value gotten from z-table; q= 1 – p mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 8 | p a g e p= numerical probability of success70% i.e 0.70 e= the margin error limit stated at 5% assigning values to these symbols, the sample size calculated thus: n= 1.962 x 0.7 x (1-0.7 (0.05)2 n= 3.8416 x 0.7 x 0.3 0.0025 n= 0.806736 0.0025 n= 322.6944 ≈ 323 table 3.1: number of questionnaires distributed to local governments in edo state local government area numbers distributed akoko edo 16 egor 22 esan central 15 esan north-east 15 esan south-east 12 esan west 15 etsako central 16 etsako east 12 etsako west 13 igueben 17 ikpoba okha 30 irrua 16 oredo 35 orhionmwon 21 ovia north east 23 ovia south west 12 owan west 13 uhunmwonde 20 total 323 source: researcher’s compilation (2024) questionnaire was designed to collect data from the respodents. the questionnaire was divided into two sections, the first is to elicit the respondent’s demographic data, while the second is to elicit their responses to the research questions. the questionnaire was made up of close ended questions, the respondents are required to rate their responses on a 5-point linkert scale consisting of strongly agree (sa), agree (a), neutral (n), disagree (d), and strongly disagree (sd). 323 questions were mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 9 | p a g e administered out of which 300 returned completed questions. the data were analysed using tables and simple percentages while chi-square was used to test the hypothesis. data analysis the data is analyzed using tables, simple percentages, mean and frequency distribution while the hypothesis was tested using least square regression. effect of microcredits on sme growth table 1: effects of microcredits on sme’s growth s/n items sa a n d sd 1. micro finance banks extend credit facilities to smes to acquire assets 114 (42%) 23 (7%) 24 (8%) 63 (21%) 66 (22%) 2. microcredits extended by microfinance banks to smes have assisted them in financing their business activities 147 (49%) 39 (13%) 30 (10%) 36 (12%) 48 (16%) 3. smes has improved their working capital through credits from microfinance banks 186 (62%) 27 (9%) 9 (3%) 36 (12%) 39 (13%) 4. profitability of sme business has improved through financing from microcredits from microfinance banks. 69 (23%) 126 (47%) 24 (8%) 30 (10%) 36 (12%) source: fieldwork, 2024 data presented in table 1 on responses relating to the effects of microcredit on growth of smes showed that 42% of the respondents strongly agreed that microfinance banks extend microcredits to smes to acquire assets, 49% strongly agreed that majority of smes have financed their business through microfinance bank, 62% strongly agreed that micro finance bank improved working capital of smes, and 47% agreed that profitability of smes micro credits from microfinance banks. this implies that microfinance bank through microcredit has great impact in the growth of smes. table 2: impact of microfinance banks on payment services of smes s/n items sa a n d sd 5. majority of smes effect payment of their clients through microfinance banks. 117 (39%) 102 (34%) 36 (12%) 12 (4%) 30 (10%) 6. microfinance banks now offer applications to their customer for payment services. 63 (21%) 39 (13%) 33 (11%) 138 (46%) 27 (9%) 7. majority of microfinance banks are now connected to nibbs that ease interbank transfers. 138 (46%) 63 (21%) 0 (0%) 66 (22%) 33 (11%) 8. microfinance banks offer their customers cheque services that can pass through cbn clearing system. 51 (17%) 129 (43%) 27 (9%) 42 (14%) 51 (17%) source: fieldwork, 2024 data presented in table 2 showed the responses on the influence of microfinance banks on payment services of smes. it was observed that 73% of the respondents agreed that smes effect payment of their mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 10 | p a g e clients through microfinance banks, 46% strongly disagreed microfinance banks offers them bank application with which to make payment services. 67% agreed that microfinance banks offer online real-time services to smes, and 60% agreed that some smes process their chq deposits through microfinance banks who assists them to clear the cheque. the summary of the responses agreed that microfinance banks has assisted to improve on payment services of smes. table 3: role of microfinance bank on smes saving of surplus fund s/n items sa a n d sd 9. smes has developed interest in savings through maintaining account with microfinance banks. 18 (6%) 39 (13%) 48 (16%) 150 (50%) 48 (16%) 10. savings interest rates offered by microfinance banks are attractive to smes 39 (14%) 57 (19%) 12 (4%) 63 (21%) 126 (42%) 11. through savings with microfinance banks, smes has improved their working capital. 66 (22%) 33 (11%) 63 (21%) 63 (21%) 138 (46%) 12. fixed deposits maintained by smes in microfinance banks can be used as collaterals for borrowing short term fund from the bank. 21 (7%) 126 (42%) 0 (0%) 90 (30%) 63 (45%) source: fieldwork, 2024 data presented in table 3 showed the responses on the impact of microfinance bank on savings mobilization of smes. it was observed that 66% of the respondents disagreed that smes developed interest in having savings with microfinance banks, 46% strongly disagreed that savings through microfinance banks improved the working capital of smes, 46% disagreed that majority of smes does not go to insolvency position due to micro credits they can fall back to, 75% of respondents disagreed that they use fixed deposits with microfinance banks as collateral to obtain loans. the summary of the respondents shows that microfinance banks does not support the savings aspect of smes finance. hypotheses testing in analyzing the three (3) hypotheses derived from the objectives, chi-square statistical tool were used to test the hypotheses. below are the analysis and the results of the hypotheses formulated to guide the study. decision rule: reject the null hypotheses if the x2 calculated value is greater than the x2 critical table value and accept the null hypotheses if the x2 calculated value is lower than the x2 critical table value. hypothesis one ho: there is no significant relationship between microcredits and business growth of smes. to test the hypothesis, the response to questions 1-4 in the questionnaire as found in table 1 was used. the chi-square statistical tool was used as shown below. table 4: chi-square computation table s/n sa a n d sd mea n (x) sd df x 2 c a l x 2 c r it . sig decisi on 1. 114 21 24 63 66 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 11 | p a g e 2. 147 39 30 36 48 2.81 1.42 9 46.91 11.085 0.05 reject h0 3. 186 27 9 36 39 4. 69 126 24 30 36 source: authors computation, 2024 the chi-square analysis (x2c<x2t; α = 0.05) was observed and based on the decision rule, microcredits has significant impact on smes growth. therefore, we accept the alternative hypothesis and reject the null hypothesis since the x2 calculated value (46.91) is greater than the critical table value of 11.085. hypothesis two microfinance bank does not support the payment services of smes. to test the hypothesis, the response to question 5-8 in the questionnaire as found in table 2 was used. the chi-square statistical tool was used as shown below. table 5: chi-square computation table s/n sa a n d sd mean (x) sd df x 2 c a l x 2 c r it . sig decisi on 5. 117 102 36 12 30 3.44 1.71 9 58.13 11.085 0.05 reject h0 6. 63 39 33 138 27 7. 138 63 0 66 33 8. 51 129 27 42 51 source: authors computation, 2024 from the above, the chi-square analysis, (x2c= 58.13 <x2t= 11.085; α = 0.05) was observed and it was found that microfinance bank has significant impact on payment services of smes. therefore, there is relationship microfinance bank and payment services of smes. we accept the alternative hypothesis and reject the null hypothesis since the x2 calculated value (58.13) is greater than the x2 critical value (11.085). hypothesis three microfinance bank does not have significant relationship with savings culture of smes to test the hypothesis, the response to question 9-12 in the questionnaire as found in table 3 was used. the chi-square statistical tool was used as shown below. table 6: chi-square computation table s/n sa a n d sd mean (x) sd df x 2 c a l x 2 c r it . sig decisi on 9 39 48 150 48 18 3.09 1.52 9 9.56 11.085 0.05 accept h0 10 57 12 63 126 39 11 33 63 63 138 66 12 126 0 90 63 21 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 12 | p a g e source: authors computation, 2024 the chi-square analysis, (x2c= 9.56 <x2t; = 11.085; α = 0.05) was observed and based on the result, there is no significant relationship between microfinance banks and savings culture of smes. it could be deduced that microfinance banks does not have significant impact on smes savings culture. therefore, we accept the null hypothesis and reject the alternate hypothesis since the x2 calculated value (9.56) is less than the x2 critical value (11.085). summary and conclusion this study looked how microfinance bank acts as an instrument of growth of smes in nigeria. it explored various ways in which access to credit has assisted small and medium scale enterprises in achieving their growth strategy. the objectives of the study focused on how microcredits has assisted smes in the area of payment services, access to microcredits and acting as a reservoir for surplus funds for smes. at the end of the investigation and based on the test of hypothesis, the following were discovered;  microcredits granted to smes by microfinance banks has significantly impacted on growth of smes.  microfinance banks has positively impacted on payment services of smes  microfinance banks has not significantly improved the savings mobilization for smes. we therefor conclude that microcredits being made available to smes through microfinance banks and other channels has greatly and positively influenced the operations of that sector of the economy. smes in turn has also contributed significantly to the growth of the economy of our country through its contribution to gdp growth. recommendations based on the outcome of the findings, the following recommendations were made; 1. there should be more enlightenment campaign on sme operators to enable them develop savings culture. on their part microfinance banks should make savings attractive by giving an interest rate that will be competitive to commercial banks. 2. government should also create enabling environment for microfinance banks to operate by liberalizing its operation for greater efficiency. 3. access to credit should not be made stringent to smes to enable them access the necessary funds for their operation. in this line, government through cbn should guarantee to some extent credit extended to sme sector. references abe, s.i. (2011). “nigerian farmers and their financial problems.” agricultural credit and financing in nigeria: problems and prospects. cbn seminar. ademola, a.e. & arogundade, k. (2014). the impact of microfinance on economic growth in nigeria. journal of entrepreneurial trends and economic management,5(5), 397-405. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 13 | p a g e akinboyo o.l (2007): microfinance banks: unblocking the potentials of micro-business activities of the nigerian economy. bullion publication of the central bank of nigeria. 13(.1). ajagba, t.s. & bolaji, b.o. (2013). socioeconomic impact of microfinance bank on the standard of living of commercial motor cycle riders in ilorin west lga of kwara state, nigeria. journal of business management, 1(4), 69-82. anyanwu, c.m. (2004). microfinance institutions in nigeria: policy, practice and potential. journal of risk and uncertainty, 19, 7-42. asian development bank (2000). finance for the poor: micro finance development strategy.adb, manila. babjide, a. (2012). impact analysis of microfinance banks in nigeria. international journal of economics and finance, 3(4), 217–223. berger, m. (2012). microfinance and emerging markets. inter-america development bank. chude, n.p. &chude, d.i. (2013). impact of government expenditure on economic growth in nigeria. international journal of business and management review, 1(4), 64-71. central bank of nigeria (cbn) statistical bulletin (2013). central bank of nigeria (2005b). microfinance policy, regulatory and supervisory frameworkfor nigeria.abuja; nigeria:cbn. dauda, r.o.s. (2007). the role of community banking system in nigeria’s development process: an appraisal. journal of banking, 2(1), 82-103. ehigiamusoe g. (2008): the role of microfinance institutions in the economic development of nigeria. bullion publication of the central bank of nigeria 32 (1) eke r.i & idogun j (2022) microcredit availability as a catalyst for small and medium enterprise growth in nigeria. international journal of research and innovation in social science 6(11) 690-697. griffith, r., waithe, k., lorde, t. & craigwell, r. (2019). the contribution of credit union to the national development of barbados. journal of public policy analysis, (3). hulme, d. & mosley, p. (2016). finance against poverty, volume 1.london; new york: routledge. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 14 | p a g e hulme, d. (2011). impact assessment methodologies for microfinance: theory, experience and better practice. world develop. 28(1), 2. ifeoma, n. (2016). “the role of commercial banks in financing agriculture”. an undergraduate dissertation, department of agricultural economics and extension. federal university of technology yola, nigeria. kasim, m.y. & jayasooria, d. (2001). informal economy, micro-finance and non-governmental organizations in malaysia. humanomics, 17(1/2), 134-140. khandker, s.r. (2013). fighting poverty with microcredit: experience in bangladesh. new york: oxford university press. ledgerwood, j. (2000). microfinance handbook: an institutional and financial perspective.usa: ibrd olowe, f.t., moradeyo, o.a. & babalola, o.a. (2013). empirical study of the impact of microfinance banks on small and medium enterprise growth in nigeria. international journal of academic research in economics and management sciences, 2(6), 116-124. ogunleye, a.g. &akanbi, b.e. (2014). are microfinance banks important in deposit mobilization in nigeria? research journal of finance and accounting, 5(9), 53-59. ogunrinola o.i (2007): micro-credit and micro-enterprises development, an analysis of some ruralbased enterprises in nigeria. the nigeria journal of economics and social studies 49 (1), 5698. okpara, g. c. (2010). microfinance banks and poverty alleviation in nigeria. journal of sustainable development in africa, 12(6). olakojo, e. &olanipeun, a. (2011). community/microfinance banking and sectoral growth: an empirical lesson from nigeria. journal of economics theory, 5(2), 50-54. olawuyi, s.o., olapade-ogunwole, f., fabiyi, y.l. &ganiyu, m.o. (2010). “effects of micro-finance bank credit scheme on crop farmers’ revenue in ogbomoso south l.g.a. of oyo state”. in: j.n. nmadu, m.a. ojo, u.s. mohammed, k.m. baba, f.d. ibrahim and e.s. yisa (eds) commercial agriculture, banking reform and economic downturn: setting a new agenda for agricultural development in nigeria. proceedings of 11th annual national conference of national association of agricultural economists (naae), 12 16. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 15 | p a g e oluyombo, o. o. (2010). assessing the impact of savings and credit cooperatives among monthly income earners. journal of research in national development, 8(2b), 407-415. oluyombo, o.o. (2011). the impact of microfinance bank credits on economic development of nigeria (1992 –2006). international journal of development and management review, 6(1). otero, m. & rhyne, e. (2014). the new world of microenterprise finance: building healthyfinancial institutions for the poor. west hartford: conn kumarian press. seibel, h. (2011). islamic microfinance in indonesia: the challenge of institutional diversity, regulation and supervision. the handbook of reparations. oxford and new york: oxford university press. taiwo, e. (2015). assessıng the extension service needs of credit officers of microfinance banks in anambra state: implıcatıons for rural finance intermediation. asian journal of agriculture and rural development, 5(2), 42-52. uche, r.u (2008): the role of banks, insurance and microfinance institutions in national development: a lecture delivered to participants of senior executive course no. 30 of the national institute for policy and strategic studies, kuru, jos. world bank (2005). “nigeria national economic empowerment and development strategy and joint ida-imf staff advisory note”, world bankwashington, dc. world bank. (2006). equity and development: overview of world development report. washington, d.c: world bank. yunus, m. (2010). building social business. new york: new york public affairs. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 16 | p a g e asset management and firm value of listed oil and gas firms in nigeria 1oranefo patricia c. and 2uzochukwu ezekwere 1department of accountancy, nnamdi azikiwe university, awka, anambra state 2department of accounting, kingsley ozumba mbadiwe university, ideato, imo state email: rollandchi@gmail.com; uzochukwu.ezekwere@komu.edu.ng doi: https://doi.org/10.5281/zenodo.14222101 abstract: the study determined the effect of asset management on the firm value of listed oil and gas firms in nigeria, using fixed asset turnover ratio and total asset turnover ratio affect the tobin’s q of listed oil and gas firms in nigeria. ex-post facto design was adopted in the study. the sample for this study was determined through purposive sampling, selecting five out of the population of nine (9) listed oil and gas firms in nigeria. the secondary data for the study were collected from the annual reports of the firms over a ten year period from 2014 to 2023. data were analyzed using descriptive statistics and tested the hypotheses with ordinary least squares (ols) regression. the study found that fixed asset turnover ratio has a positive but non-significant effect on tobin's q of listed oil and gas firms in nigeria, while total asset turnover ratio has a negative but nonsignificant effect on tobin's q of listed oil and gas firms in nigeria. the study recommends that the boards of directors of listed oil and gas firms should prioritize investments in training and development for operational staff to ensure optimal utilization of fixed assets. this training can enhance asset productivity and support sustainable growth in firm value. keywords: asset management, fixed asset turnover ratio, total asset turnover ratio, and tobin’s q introduction asset management is not just about financial stewardship; but it also encompasses the strategic deployment, maintenance, and utilization of both physical and intangible assets to optimize operational performance and achieve long-term business goals (joseph, isah & abe, 2023). as the industry faces increasing pressure from stakeholders, including governments, investors, and environmental groups, the need for robust asset management practices has become more pronounced. firms that can effectively manage their assets are better positioned to navigate the complexities of the industry, mitigate risks, and capitalize on opportunities, thereby enhancing their value and ensuring their competitiveness in the global market (achori, dada & ogundajo, 2023). asset management involves a comprehensive approach to managing an organization’s assets throughout their lifecycle—from acquisition and operation to maintenance and eventual disposal mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 17 | p a g e (achori, dada & ogundajo, 2023). ensuring asset integrity is crucial in the oil and gas industry, where the failure of critical assets can have catastrophic consequences, including environmental disasters, financial losses, and damage to a company’s reputation. value optimization, the ultimate goal of asset management, involves maximizing the return on investment from assets while minimizing costs and risks. this requires a strategic approach to asset management, where decisions are based on a thorough understanding of the asset’s value, its contribution to the organization’s objectives, and the trade-offs between cost, risk, and performance. in the oil and gas industry, effective asset management is critical to achieving long-term business success because asset management plays a pivotal role in influencing the value of firms, particularly in capital-intensive industries like oil and gas. the value of a firm is often measured by its market capitalization, which reflects the collective perception of investors regarding the firm’s future profitability and growth potential (igwe, 2024). effective asset management can enhance firm value by improving operational efficiency, reducing costs, and mitigating risks, all of which contribute to stronger financial performance and higher investor confidence. firms that manage their assets in a manner that maximizes efficiency are able to minimize costs, and optimize production, thereby enhancing overall firm value. asset management practices when strategically aligned with the firm’s long-term goals ensures that assets are well-maintained, reliable, and capable of delivering consistent performance over time (nkwo, 2023). additionally, firms would proactively manage risks associated with asset failures, regulatory compliance, and environmental impacts, thereby protecting their investments and maintaining a strong reputation among stakeholders. however, asset management practices are often suboptimal, characterized by inadequate maintenance, poor planning, and insufficient investment in new technologies (campbell, jardine, mcglynn & barry, 2024). many firms struggle to maintain the integrity and reliability of their critical assets, leading to frequent breakdowns, production disruptions, and increased operational costs. additionally, the risk management strategies employed by these firms are often reactive rather than proactive, with firms responding to asset failures and regulatory issues only after they have occurred. this approach not only increases the likelihood of operational disruptions but also exposes firms to significant financial risks (joseph, isah & abe, 2023). the existing literature reveals a significant gap in understanding the effect of asset management on firm value, specifically within the context of listed oil and gas firms in nigeria. previous studies, such as basri (2023), focused on total asset turnover and asset structure but did not address the industryspecific dynamics of the oil and gas sector. while abebe (2022) and wokeh (2022) explored assetliability management and non-current assets, their research did not examine the impact on tobin’s q, a key measure of firm value. further, banamtuan, zuhroh, and sihwahjoeni (2020) and charlie and akpan (2020) assessed asset management’s effect on performance metrics like roi but overlooked tobin's q in the context of nigerian oil and gas firms. studies by purba and bimantara (2020) and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 18 | p a g e sarafa and joshua (2020) investigated asset management effects on financial performance indicators, yet did not address its specific impact on tobin’s q. kadioglu and ocal (2017) and mwaniki and omagwa (2017) also failed to explore this relationship within the oil and gas sector. addressing this gap could provide crucial hints on how asset management strategies influence firm value in this critical industry. the main objective of this study is to examine the effect of asset management on the firm value of listed oil and gas firms in nigeria. the specific objectives are to:  evaluate the effect of fixed asset turnover ratio on tobin’s q of listed oil and gas firms in nigeria.  determine the effects of total asset turnover ratio on tobin’s q of listed oil and gas firms in nigeria. conceptual review asset management asset management is a systematic approach to overseeing a company's assets with the aim of enhancing their value and optimizing their use while mitigating associated risks (joseph, isah & abe, 2023). this process involves the strategic organization, monitoring, and administration of both physical and financial assets to ensure they contribute effectively to achieving the company's goals and maximizing returns on investment. at its core, asset management seeks to balance the cost of owning and maintaining assets against the benefits they deliver (purba & bimantara, 2020). effective asset management encompasses a range of activities including inventory management, maintenance scheduling, and asset tracking. it requires the careful planning and execution of strategies for acquiring, utilizing, and disposing of assets in a manner that aligns with the organization's strategic objectives (oghenekohwo, anastesia & moses, 2019). this practice involves managing both tangible assets, such as machinery, real estate, and infrastructure, and intangible assets like financial investments and intellectual property (olaoye & ayodele, 2019). a key aspect of asset management is optimizing the return on assets while controlling costs and risks. for instance, investing in high-cost equipment may enhance operational efficiency, but organizations must also weigh the costs of maintenance and potential repairs throughout the equipment's lifecycle (kadioglu & ocal, 2017). effective asset management thus requires a careful evaluation of whether the long-term benefits outweigh the associated expenses and risks. risk management is another crucial element of asset management. this involves identifying and addressing potential risks related to asset ownership, such as equipment failures, accidents, and technological obsolescence. by implementing robust risk management strategies, organizations can reduce the likelihood and impact of such risks, thereby protecting their investments and ensuring continuous operational stability (purba & bimantara, 2020). fixed asset turnover ratio the fixed asset turnover ratio is a key financial metric that assesses how efficiently a company utilizes its fixed assets to generate revenue. fixed assets, which include long-term investments such as mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 19 | p a g e property, plant, and equipment, are not expected to be converted into cash within a year (olaoye & ayodele, 2019). this ratio helps evaluate how effectively these assets are leveraged to produce sales. to calculate the fixed asset turnover ratio, the company’s net sales over a specific period, usually a year, are divided by the average fixed assets held during that same period (sunjoko & arilyn, 2016). the resulting figure indicates the amount of revenue generated for each dollar of fixed assets. a high fixed asset turnover ratio suggests that the company is efficiently using its fixed assets to drive sales, reflecting an effective production process and robust asset management practices (purba & bimantara, 2020). it often implies that the company is making optimal use of its property, plant, and equipment, and has a solid strategy for generating revenue. investors and analysts frequently use the fixed asset turnover ratio to gauge a company’s operational efficiency and financial health (mawih, 2013). by comparing this ratio with those of other firms in the same industry, stakeholders can gain hints into a company's relative performance. additionally, tracking changes in the ratio over time can provide valuable information about the effectiveness of the company's strategies and highlight areas where operational improvements may be needed (sunjoko & arilyn, 2016). overall, the fixed asset turnover ratio is a critical measure for understanding how well a company is using its fixed assets to generate sales and revenue. it helps in assessing whether the company’s investment in property, plant, and equipment is translating into effective sales performance and operational efficiency. total asset turnover ratio the total asset turnover ratio is a financial metric that assesses how effectively a company utilizes its assets to generate revenue. this ratio is calculated by dividing the company’s net sales by its average total assets over a specific period, typically one year (sunjoko & arilyn, 2016). it serves as a measure of the efficiency with which a company converts its assets into sales. this ratio is essential for evaluating a company's operational performance because it compares the total revenue generated to the total assets employed in the business (oghenekohwo, anastesia & moses, 2019). by analyzing this ratio, investors and analysts can gain hints into how well a company is managing its assets to produce revenue. a higher total asset turnover ratio indicates that the company is effectively leveraging its assets to generate substantial revenue, suggesting efficient resource management and potentially higher profitability (kurniawan, 2021). this efficiency is indicative of a well-run company with effective asset utilization strategies. conversely, a lower total asset turnover ratio may signal inefficiencies in asset management. if a company is not generating enough revenue relative to its asset base, it could imply that the company is not utilizing its assets effectively. this could be due to factors such as excess inventory, underperforming assets, or suboptimal resource allocation (olaoye & ayodele, 2019). for investors, a low ratio might be a cause for concern as it may reflect potential operational issues or decreased profitability. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 20 | p a g e firm value market capitalization, one of the most commonly used measures, is calculated by multiplying the company’s current share price by its total number of outstanding shares. this metric provides a snapshot of the company’s market value as perceived by investors, reflecting how much they are willing to pay for a share of the company. market capitalization is a straightforward measure but may not fully capture the company’s financial health or growth prospects. enterprise value offers a more comprehensive assessment by including not just the market capitalization but also net debt, which accounts for the company's outstanding debt and cash reserves. this metric provides a more holistic view of a company's total value, considering its capital structure and financial obligations. enterprise value is often used in valuation multiples, such as the ev/ebitda ratio, to assess a company's value relative to its earnings before interest, taxes, depreciation, and amortization. book value, on the other hand, represents the net asset value of a company, calculated as total assets minus total liabilities. while it provides a hint into the company's equity position, it may not fully reflect the market value, especially for companies with significant intangible assets or those in rapidly changing industries. firm value is not static; it evolves with changes in the company's financial performance, market conditions, and investor perceptions (shuaibu, ali & amin, 2019). key factors influencing firm value include revenue growth, profitability, risk management, and operational efficiency. additionally, external factors such as market trends, economic conditions, and industry dynamics play a role in shaping a company's value. by understanding firm value, stakeholders can make informed decisions about investments, corporate strategy, and financial management. a tobin’s q ratio greater than one indicates that the market value of the assets exceeds their replacement cost, suggesting that the firm’s assets are valued highly by investors and that it may be advantageous to invest in or expand the business. conversely, a tobin’s q ratio less than one implies that the market value of the assets is lower than their replacement cost, which could signal undervaluation or a less attractive investment opportunity. in this case, it might be more prudent to delay or reconsider new investments. tobin’s q is a valuable tool for assessing investment decisions and corporate strategy (el-faitouri, 2014). it helps identify whether existing assets are being used efficiently and whether new investments will add value (singh, tabassum, darwish & batsakis, 2018). companies with a high tobin’s q are often seen as having strong growth prospects and competitive advantages, while those with a low q may face challenges or require strategic adjustments. this ratio also provides hints into how market perceptions and asset valuation impact corporate investment decisions and overall firm value. empirical review rachman, karyatun and digdowiseiso (2023) determined the effect of total asset turnover (tato) on financial performance of listed firms in indonesia. this study was processed using the eviews 10 application. in this study, there were 79 population of property and real estate companies listed on the indonesia stock exchange (idx) for the 2016-2020 period. the sample of this research used mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 21 | p a g e purposive sampling method. the results of the regression analysis show that partially total asset turnover (tato) has a positive and significant impact on the financial performance of property and real estate companies listed on the idx in 2016-2020. wokeh (2022) ascertained the impact of noncurrent assets on financial performance among listed deposit money banks in nigeria. using an expost facto design, the study covered all thirteen listed deposit money banks in nigeria for 2022, employing a census approach. data from the annual reports of these banks from 2017 to 2021 were analyzed using multiple regression and stata12 software. the study showed a negative and insignificant relationship between property, plant, and equipment and return on assets, and a positive but insignificant relationship between these assets and return on equity. banamtuan, zuhroh and sihwahjoeni (2020) determined the effect of asset management on stock prices through return on investments (roi) in indonesia. this research is an explanation using quantitative methods. the population of the study was 64 companies listed on the indonesia stock exchange. the sampling technique used was purposive sampling with the results of 36 companies. the data used coverred 2016-2018 financial statements. the analysis method applied was path analysis. the results of the study proved that management of asset significantly influences roi, management asset significantly influences stock prices. charlie and akpan (2020) examined the influence of tangible and intangible assets ratio on the performance of deposit money banks (dmbs) in nigeria. secondary data, were collected from published financial statements of ten (10) sampled dmbs from 2000 to2017. the expost facto research design was adopted, and pooled multiple regression techniques was employed for the analysis and test of the hypotheses. result revealed that the ratio of tangible to the intangible asset has a significant negative effect on roa of dmbs in nigeria. cheptoo (2018) determined the effect of asset performance management on profitability of deposit taking saccos in nakuru county, kenya. the study was guided by four variables; loan performance management, fixed assets management, financial investments management, and accounts receivables management. the study used explanatory research design, stratified proportional sampling and random sampling technique. primary data was collected using structured questionnaires. data was analyzed using descriptive statistics including, frequencies, mean and standard deviations and inferential statistics methods including correlation coefficient and with the assistance of spss as the tool of analysis. the research findings indicate there exist a significant positive relationship between loan performance, fixed assets management, financial investments management, accounts receivables management and profitability of deposits taking saccos in nakuru town. kadioglu and ocal (2017) investigated whether asset quality affects the bank’s profitability in turkey. the study applied a panel regression method to the quarterly data set including 1809 observation belongs to 55 banks in turkey during the period from 1st quarter of 2005 to 3rd quarter of 2016. it was found that lower asset quality leads to the lower return on equity and return on asset, and higher asset quality leads to the higher return on equity and return on asset. oliver, ugbor and chukwuani (2017) ascertained the relationship between assets growth rate financial performance of manufacturing firms in nigeria using six firms from the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 22 | p a g e nigerian stock exchange and analyzed the firms for a period of ten years using pearson product moment correlation matrix and multiple regressions. the findings showed that non-current asset growth rate and net asset growth rate of firms are positively and strongly related. it was recommended that manufacturing firms in nigeria should increase their non-current assets and net assets value by increasing their total assets and reducing the components of their current liabilities. martina (2015) examined the association between tangible assets and the capital structure of croatian small and medium-sized enterprises. the study was conducted on a sample of 500 croatian smes for the period between 2005 and 2010. the data used for the empirical analysis were taken from companies’ annual reports. the results of the regression analysis found that tangible assets are differently correlated with short-term and long-term leverage. the relationship between tangible assets and short-term leverage was negative and statistically significant in all observed years. the relationship between tangible assets and long-term leverage was positive in all observed years and statistically significant. the results showed that small and medium-sized companies use their collateral to attract long-term debt, which means that small and medium-sized companies use lower costs and the interest rate of long-term debt in relation to short-term debt. mawih (2013) investigated the effects of assets structure (fixed assets and current assets) on the financial performance of some manufacturing companies listed on muscat securities market (msm), for the period 2008-2012. the assets structure was measured by fixed assets turnover and current assets turnover while the financial performance was measured by roa and roe. the overall result of the study was that the structure of assets does not have a strong impact on profitability in terms of roe. another result of the study indicated that only the fixed assets had impact on roe unlike roa. further, the result suggested that the effect of asset structure had an impact on roe only in petro-chemical sector. it also concluded that there was no impact for current assets on roe and roa. methodology the ex-post facto design was adopted in examining the effect of asset management on the firm value of listed oil and gas firms in nigeria because it allows for the analysis of existing data to identify relationships between variables after events have occurred. the study examines all publicly listed oil and gas firms on the nigerian exchange group (ngx). as of december 31, 2023, there are nine oil and gas companies on the nse. the sample for this study was determined through purposive sampling, selecting five out of the nine available firms based on data accessibility. the annual reports and financial statements of these five oil and gas companies, covering the period from 2014 to 2023, were used for variable computation and analysis. the firms chosen for the study are; total energies plc, conoil plc, eterna plc, japaul oil & ventures plc, mrs oil nigeria plc. method of data collection the data collection method for this study involved the use of annual reports from the selected oil and gas firms spanning the financial years from 2014 to 2023. this approach ensured that the data were mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 23 | p a g e comprehensive and relevant for the analysis of asset management's impact on firm value. by relying solely on these reports, the study was able to obtain detailed and consistent financial information necessary for examining the relationships between asset management practices and firm value metrics. model specification the model tested in the study is shown below. toqit = β0 + β1fitrit + β2totrit + ε………………………………………..i where: toq = tobin’s q fitr = fixed asset turnover ratio totr = total asset turnover ratio ε = error term βo = regression intercept β1-2 = parameters method of data analysis data were gathered and input into e-view 10.0 software for the computation of both independent and dependent variables. the analysis was conducted using descriptive statistics and ordinary least squares (ols) regression. the estimates obtained from the ols regression served as the foundation and tool for hypothesis testing. decision rule the decision rule in this study provides the criteria for accepting or rejecting the null hypothesis. the criterion is based on a 5% level of significance, which means that if the p-value in the result is greater than 0.05, the null hypothesis will be accepted. in opposition, if the p-value is less than 0.05, the null hypothesis will be rejected and the alternative hypothesis will be accepted. data analysis and results table 1 descriptive analysis toq fitr totr mean 1.070704 17.83480 1.893302 median 0.898076 9.053035 1.752859 maximum 2.984020 128.9230 8.098671 minimum 0.628096 0.011631 0.003187 std. dev. 0.440060 24.83891 1.457359 skewness 2.227935 2.612736 1.591877 kurtosis 9.233313 10.66700 8.048009 jarque-bera 122.3103 179.3510 74.20560 probability 0.000000 0.000000 0.000000 sum 53.53522 891.7401 94.66508 sum sq. dev. 9.488996 30231.59 104.0709 observations 50 50 50 source: e-views 10.0 analytical result (2024) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 24 | p a g e the analysis of tobin's q (toq) indicates a mean value of 1.0707, suggesting that, on average, the market values of listed oil and gas firms in nigeria exceed their asset values, reflecting positive investor sentiment. the maximum value of 2.9840 highlights instances where the market capitalization significantly outstrips the firm's asset base, potentially indicating high growth expectations or market confidence. conversely, the minimum value of 0.6281 indicates some firms are valued below their asset values, possibly due to negative perceptions or performance issues. the standard deviation of 0.4401 reveals moderate variability around the mean, suggesting differences in firm valuations across the industry. the skewness of 2.2279 points to a rightward skew in the distribution, indicating that a few firms have very high market valuations. lastly, the kurtosis of 9.2333 indicates a leptokurtic distribution, suggesting a higher likelihood of extreme values in the dataset, and the probability of the jarque-bera statistic at 0.0000 confirms that the toq data is significantly non-normally distributed. for the fixed asset turnover ratio (fitr), the mean of 17.8348 indicates a strong capacity of the firms to generate revenue from their fixed assets, averaging about 17.83 units of revenue per unit of fixed assets. the maximum value of 128.9230 suggests that certain firms exhibit exceptional efficiency in utilizing their fixed assets to generate revenue, while the minimum of 0.0116 points to severe inefficiencies in some firms. the standard deviation of 24.8389 reflects considerable variability in how effectively different firms manage their fixed assets, indicating diverse operational practices across the sector. the skewness of 2.6127 indicates a significant rightward skew, suggesting that a few firms significantly outperform their peers in terms of fixed asset turnover. the kurtosis of 10.6670 indicates a distribution with heavier tails, suggesting a greater likelihood of extreme values than in a normal distribution. the jarque-bera test shows a probability of 0.0000, confirming that the fitr data is significantly non-normally distributed. lastly, the total asset turnover ratio (totr) presents a mean of 1.8933, indicating that, on average, the firms generate about 1.89 units of revenue for every unit of total assets, reflecting a relatively efficient use of total assets. the maximum value of 8.0987 highlights instances of particularly effective asset utilization; while the minimum value of 0.0032 shows that some firms struggle significantly to generate revenue from their assets. the standard deviation of 1.4574 indicates moderate variability in asset turnover performance across the firms. the skewness of 1.5919 suggests a rightward skew in the distribution, indicating that a few firms achieve high turnover ratios. the kurtosis of 8.0480 indicates a distribution that is peaked, suggesting a concentration of values around the mean with potential outliers. the jarque-bera probability of 0.0000 confirms that the totr data is significantly non-normally distributed, indicating that traditional parametric analyses may need to be approached with caution. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 25 | p a g e test of hypotheses table 2: regression result from ols model dependent variable: toq method: least squares date: 09/23/24 time: 04:29 sample: 1 50 included observations: 50 variable coefficient std. error t-statistic prob. fitr 0.000762 0.003222 0.236589 0.8140 totr -0.222383 0.229586 -0.968628 0.3378 c 1.237748 0.105330 11.75110 0.0000 r-squared 0.081266 mean dependent var 1.070704 adjusted r-squared 0.021348 s.d. dependent var 0.440060 s.e. of regression 0.435338 akaike info criterion 1.251229 sum squared resid 8.717867 schwarz criterion 1.404190 log likelihood -27.28072 hannan-quinn criter. 1.309477 f-statistic 1.356293 durbin-watson stat 1.414739 prob(f-statistic) 0.267952 source: eviews 10.0 analytical result (2024) the regression analysis presented in table 4.3 examines the effect of asset management on the firm value of listed oil and gas firms in nigeria, as measured by tobin’s q (toq). the adjusted r-squared value of 0.0213 suggests that only about 2.13% of the variability in toq is explained by the independent variables in the model, indicating that the model may not adequately capture the factors influencing firm value. additionally, the f-statistic probability of 0.2679 implies that the overall model is not statistically significant, suggesting that the included predictors do not collectively have a meaningful effect on the firm value measured by tobin’s q. test of hypothesis one h01: fixed asset turnover ratio does not significantly affect the tobin’s q of listed oil and gas firms in nigeria. the fixed asset turnover ratio (fitr) presents a coefficient of 0.000762 and a p-value of 0.8140, revealing a positive and again statistically insignificant effect on tobin's q. this result implies that an mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 26 | p a g e increase in the fixed asset turnover ratio contributes a marginal increase of 0.000762 to tobin’s q, but with a p-value far exceeding 0.05, the effect is not statistically significant. consequently, we also accept the null hypothesis for fitr, indicating that the efficiency in utilizing fixed assets does not significantly influence the firm value in the oil and gas sector. thus, fixed asset turnover ratio has a positive but non-significant effect on tobin's q of listed oil and gas firms in nigeria (beta: 0.000762, p = 0.8140). test of hypothesis two h02: total asset turnover ratio does not significantly affect the tobin’s q of listed oil and gas firms in nigeria. lastly, the total asset turnover ratio (totr) has a coefficient of -0.222383 with a p-value of 0.3378, suggesting a negative relationship with tobin’s q, though this too is statistically insignificant. this coefficient indicates that a one-unit increase in total asset turnover could lead to a decrease in tobin's q by approximately 0.2224, yet with a p-value greater than 0.05, we cannot reject the null hypothesis. thus, this result implies that the overall effectiveness in utilizing total assets does not significantly affect the firm value, further reinforcing the notion that asset management practices in this context may not be aligned with enhancing market valuation. thus, total asset turnover ratio has a negative but nonsignificant effect on tobin's q of listed oil and gas firms in nigeria (beta: -0.222383, p = 0.3378). conclusion and recommendations conclusion firms that manage their assets in a manner that maximizes efficiency are able to minimize costs, and optimize production, thereby enhancing overall firm value. asset management practices when strategically aligned with the firm’s long-term goals ensures that assets are well-maintained, reliable, and capable of delivering consistent performance over time. additionally, firms would proactively manage risks associated with asset failures, regulatory compliance, and environmental impacts, thereby protecting their investments and maintaining a strong reputation among stakeholders. the findings of the study suggests that an increase in the current asset turnover ratio is associated with a higher tobin’s q, indicating that firms are able to generate more revenue from their current assets. this could be reflective of efficient management practices and operational agility in utilizing shortterm assets to drive sales. also, firms generating revenue effectively from their fixed assets can contribute to their overall market value. in the capital-intensive oil and gas industry, where significant investments in infrastructure and equipment are necessary, effective utilization of fixed assets can signal operational efficiency. finally, while some firms achieve high total asset turnover, they might do so at the expense of profit margins, leading to lower market valuations. in the oil and gas sector, a high turnover could be misleading if it does not translate into profitability or if it is indicative of aggressive revenue generation tactics that compromise asset quality. such dynamics might cause investors to reassess the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 27 | p a g e sustainability of growth generated from asset turnover alone, focusing instead on overall financial health and long-term viability. the negative coefficient prompts consideration of broader strategic factors and operational effectiveness beyond asset management practices. in conclusion, effective asset utilization must be complemented by robust profitability and strategic positioning to drive investor confidence and enhance market valuation. recommendations  the boards of directors of listed oil and gas firms should prioritize investments in training and development for operational staff to ensure optimal utilization of fixed assets. this training can enhance asset productivity and support sustainable growth in firm value.  investors and financial analysts should consider a more comprehensive evaluation framework that includes not only total asset turnover but also profitability margins and long-term strategic positioning. this holistic approach can lead to more accurate assessments of firm value in the oil and gas sector. references abebe, m. g. (2022). the effect of asset and liability management on the financial performance of microfinance institutions: evidence from sub-saharan african region. future business journal, 8(1), 1-12. achori, e., dada, s., & ogundajo, g. (2023). asset liability management and performance of deposit money banks in nigeria and ghana. caleb university journal of development studies, 6(1), 62-75. banamtuan, o., zuhroh, d., & sihwahjoeni, s. (2020). asset management and capital ownership on firm value: through profitability. afre accounting and financial review, 3(1), 83-92. basri, j. (2023). the influence of profitability, asset structure and company size on the performance of manufacturing company shares that go public on the indonesia stock exchange. southeast asia journal of graduate of islamic business and economics, 1(3), 140-151. campbell, j. d., jardine, a. k., mcglynn, j., & barry, d. m. (eds.). (2024). asset management excellence: optimizing equipment life-cycle decisions. crc press. charlie, s. s., & akpan, s. s. (2020). tangible and intangible asset ratio and performance of deposit money banks in nigeria. management science review,11(1), 1-17. cheptoo, l. (2018). effect of asset performance management on profitability of deposit taking saccos in nakuru county (doctoral dissertation, jkuat). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 28 | p a g e el-faitouri, r. (2014). board of directors and tobin’s q: evidence from uk firms. journal of finance and accounting, 2(4), 82-99. igwe, a. o. (2024). effect of debt financing on firm value of listed ict firms in nigeria exchange group (ngx). international journal of management technology, 11(2), 52-68. joseph, s. m., isah, i., & abe, o. o. (2023). assets management and organizational performance among listed manufacturing companies in nigeria. oguya international journal of contemporary issues, 3(1), 16-27. kadioglu, e., & ocal, n. (2017). effect of the asset quality on the bank profitability. international journal of economics and finance, 9(7), 60-68. kurniawan, a. (2021). analysis of the effect of return on asset, debt to equity ratio, and total asset turnover on share return. journal of industrial engineering & management research, 2(1), 64-72. manasseh, c. o., nwakoby, i. c., okanya, o. c., ifediora, c. u., & nzidee, w. a. 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(2019). effect of asset management efficiency on performance of building and construction companies in nigeria. archives of business research (abr), 7(12). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 29 | p a g e olaoye, c. o., & ayodele, j. e. (2019). assets management and performance of selected quoted firms in nigeria. american international journal of business management, 2(11), 65-76. oliver, i. i., ugbor, r. o. & chukwuani v. n. (2017). evaluation of the relationship between assets growth rate and financial performance of manufacturing firms in nigeria. international journal of managerial studies and research, 5(10), 63 – 73. purba, j. h. v., & bimantara, d. (2020, may). the influence of asset management on financial performance, with panel data analysis. in 2nd international seminar on business, economics, social science and technology (isbest 2019) (pp. 150-155). atlantis press. rachman, s., karyatun, s., & digdowiseiso, k. (2023). the effect of current ratio, debt to equity ratio, debt to asset ratio, and total asset turnover on the financial performance of property and real estate companies listed in the idx for the 20162020 period. jurnal syntax admiration, 4(2), 361-377. sarafa, a. a & joshua, a. t. (2020) asset efficiency and financial performance of manufacturing firms quoted on nigerian stock exchange. caleb international journal of development studies, 3(1), 117 – 138. shuaibu, k., ali, i., & amin, i. m. (2019). company attributes and firm value of listed consumer goods companies in nigeria. journal of research in humanities and social science, 7(5), 40-49. singh, s., tabassum, n., darwish, t. k., & batsakis, g. (2018). corporate governance and tobin's q as a measure of organizational performance. british journal of management, 29(1), 171-190. sunjoko, m. i., & arilyn, e. j. (2016). effects of inventory turnover, total asset turnover, fixed asset turnover, current ratio and average collection period on profitability. jurnal bisnis dan akuntansi, 18(1), 79-83. wokeh, p. i. (2022). non-current asset and financial performance of listed deposit money banks in nigeria. american journal of economics and business management, 5(12), 172-178xdrhg mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 93 | p a g e marketing analytics and financial forecasting: linking customer data with revenue projections in nigerian banks 1aniefiok okon akpan and 2ekwere raymond enang and 3michael david essien 1department of marketing, faculty of management sciences, university of uyo, uyo, akwa ibom state, nigeria 2department of accounting, faculty of management sciences, university of uyo, uyo, akwa ibom state, nigeria 3department of accounting, faculty of management sciences, akwa ibom state university, obio akpa campus, akwa ibom state, nigeria doi: https://doi.org/10.5281/zenodo.13833179 abstract: this study investigated the impact of marketing analytics on financial forecasting in nigerian banks, focusing on the relationships between customer lifetime value (clv) and customer segmentation. utilizing a quantitative research approach, data were collected from banking professionals through structured surveys. the analysis revealed significant findings: a strong positive correlation existed between clv and the accuracy of revenue projections, indicating that banks with a deeper understanding of their customers could enhance financial forecasting. furthermore, effective customer segmentation based on marketing analytics significantly improved forecasting accuracy. these findings underscored the critical role of data-driven marketing strategies in optimizing financial decision-making and fostering sustainable growth within the nigerian banking sector. the study concluded with recommendations for banks to invest in advanced marketing analytics tools and refine customer segmentation strategies to improve overall performance. keywords: marketing analytics, financial forecasting, customer data, revenue projection, nigerian banks, customer lifetime value (clv), segmentation. introduction in today’s highly competitive banking sector, customer data has emerged as a critical asset for driving revenue growth and ensuring business sustainability. the advent of digital banking and technological advancements has made it possible for banks to collect, analyze, and interpret vast amounts of customer data to inform decision-making. marketing analytics, in particular, has gained prominence as a powerful tool that banks can use to enhance customer engagement, optimize marketing campaigns, and predict future revenue streams. by leveraging data-driven insights, marketing analytics allows mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.5281/zenodo.13832449 american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 94 | p a g e organizations to better understand their customers and make informed decisions that directly impact profitability (gupta & zeithaml, 2006). the nigerian banking sector has seen substantial growth over the past two decades, driven by regulatory reforms and technological innovations. however, banks in nigeria face increasing pressure to remain profitable in a market characterized by stiff competition, economic volatility, and changing customer preferences (adeleye & adebayo, 2020). traditionally, financial forecasting in nigerian banks has been based primarily on historical financial data and macroeconomic factors, such as inflation rates, interest rates, and gdp growth (ogunleye, 2018). while these factors are important, they fail to capture the nuances of customer behaviour and the impact of marketing efforts on revenue generation. the shift towards a customer-centric business model in the global banking industry has underscored the importance of integrating marketing analytics into financial forecasting. customer data, which includes information on customer demographics, behaviour, preferences, and transaction history, offers valuable insights into future revenue potential (rust, lemon, & zeithaml, 2004). one key metric that has proven particularly useful in revenue projection is customer lifetime value (clv), which measures the total worth of a customer to a business over the entire period of their relationship (venkatesan & kumar, 2004). by understanding the clv, banks can identify high-value customers and focus on retaining them, thereby increasing long-term profitability. despite the growing body of research demonstrating the benefits of marketing analytics in improving business performance, nigerian banks have been slow to fully embrace these techniques (adeleye & adebayo, 2020). many banks continue to rely heavily on traditional financial metrics to make decisions, with little attention paid to the potential value of customer data. however, the increased adoption of digital banking platforms in nigeria has created a wealth of customer data that, if properly harnessed, can significantly enhance the accuracy of revenue projections (eke, 2019). therefore, integrating marketing analytics into financial forecasting models presents a unique opportunity for nigerian banks to improve their decision-making processes and achieve sustainable growth. this study seeks to examine how marketing analytics, particularly the use of customer data, can be leveraged to improve financial forecasting in nigerian banks. by exploring the relationship between marketing metrics and financial outcomes, this research aims to provide insights into how nigerian banks can optimize their use of customer data to enhance revenue projections and overall financial performance. objectives of the study the primary objective of this study is to examine the role of marketing analytics in improving financial forecasting through the utilization of customer data in nigerian banks. specifically, the study seeks to: 1. evaluate the relationship between customer lifetime value (clv) and the accuracy of revenue projections in nigerian banks. 2. assess the relationship between customer segmentation and the effectiveness of financial forecasting in nigerian banks. hypotheses of the study h₀₁: there is no significant relationship between customer lifetime value (clv) and the accuracy of revenue projections in nigerian banks. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 95 | p a g e h₀₂: customer segmentation based on marketing analytics does not significantly improve the accuracy of financial forecasts in nigerian banks. literature review conceptual review marketing analytics marketing analytics refers to the use of data-driven techniques and tools to measure, manage, and analyze marketing performance to maximize its effectiveness and optimize return on investment (roi). the process involves tracking key metrics such as customer engagement, campaign performance, and customer behaviour to inform marketing strategies (gupta & zeithaml, 2006). in the banking sector, marketing analytics provides actionable insights that enable banks to better understand their customers and tailor services to meet their specific needs. it allows banks to analyze customer behaviour patterns, assess the success of marketing initiatives, and make data-informed decisions that enhance revenue generation (adeleye & adebayo, 2020). in the context of nigerian banks, the potential for marketing analytics lies in its ability to leverage the vast amount of customer data generated through digital banking platforms. these insights can be used to predict future customer behaviors, segment customer groups, and identify the most profitable customers for targeted marketing strategies (eke, 2019). customer lifetime value (clv) customer lifetime value (clv) is a key metric in marketing analytics that estimates the total revenue a business can expect from a single customer over the course of their relationship (venkatesan & kumar, 2004). clv helps banks determine which customers are most valuable and how much should be invested in acquiring and retaining them. by focusing on clv, banks can allocate resources efficiently to high-value customers and optimize marketing efforts to maximize revenue. in financial forecasting, clv is used to predict future revenue streams based on the predicted longevity and profitability of customer relationships (gupta & zeithaml, 2006). nigerian banks, which operate in a highly competitive environment, can benefit from using clv to prioritize customer retention strategies. since retaining existing customers is often more cost-effective than acquiring new ones, focusing on maximizing the value of existing customers can lead to more stable and predictable revenue streams (adeleye & adebayo, 2020). customer segmentation customer segmentation is another critical component of marketing analytics that involves dividing a bank’s customer base into distinct groups based on shared characteristics such as demographics, behaviours, and preferences (rust, lemon, & zeithaml, 2004). this process allows banks to design personalized marketing campaigns that address the specific needs of each customer segment. effective mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 96 | p a g e segmentation not only improves customer satisfaction but also increases the chances of campaign success and, consequently, revenue generation (venkatesan & kumar, 2004). in nigerian banks, where customer preferences and behaviours vary significantly across regions and income levels, segmentation can help institutions better target their marketing efforts. by identifying high-potential segments and tailoring products and services to meet their needs, banks can improve the accuracy of their financial forecasts and increase profitability (eke, 2019). financial forecasting in nigerian banks financial forecasting involves predicting future financial performance based on historical data and market trends. traditionally, nigerian banks have relied on macroeconomic indicators such as inflation rates, gdp growth, and interest rates to make revenue projections (ogunleye, 2018). however, these models often fail to capture the full impact of customer behavior on revenue. by integrating marketing analytics into financial forecasting, banks can leverage customer data to make more accurate predictions and improve long-term planning (adeleye & adebayo, 2020). integrating marketing analytics with traditional financial forecasting methods offers nigerian banks a more comprehensive view of their future financial performance. with the rise of digital banking, banks now have access to large volumes of customer data that can be used to refine their forecasts and develop strategies that better align with customer needs (eke, 2019). challenges of integrating marketing analytics in nigerian banks despite the clear benefits, integrating marketing analytics into financial forecasting presents several challenges for nigerian banks. one major challenge is the siloed nature of marketing and finance departments, which often operate independently with limited collaboration (ogunleye, 2018). additionally, many banks lack the technological infrastructure and skilled personnel necessary to effectively collect and analyze large volumes of customer data (adeleye & adebayo, 2020). overcoming these challenges requires banks to invest in marketing analytics tools and foster collaboration between departments to ensure that customer insights are fully incorporated into financial models. theoretical framework the theoretical framework for this study is based on two key theories: relationship marketing theory and resource-based view (rbv) theory. these theories provide the foundation for understanding how marketing analytics, particularly customer data, can enhance financial forecasting in nigerian banks. relationship marketing theory relationship marketing theory emphasizes the long-term value of building and maintaining strong relationships with customers. introduced by berry (1983), this theory argues that the success of an organization depends on its ability to create lasting, mutually beneficial relationships with its customers. instead of focusing on individual transactions, relationship marketing promotes ongoing customer engagement and loyalty, which ultimately drives profitability (grönroos, 1994). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 97 | p a g e in the context of nigerian banks, relationship marketing theory highlights the importance of using marketing analytics, such as customer lifetime value (clv) and customer segmentation, to foster stronger relationships with high-value customers. by understanding customer behaviors and preferences, banks can deliver personalized services that meet customer needs, leading to increased retention and profitability (gupta & zeithaml, 2006). this approach aligns with the goal of improving financial forecasting, as banks that invest in building long-term customer relationships can better predict future revenue streams and allocate resources more effectively. the use of customer data to inform marketing strategies is a direct application of relationship marketing theory, as it allows banks to identify and prioritize customers who contribute the most to long-term revenue. by integrating marketing analytics with financial forecasting models, nigerian banks can enhance their ability to anticipate future financial outcomes based on customer behavior (rust, lemon, & zeithaml, 2004). resource-based view (rbv) theory the resource-based view (rbv) theory, developed by barney (1991), posits that an organization’s sustainable competitive advantage is derived from its ability to acquire and manage valuable, rare, inimitable, and non-substitutable resources. according to rbv, firms that possess unique resources or capabilities are better positioned to outperform their competitors. in the banking sector, customer data is considered a strategic resource that, when properly harnessed, can drive competitive advantage (wernerfelt, 1984). marketing analytics, particularly the use of customer data, is an essential resource for nigerian banks looking to improve their financial forecasting and overall performance. the rbv theory suggests that banks that invest in advanced analytics tools, skilled personnel, and data-driven decision-making processes will be able to better forecast future revenues and achieve long-term financial success (barney, 1991). in this context, customer data is not just a source of information but a strategic asset that can influence financial outcomes. moreover, rbv supports the idea that nigerian banks that effectively integrate marketing analytics into their operations can differentiate themselves from competitors. by leveraging customer insights to optimize marketing strategies and predict future revenues, these banks can achieve a sustainable competitive advantage in a crowded marketplace (adeleye & adebayo, 2020). integration of theories the integration of relationship marketing theory and the resource-based view provides a robust framework for understanding how marketing analytics can enhance financial forecasting in nigerian banks. relationship marketing theory emphasizes the importance of customer relationships as a driver of long-term profitability, while rbv highlights the strategic value of customer data as a unique resource for gaining competitive advantage. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 98 | p a g e by applying these theories, this study posits that nigerian banks that leverage marketing analytics, particularly customer lifetime value and segmentation, can improve their financial forecasting accuracy. this integration is essential for banks to navigate the competitive and dynamic nature of the nigerian banking sector, where customer engagement and data-driven decision-making are key to sustained financial performance. review of empirical studies kumar & reinartz (2016) examined the impact of customer analytics on firm performance in the retail sector in germany. using a dataset from over 200 retail companies and structural equation modeling, they found that effective customer analytics significantly improved revenue growth and customer retention. the study emphasized the role of data-driven decision-making in enhancing marketing strategies and financial performance. chong et al. (2017) explored the relationship between big data analytics and organizational performance in australian banks. through a survey of 100 bank executives and multiple regression analysis, they found that big data analytics positively influenced financial forecasting accuracy and operational efficiency. the authors highlighted the strategic importance of data analytics in enhancing competitiveness in the banking sector. nguyen et al. (2020) investigated the effect of customer data analytics on financial performance in the telecommunications industry in vietnam. by analyzing data from 150 telecom companies and using hierarchical regression analysis, they found a significant positive relationship between customer data analytics and financial performance, particularly in revenue growth and customer satisfaction. the study concluded that leveraging customer insights is crucial for improving financial outcomes. kumar et al. (2018) analyzed the impact of marketing analytics on financial performance in the u.s. banking industry. using a sample of 200 banks and structural equation modeling, they found that banks leveraging marketing analytics reported higher profitability and more accurate financial forecasts. the study highlighted the necessity for banks to invest in marketing analytics tools to gain a competitive advantage. cohen & kietzmann (2016) explored the impact of customer relationship management (crm) analytics on financial forecasting in the healthcare sector in the united states. through case studies of four healthcare organizations, they found that crm analytics improved forecasting accuracy and patient engagement, leading to increased financial performance. the study emphasized the need for healthcare organizations to integrate crm analytics into their financial planning processes. ogunleye & adebayo (2020) examined the impact of marketing analytics on financial performance in nigerian banks. using data from 15 commercial banks and employing regression analysis, they found that banks that used advanced analytics tools experienced a 12% improvement in revenue projections. the study also revealed that banks that integrated customer data into their financial models were better mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 99 | p a g e able to forecast future profitability. the authors highlighted the importance of marketing analytics in enhancing decision-making processes in the nigerian banking sector. eke (2019) explored the role of digital banking and customer data in shaping financial strategies in nigerian banks. by analyzing survey responses from 150 bank managers and performing structural equation modeling, eke found that banks that harnessed customer data for marketing purposes had higher forecast accuracy in their financial models. the study concluded that digital banking provides an opportunity for banks to leverage customer insights to enhance revenue generation and improve long-term financial planning. johnson & ekwueme (2017) investigated the relationship between customer segmentation and revenue performance in nigerian retail banks. using cluster analysis on a dataset of 3,000 bank customers, the study revealed that customer segmentation based on demographic and transactional data significantly enhanced the accuracy of revenue forecasts. the findings suggest that banks focusing on high-value customer segments achieve more stable revenue projections and better financial outcomes. adeleke & odum (2021) assessed the impact of customer lifetime value (clv) on revenue forecasting in nigerian banks. using a longitudinal data analysis of customer transaction histories from five major banks, they found that integrating clv into financial forecasting models improved revenue prediction accuracy by 15%. the study emphasized that banks focusing on retaining high-value customers through tailored marketing strategies can better predict long-term revenue streams. olufemi & bamidele (2018) examined the influence of marketing campaign effectiveness on future revenue generation in nigerian banks. using a sample of 10 banks and analyzing campaign performance data over two years, the study found a significant positive correlation between marketing campaign success rates and future revenue projections. banks that utilized customer feedback and behavior data in campaign design saw a 20% improvement in revenue forecasts compared to those that did not. ayodeji & hassan (2020) studied how customer loyalty programs influence financial forecasting in the nigerian banking sector. using a survey of 500 customers and time-series analysis, the researchers found that loyalty programs led to a more accurate prediction of future revenue, particularly among high-frequency customers. the study concluded that loyalty programs, combined with customer analytics, can play a crucial role in refining revenue projections and improving customer retention. nwachukwu & nwosu (2019) explored the challenges nigerian banks face in adopting marketing analytics for financial forecasting. using qualitative interviews with 20 marketing and finance managers from various banks, the study identified key challenges such as lack of skilled personnel, technological constraints, and departmental silos. the authors concluded that overcoming these barriers would allow for better integration of customer data into financial models, resulting in more accurate revenue forecasts. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 100 | p a g e ibrahim & lawal (2021) analyzed the relationship between customer satisfaction metrics and financial performance in nigerian banks. using survey data from 400 bank customers and regression analysis, they found that higher customer satisfaction scores were significantly associated with improved financial forecasts. the study highlighted the importance of tracking customer satisfaction as a predictor of future revenue and recommended that banks invest in customer feedback mechanisms to enhance forecasting accuracy. okoye & adeola (2019) investigated the impact of real-time customer data on the accuracy of financial forecasts in nigerian banks. by analyzing transaction data from mobile and internet banking platforms, they found that banks that utilized real-time data were able to improve their financial forecasting models by 18%. the study emphasized that real-time data, particularly transaction histories and behavioral patterns, is critical in making timely and accurate revenue projections. obi & chika (2020) explored the role of customer relationship management (crm) systems in improving financial forecasting in nigerian banks. using case study analysis of five banks that adopted crm systems, the researchers found that these systems helped banks integrate customer data into their financial models, leading to more precise revenue predictions. the study recommended that nigerian banks invest in crm technologies to facilitate better alignment between customer insights and financial planning. methodology research design this study employed a cross-sectional quantitative research design. this design allowed for the examination of the relationships between marketing analytics practices and the accuracy of financial forecasting in nigerian banks at a specific point in time. population and sampling population: the target population for this study consisted of employees in the marketing and finance departments of commercial banks operating in nigeria, including bank managers, marketing analysts, financial analysts, and data scientists. sampling method: a stratified random sampling technique was used to ensure representation from various bank sizes (large, medium, and small banks) and geographic regions within nigeria. based on cochran's formula for sample size calculation, the estimated target was 300 respondents to ensure sufficient statistical power for the analyses. data collection techniques a structured questionnaire was developed to collect data. the questionnaire consisted of three sections: o section a: demographic information (age, gender, education level, years of experience). o section b: marketing analytics practices. responses were measured using a likert scale (1 = strongly disagree to 5 = strongly agree). o section c: financial forecasting accuracy, which included questions regarding the accuracy of revenue projections and the frequency of forecast adjustments. this section also used a likert scale for responses. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 101 | p a g e the questionnaire was distributed electronically to participants via email and online survey platforms to facilitate data collection. data analysis procedures data collected from the questionnaires were analyzed using statistical software (spss). descriptive statistics (mean, standard deviation, frequency distributions) were calculated to summarize demographic information and responses to survey items. inferential statistical techniques, including correlation analysis and multiple regression analysis, were employed to test the hypotheses regarding the relationship between marketing analytics practices and financial forecasting accuracy. specifically, the regression analysis assessed the extent to which marketing analytics practices predicted the accuracy of revenue forecasts. ethical considerations informed consent: all participants were informed about the purpose of the study, the voluntary nature of their participation, and their right to withdraw at any time without any consequences. informed consent was obtained prior to data collection. confidentiality: participants' confidentiality was maintained by anonymizing their responses and securely storing data. ethical approval: the research adhered to ethical standards, and ethical approval was obtained from the institutional review board (irb) of the researcher's affiliated institution. limitations of the study while this study aimed to provide valuable insights into the impact of marketing analytics on financial forecasting, it is important to acknowledge potential limitations: self-reported data: the reliance on self-reported data may have introduced biases, as participants may have overstated or understated their use of marketing analytics. generalizability: the findings may have been limited to the nigerian banking context and may not be generalizable to other industries or countries. data analysis and results 1. descriptive statistics table 1: demographic characteristics of respondents demographic variable frequency (n=300) percentage (%) gender male 180 60.0 female 120 40.0 age group 18-30 90 30.0 31-45 120 40.0 46-60 60 20.0 61 and above 30 10.0 education level mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 102 | p a g e demographic variable frequency (n=300) percentage (%) bachelor’s degree 180 60.0 master’s degree 90 30.0 doctorate 30 10.0 interpretation: the majority of respondents were male (60%), with the most significant age group being 31-45 years (40%). most respondents held a bachelor’s degree (60%), indicating a relatively welleducated sample. test of hypotheses the table below summarizes the testing of the two hypotheses related to customer lifetime value (clv), customer segmentation, and the effectiveness of marketing campaigns in the context of financial forecasting in nigerian banks. hypotheses test method result type coefficient / correlation coefficient p-value interpretation h₀₁: there is no significant relationship between clv and revenue projections. pearson correlation analysis correlation 0.70** 0.000 since the p-value < 0.01, we rejected h₀₁. there is a significant positive relationship between clv and revenue projections, indicating that higher clv is associated with more accurate revenue projections. h₀₂.customer segmentation based on marketing analytics does not significantly improve financial forecasts. multiple regression analysis regression coefficient 0.28 0.001 with a p-value < 0.01, we rejected h₀₂. customer segmentation significantly improves the accuracy of financial forecasts, suggesting that effective segmentation leads to better forecasting outcomes. hypothesis 1 (h₁): the analysis revealed a strong positive correlation (0.70) between customer lifetime value (clv) and the accuracy of revenue projections, indicating that banks with higher clv tend to have more precise revenue forecasts. the significant p-value (0.000) confirms the importance of leveraging clv in financial forecasting. hypothesis 2 (h₂): the regression analysis showed that customer segmentation based on marketing analytics has a positive coefficient (0.28) and a significant p-value (0.001), which suggests that effective segmentation strategies improve the accuracy of financial forecasts. this reinforces the necessity for banks to employ marketing analytics for enhanced segmentation. discussion of findings mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 103 | p a g e the findings of this study on "marketing analytics and financial forecasting: linking customer data with revenue projections in nigerian banks" provide critical insights into the relationships between customer lifetime value (clv), customer segmentation, and financial forecasting accuracy. below is a detailed discussion of the findings based on the hypotheses tested. 1. relationship between customer lifetime value (clv) and revenue projections the significant positive correlation (0.70) between clv and the accuracy of revenue projections highlights the importance of understanding customer behavior and value in the banking sector. this finding supports previous research that emphasizes the role of clv in guiding financial decisionmaking (kumar & reinartz, 2016). by effectively leveraging clv data, banks can improve their forecasting accuracy, allowing them to allocate resources more efficiently and enhance their strategic planning processes. 2. impact of customer segmentation on financial forecasting the finding that customer segmentation based on marketing analytics significantly improves the accuracy of financial forecasts (coefficient = 0.28) reinforces the notion that targeted marketing strategies lead to better financial outcomes. effective segmentation allows banks to categorize customers based on specific characteristics and behaviors, enabling them to customize their offerings and marketing messages (smith, 1956). this targeted approach not only enhances customer satisfaction but also leads to more accurate financial projections. summary this study examined the interplay between marketing analytics and financial forecasting in nigerian banks, specifically focusing on how customer lifetime value (clv) and customer segmentation influence revenue projections. using a quantitative methodology, data were collected from banking professionals through structured surveys, and the analysis revealed significant findings: 1. customer lifetime value (clv): there was a strong positive correlation between clv and the accuracy of revenue projections, suggesting that banks with a better understanding of their customers' long-term value could make more precise financial forecasts. 2. customer segmentation: the study found that effective customer segmentation based on marketing analytics significantly improved the accuracy of financial forecasts. this indicates that targeted marketing strategies enhance banks' ability to anticipate financial outcomes. conclusion the findings of this study underscore the critical role of marketing analytics in enhancing financial forecasting and revenue generation in nigerian banks. by effectively utilizing customer lifetime value data and implementing precise customer segmentation, banks can improve their financial decisionmaking processes. the results highlight that a data-driven approach is essential for banks to thrive in a competitive landscape, enabling them to allocate resources more efficiently and drive sustainable growth. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 104 | p a g e recommendations based on the findings of the study, the following recommendations were made for nigerian banks: 1. invest in marketing analytics: banks should invest in advanced marketing analytics tools to gather, analyze, and leverage customer data effectively. this investment will help enhance clv measurement and customer segmentation capabilities. 2. enhance customer segmentation strategies: it is crucial for banks to refine their customer segmentation strategies by using data analytics. by categorizing customers based on behaviors and preferences, banks can tailor their marketing efforts, leading to improved financial forecasting accuracy. 3. training and development: banks should prioritize training and development for staff in the use of marketing analytics tools and techniques. equipping employees with the necessary skills will enhance the overall effectiveness of marketing initiatives and financial forecasting processes. 4. foster a data-driven culture: it is essential for banks to foster a data-driven culture within their organizations. encouraging a mindset that values data and analytics can lead to more informed decision-making and better financial outcomes. by adopting these recommendations, nigerian banks can improve their marketing strategies and financial forecasting capabilities, ultimately driving sustainable growth and enhancing their competitive edge in the market. references adeleke, t., & odum, i. (2021). customer lifetime value and revenue forecasting in nigerian banks: a longitudinal data analysis. journal of banking and finance, 28(4), 85-98. adeleye, b., & adebayo, t. (2020). marketing analytics and its impact on financial performance in nigerian banks. journal of banking and finance, 18(3), 45-58. ayodeji, m. a., & hassan, a. o. (2020). the influence of customer loyalty programs on financial forecasting accuracy in the nigerian banking sector. african journal of business management, 14(6), 194-206. barney, j. (1991). firm resources and sustained competitive advantage. journal of management, 17(1), 99-120. berry, l. l. (1983). relationship marketing. in l. l. berry, g. l. shostack, & g. upah (eds.), emerging perspectives on services marketing (pp. 25-28). american marketing association. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 105 | p a g e chong, a. y. l., li, b., & sweeney, g. (2017). the impact of big data analytics on operational performance: evidence from australian banks. journal of business research, 94, 1-12. https://doi.org/10.1016/j.jbusres.2018.02.008 cohen, a., & kietzmann, j. (2016). the role of crm analytics in financial forecasting in healthcare. journal of health management, 18(3), 407-419. https://doi.org/10.1177/0972063416663827 eke, a. o. (2019). digital banking and customer data: implications for marketing and financial strategies in nigeria. international journal of finance and marketing, 22(1), 102-115. grönroos, c. (1994). from marketing mix to relationship marketing: towards a paradigm shift in marketing. management decision, 32(2), 4-20. gupta, s., & zeithaml, v. a. (2006). customer metrics and their impact on financial performance. marketing science, 25(6), 718-739. gupta, s., & zeithaml, v. a. (2006). customer metrics and their impact on financial performance. marketing science, 25(6), 718-739. ibrahim, r., & lawal, t. (2021). the relationship between customer satisfaction and financial forecasting accuracy in nigerian banks. nigerian journal of economic and financial research, 35(2), 201-218. johnson, t., & ekwueme, c. 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(2019). challenges of integrating marketing analytics into financial forecasting models in nigerian banks. journal of business analytics, 10(3), 45-62. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 106 | p a g e obi, c. p., & chika, i. o. (2020). the role of crm systems in improving financial forecasting in nigerian banks: a case study analysis. journal of financial management and strategy, 17(5), 133-149. ogunleye, r. o. (2018). financial forecasting models in nigerian banks: an empirical review. nigerian journal of economic and financial research, 29(1), 12-28. ogunleye, t. s., & adebayo, r. k. (2020). marketing analytics and its impact on financial performance in nigerian banks. journal of banking and finance, 18(3), 45-58. okoye, m. o., & adeola, k. t. (2019). the influence of real-time customer data on financial forecasting accuracy in nigerian banks. journal of financial innovation, 25(2), 67-84. olufemi, a., & bamidele, e. (2018). marketing campaign effectiveness and its impact on future revenue generation in nigerian banks. west african journal of business research, 14(4), 101-116. rust, r. t., lemon, k. n., & zeithaml, v. a. (2004). return on marketing: using customer equity to focus marketing strategy. journal of marketing, 68(1), 109-127. venkatesan, r., & kumar, v. (2004). a customer lifetime value framework for customer selection and resource allocation strategy. journal of marketing, 68(4), 106-125. wernerfelt, b. (1984). a resource-based view of the firm. strategic management journal, 5(2), 171180. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 1 | p a g e public finance instruments and poverty alleviation in nigeria prof. agbo, elias igwebuike and ugwu osmund chinweoda, phd. department of accounting and finance, faculty of management and social sciences, godfrey okoye university, ugwuomu-nike, emene, enugu state, nigeria. doiu: https://doi.org/10.5281/zenodo.15309375 abstract: in low-income countries like nigeria, governments use the instruments of public finance to carry out their crucial function of promoting the well-being of their residents which includes poverty alleviation. however, they often find deciding on how to achieve that objective difficult owing to some challenges. this study investigates the impact of public finance instruments on poverty reduction in nigeria using ex post facto as the research plan strategy. specifically, it examines the impacts of public revenue, public expenditure and public debt on poverty incidence in nigeria for 1981 to2024. unemployment, inflation and gdp growth rates are introduced in the study as control variables. descriptive, correlation matrix and hierarchical regression are employed to analyze data. the findings indicate that while the impact of public revenue and public debt on the rate of poverty are positive and weak, the impact of public expenditure on poverty rate is both adverse and non-significant. also, the findings show that the variables all move together toward the same direction during the study period. the implication is that there are strong interrelationships among the variables and that any alteration in one may have ripple effects across the others. consequently, governments are advised to fine-tune their public finance instruments to invigorate the economy, reduce income imbalance and reduce poverty level significantly. keywords: public finance, public revenue, public expenditure, public debt, poverty reduction, nigeria. 1.0 introduction with properly-designed fiscal policies and spending, public finance is expected to reduce poverty incidence by fostering economic growth, improving entry to essential services and promoting inclusive development (ejemezu&ajala,2024). although budgetary allocation appears to be the main platform for operationalizing pro-poor growth, it has proved to be among the most evasive challenges (wilhelm & fiestas, 2005). indigence is a universal menace confronting several economies globally. for instance, united nations, as reported in ventura (2024), revealed that approximately 700 million persons were living on below $2.15 per day universally in 2024.this figure represented almost 10% of the world’s https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.5281/zenodo.15308907 american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 2 | p a g e population (ventura,2024). in sub-saharan africa (ssa), the poverty level is high. in 2019, for instance, 40.9% of the region’s residents lived below us$1.90 per person per day (jobarteh,2023). poverty incidence in nigeria is particularly worrisome. no correlation exists between several policies the nigerian government which target poverty alleviation and the poverty level it recorded from year to year(ejemezu &ajala,2024).this situation has necessitated giving destitution serious and urgent government attention to alleviate poverty, the administration has been implementing a lot of schemes in different sectors of the nigerian economy(ejemezu &ajala,2024) but its level has been rising; poverty has been defiling every programme (olasehinde & adekoya, 2014).since the past 42 years, the number of the indigent has been on the increase in nigeria. national bureau of statistics (2020) reported that the pervasiveness of poverty sky-rocketed from 28.1 per cent during 1980 to46.3 percentin1985.nigeria witnessed a decrease in the level to 42.7 percent in 1992 and an increase to 65.6 percent in 1996 and a reduction to 54.4 percent in2004.it move up again to 60.9 percent in 2010. between 2020 and 2022, poverty level moved up from 46.4 percent to 62.9. in the year 2023, approximately 87million residents were already affected. with an hdi of 0.548 in 2022, nigeria’s standing on the human development index is not encouraging, as it held the 161st position among 189 countries (adebayo, 2025). in spite of this urgly situation, the total public spending has continued increasing (apere, 2017). in 2017, for instance, it rose from 6456.70 billion to 17,557.40 billion, and then to n24,431.21 billion in 2020, 2021, and 2022 respectively (central bank of nigeria,2022). transforming those expenditures into considerable development has proven to be challenging throughout the years as there have emerged troubling figures characterized by a persistent increase in poverty incidence as shown by high rate of unemployment and illiteracy. these have attracted global attention recently amid a shortfall in revenue mobilization to take care of the desired government expenditure (nimvyap et al.(2023). the nigerian government had attempted to better the lives of her population through through interventions in the areas of education, health, economic empowerment of the and infrastructural development, using various schemes. however, the effects of all those interventions on the alleviation of penury in the country still remain questionable (ajala & adeyinka,2021). in 2023,the government arranged to spend n543 billion on servicing public debt out of the debt servicing cost of n592billion.inspite of this amount of national debt outstanding, debt stock was to move up to approximately n7 trillion ($45 billion) at the close of 2013 (ozigbu, 2018). in 2024, the amount national debt rose to n144,670 billion. the enormous public borrowing has been aimed at supporting the productive sectors of the economy to take nigerians out of poverty. .however, just as is the case in several other low-income countries (morseno-dodson & wodon, 2008), poverty incidence continues to increase in the country (nimvyap et al.,2023). https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 3 | p a g e it is undisputable that nigeria has wealth in abundance. what remains an intractable question is the reason that these resources have not translated into national wealth (kwode, 2024). what looks paradoxical is that the more revenues are assembled and spent, the poorer the nigerians and nigeria become (obi, 2007).. 1.1 the problem in spite of the situation highlighted above, the studies that seek to find the relationship between public finance instruments and poverty reduction were either executed outside nigeria or too narrow in scope or methodology (akpan & orok, 2009). further, majority of the researches on poverty alleviation have concentrated on broad macroeconomic policies without specific attention to the impact of public finance instruments on poverty alleviation while others have predominantly relied on theoretical analyses instead of robust empirical inquiries. even those studies that examined the impact of individual public finance instruments exclusively concluded with conflicting results. consequently, a gap has been left in literature concerning how the instruments of public finance, taken together, affect poverty reduction in nigeria. therefore, the main objective of this work is to fill this opening by doing a robust empirical evaluation of the contribution of public finance instruments in the fight against destitution in nigeria. by so doing, the study provides concrete evidence and practical policy implications through appropriate econometric techniques. the data set for the period between 1981 and 2023 facilitates the employment of updated information, thereby making it easier to carry out accurate and relevant analysis of the nexus between public finance instruments and poverty rates in nigeria address potential concerns about omitted variables, the research incorporates key variables identified by literature as important causes of outcomes, namely economic growth, inflation and unemployment rates. after reviewing some of the important concepts theories employed in section 2,the paper dedicates section 3 to methodology. section 4 is for data analysis and discussion of findings, while section 5 concludes the paper. 2.0. literture review 2.1conceptual review 2.1.1 poverty poverty usually connected with abysmal income, absence of social, economic, cultural, and political entitlements and lack of access to basic necessities like food, shelter and clean water (arora & romijn, 2012). it means not having the fundamental enablement to be part of human society effectively (kuhe,et al.2016). it refers to a complex and multidimensional phenomenon that affects persons and societies in several ways (covarrubias, 2023). while poverty is commonly estimated in financial terms,one should remember that possessing insufficient money is just an indicator instead of the only cause of poverty. power dynamics, like denial of access to basic needs, is capable of contributing to poverty. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 4 | p a g e (arora & romijn, 2012). 2.1.2 public finance this refers to an aspect of a discipline that deals with public revenue, expenditure and debt. creedy(1984) defines it aqs the management of a nation’s revenue, spending and borrowings through several public institutions and agencies. public finance has some principles, namely, efficient resource allocation, even distribution of wealth and stability of the economy. it uses some instruments such as revenue, expenditure, debt and financial administration. 2.1.2.1.public revenue public revenue refers to the overall incomes that accrue to governments) from some sources.the means through which governments generate income and reasons for which revenue is required needed have differed considerably over time and from economy to economy. generally, governments produce income from taxes, loans, grants and aids, licenses, savings, rents and rates, fees, fines, royalties and earnings from ventures. of all the revenue sources available to government, tax is generally considered most important both indeveloping and developed countries(agbo & onuegbu, 2022). public revenues are classified as capital and recurrent revenues. capital revenue are irregular receipts employed by an administration to fund longterm and big capital projects. recurrent revenue is the name for the kind of revenue that government receives regularly such as taxes, licenses, fees and fines. states in nigeria produce incomes from paye, direct assessment, road taxes and other taxes and income from ministries, departments and agencies (mdas)( agbo,2024a). federal government generates its own revenue from both oil and non-oil taxes. oil tax comes petroleum profit. non-oil taxes come from company income tax(cit), personal income tax (pit), gas income, capital gain tax, stamp duty,value-added tax,etc. 2.1.2.2 public expenditure public spending is the major policy tool through which an economy can directly control poverty incidence. it is a key avenue through which government policies are made to affect development outcomes, particularly poverty levels. it is multi-channeled. public expenditure in nigeria is broadly grouped into capital and recurrent expenditure, each with distinct implication for poverty alleviation. capital expenditure refers to investments in infrastructure like roads, buildings and machinery. recurrent expenditures include spending on social protection programs, personnel development and social services. 2.1.2.3 public debt public authorities borrow money to carry out their statutory obligations when the income at their disposal becomes below what they need to spend. public debt is therefore an important instrument that governments use to finance public expenditures and accelerate economic growth, especially when it is not feasible forthem to collect taxes or reduce expenditure((nimvyap et al.,2023). the sizes of https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 5 | p a g e external debts are mainly determined by gdp, exchange rate, fiscal deficit, interbank rate, and terms of trade( udoka & anyingang ,2010), 2.1.2.4 public financial management this refers to the process by which governments acquire and dispose of financial resources (abianga,2009). the resources are properly managed and controlled through budgets which are usually prepared annually or through developmental plans for some specified period depending on government’s needs. 2.2. theoretical framework this study is founded on the following theories: theories: 2.2.1 poverty theories a. keynesian/neoliberal theory:.the proponents of this theory lay much emphasis on the responsibility of government to stabilize tha economy and make public goods available. they consider poverty as mainly involuntary and as caused by the absence of employment opportunities b. marxian theory: this theory considers discrimination among classes and groups as mainly responsible for indigence. consequently, it assigns an important role to public administration in regulating the market place. 2.2.2 public finance theories public finance theories explore how governments manage the finances available to them, encompassing areas like taxation, public spending and debt management. they aim to optimize these functions in the interest of the citizenry by ensuring efficient resource allocation, equitable income distribution and economic stability. the primary theories of public finance center attention on how governments should raise and utilize funds to provide public services. 2.3. empirical studies yaru and ohiaka (2022) investigated the link between poverty incidence and income generated from indirect taxes for 29 selected ssa countries between 1990 and 2020.the results gotten from the panel regression estimates indicated that gdp per capita has adverse significant impact on indigence within ssa. markina (2022) evaluated the effect of taxes on income and penury in ukraine, using both commitment to equity (ceq) and linear regression. ceq was produced to determine how taxes and social expenditure influence destitution and inequality in different countries. findings were that ukraine's income tax overhaul should concentrate attention on transferring taxes from the rich to the destitute and preventing aggressive tax planning, instead altering tax rates and tax periods. ikechukwu et al. (2021) employed cit, pit, ppit and education tax and education tax as direct tax variables during 1990to 2019 to estimate the impact of direct taxes on the redistribution of income in nigeria, using annual data sourced from the firs and cbn statistical bulletin. the findings indicated that pit and ppit have strong favorable impact on income redistribution in nigeria, while cit and education https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 6 | p a g e tax both have weak adverse impact and help to decrease income inequality. using gdp, population, per capita income and inflation as empirical variables, ahmad and awan (2021) examined the manner taxes influence indigence in pakistan. the study analyzed time series data for 1998 through 2018 with correlation and regression methods .the results indicated that taxes and destitution have favorable connection. multiple regression analysis indicated that while population and per capita income have positive impact on poverty, taxes, inflation, and gdp have adverse effect. usman and idoko (2021) evaluated the effect of taxation as an instrument for poverty alleviation in nigeria from1990 to 2019.the research used ardl to estimate the parameters. the results indicated that ppt,cit and vat have positive and strong link with the level of penury ,while ced and pit have adverse and strong connection. oduro (2001) cited in kwode (2024) carried out a study and concluded that public spending is capable of decreasing indigence by providing infrastructure and service to the indigent and putting in place the necessary conditions which will increase the competence of the destitute to obtain assets, enabling the provision of infrastructure and services for the institutions that will decrease the risks confronting the poor and reduce the impact of negative shocks through the provision of buffers among others. in indonesia, birowo (2011) evaluated connection between public expenditure and poverty rate .analyzing the data with ols regression, the author noted that budgetary increase and poverty are positively and slightly related connected. the study conducted by megbowon et al. (2020) in nigeria with ardl analytical methods disclosed that public expenditure reduces indigence and that long–run relationship that exists between public expenditure and poverty rate for all tiers of governance in nigeria. aladelusi and isiaka (2023) sought to determine the extent that the destitute gain from public spending on education, agricultural sectors, health and the amount of public debt in nigeria the ardl method was employed for regression. the findings indicated that fiscal policy has a great effect in decreasing poverty level and that long-run connections exists between them. using a setod empirical data and ordinary least squares method, nkamnebe(2023) evaluated the link between public spending and poverty alleviation for 2000 to 2022.multidimensional poverty index (mpi) constituted the dependent variable ,while public expenditure on education, health and infrastructure became the explanatory variables. the study's primary findings disclosed that an upward movement in public spending on education has a significant adverse effect on poverty reduction, both in the short run and long run while government health spending has a strong adverse effect in the short run and no effect in the long run. kwode (2024) examined the effect of public spending on poverty. the data employed were sourced from official publications of cbn and nbs and analyzed with regression method. the findings indicated that public spending has a positive link with poverty; it has nonsignificant effect on poverty alleviation and adverse connection with poverty headcount ratio. adebayo (2025) evaluated the impact of public spending on poverty in nigeria from 1981 to2022, using vcm model framework. the study analyzed the link between poverty level and public expenditure, gdp per https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 7 | p a g e capita, agricultural credit guarantee scheme fund and gross enrolment ratio in secondary education. with time series data and cointegration analysis, a strong long-run relationship was found between government spending and poverty alleviiation. bloj (2009) sought to find out the effect of budgeting process on social policies and poverty reduction. the author found that the recent tendency of developing nations to possess results -oriented budgeting approach is in order since this new approach is deemed to be directly linked with poverty alleviation through the medium term expenditure framework. using descriptive technique and non-parametric statistics on data series covering 1980-2005, akpan and orok (2015) observed that budgetary provision for poverty reduction program are dissatisfying and ineffective and that actual release of even the allocations are significantly delayedan issue that has negatively affected the implementation poverty alleviation programmes of government. oyedele et al. (2013) employed co-integration and regression methods to examine the impact of external debt and debt servicing on poverty alleviation in nigeria. time series data on debt income ratio, debt service, degree of openness, growth of agricultural value added, per capita income, inflation rate and investment-income ratio for 1980-2010 were analyzed. multiple regression results indicated that external debt and debt servicing cause poverty in nigeria. ekpo and udo (2013) investigate the link between debt burden, growth and poverty alleviation in nigeria between 1970 and 2011.elements of a failing state comprising corruption, insecurity, and ethnic violence were included in the model as explanatory variables ,while the dependent variable (incidence of poverty) was measured by the ratio of public expenditure and social services and income per capita. findings disclosed that public debt is negatively linked to growth and poverty alleviation. ozigbu (2018) evaluated the effect of public debt sustainability on the incidence of poverty in nigeria. the study employed external debt stock and interest paid on external debt stock as explanatory variables and poverty rate as dependent variable. the outcome of johansen-juselius co-integration test disclosed that the series have long-run relationship. nimvyap et al. (2023) analyzed the effect of public dept on poverty alleviation in nigeria secondary data covering 2000–2021) were employed in the research and analyzed using descriptive statistics, correlation matrix, and error correction mechanism (ecm).the findings indicated that external debt has positive and significant effect on poverty reduction ,while domestic debt and debt servicing have adverse connection with poverty incidence in nigeria fatoba and otonne (2024) explored the impact of fiscal policy crashes on nigeria's iincome imbalance and household poverty. the authors employed the impulse response function and variance decomposition methodology within the bayesian vector autoregressive (bvar) framework. the findings indicated that from the second year to the fifteenth year, a 1% change in tax income generates a reduced average effect of 0.036% on household poverty. contrarily, household indigence level https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 8 | p a g e increases with the changes in public spending. 3.0 methodology 3.1 research strategy ex post facto research plan was employed in the study. 3.2 data and variables a paneldata series covering 1981to 2023 were utilized. in the key variables, poverty reduction was the dependent variable while public revenue, public expenditure and public debt constituted the explanatory variables. economic growth rate, inflation rate and unemployment rate were the control variables. poverty reduction was proxied by poverty headcount ratio. the data were analyzed using genstat software. 3.3model specification as was the case with erin et al.(2020) and erinand aribaba(2021),the study used hierarchical regression model specified as follows: step 1: baseline model (control variables only) poverty rate = β0 + β1(unemployment rate) + β2(gdpgrowthrate) + β3(infaltion rate) + ϵi……. (1) step 2:full model(add predictors) poverty rate = 0 + 1 ( unemployment rate ) + 2 (gdp growth rate) + 3 (inflation rate) + 4 (public debt) + 5 (public revenue) + 6 ( public expenditure) …….(2) step 2: full model (add predictors) model evaluation  compare r² from step 1 and step 2 to assess the additional variance explained by the financial predictors.  inspect ftest change to check significance of added predictors.  look at coefficients (β₄, β₅, β₆) to interpret individual effects of debt, revenue, and expenditure on poverty rate. 4.0 data analysis and interpretation the empirical data obtained were shown in tables, charts and graphs (see appendices1 to 9).both parametric technique was used for data analysis. specifically, descriptive was done first as preliminary analysis and the inferential statistic that provided more detailed analysis. descriptive statistics the descriptive statistics in table 1 provide an overview of the central tendency and spread of the major economic variables. the average values exhibit a positive financial balance, with public revenue (4470.312) exceeding public spending (3739.097). however, public debt (11798.395) is significantly high, raising concerns about fiscal sustainability.gdp growth rate modest at 3.180, but inflation rate notably high at 19.040, suggesting potential issues with price stability. in addition, the average https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 9 | p a g e unemployment rate is 14.993 and poverty rate is 54.427 point, occasioning significant economic challenges which affect a big portion of the population. the values of skewness reveal important awareness into the spread of these variables. for total revenue, the skewness of -0.117 shows a nearly symmetric distribution, suggesting balanced revenue sources. contrarily, public spending indicates a high positive skew (6.923), indicating that some observations are significantly higher than the average, which could reflect irregular spikes in spending. similarly, the total national debt has a skewness of 17.515, implying that while most entities have lower debt levels,some holds extremely high amounts, contributing to overall financial instability. finally, the data highlights pressing economic challenges, particularly high debt, unemployment rate and poverty rate. the values of skewness highlight disparities among data, indicating that averages may mask underlying inequalities, especially in expenditure and debt distribution. addressing these issues will be crucial for fostering economic solidity and improving the living conditions of the affected populations. table 1: descriptive statistics name mean median observed min observed max standard deviation excess kurtosis skewness public revenue 4470.312 2575.100 10.500 18320.000 4714.094 -0.117 0.823 public expenditure 3739.079 1225.990 9.640 27500.000 5678.769 6.923 2.465 public debt 11798.395 3818.470 13.520 144670.000 25686.472 17.515 3.978 gdp growth rate 3.180 3.400 -10.930 15.330 4.768 1.450 -0.464 inflation rate 19.040 13.900 5.400 72.800 15.296 3.225 1.878 unemployment 14.993 11.900 1.800 56.100 14.587 1.302 1.432 poverty rate 54.427 59.300 27.200 88.000 15.133 -0.449 0.057 correlation matrix the correlation matrix in table 2 provides insight into the linear connections between poverty and other variables in the study that are grouped into control variables and independent variables. among the control variables, the link between poverty and gdp growth rate is 0.0506, with a p-value of 0.000. although the correlation is very weak and positive, the link is strong statistically, indicating a consistent but minimal association where slight increases in gdp growth rate correspond to slight increases in poverty. this could reflect growth patterns that do not convert to broad-based improvements in living standards.the link between poverty and inflation rate is negative (r = -0.237), meaning that higher inflation may be associated with lower poverty levels. however, with a p-value of 0.121, this connection is weak, suggesting the observed association may be as a result of random chance. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 10 | p a g e similarly, the correlation between poverty and unemployment is very weak and positive (r = 0.067) with a p-value of 0.667, indicating no statistically meaningful relationship. the implication is that, among the data, alterations in unemployment do not significantly influence poverty levels. among the explanatory variables, public revenue indicates a weak positive connection with poverty (r = 0.187, p = 0.247), and public spending has a similarly weak positive link (r = 0.124, p = 0.427). both of them are non-significant, implying that variations in public fiscal activities are not directly connected with the alterations in poverty . total national debt displays a negligible correlation with poverty (r = 0.010), yet it is significant (p-value = 0.000).in spite of the level of significance, the practical implication is minimal because of the extremely weak strength of the association. in summary, while gdp growth rate exhibits a statistically significant but positive correlation with poverty, all other variables, both control and independent, exhibit statistically non-significant relationships, underscoring the multifaceted nature of indigence and its determinants. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 11 | p a g e table 2: correlation matrix public revenu e public expenditu re publi c. debt gdp growt h rate inflatio n rate unemployme nt povert y rate publicl revenue correlatio n 1 sig. (2tailed) public expenditure correlatio n .848 1 sig. (2tailed) .000 public debt correlatio n .720 .937 1 sig. (2tailed) .000 .000 gdp growth rate correlatio n .188 .019 -.006 1 sig. (2tailed) .223 .903 .969 inflation rate correlatio n -.300 -.130 -.066 -.281 1 sig. (2tailed) .048 .405 .671 .064 unemployme nt correlatio n .562 .569 .140 .053 -.322 1 sig. (2tailed) .000 .000 .366 .732 .033 poverty rate correlatio n .187 .124 .010 .506 -.237 .067 1 sig. (2tailed) .247 .427 .947 .000 .121 .667 control variable: unemployment, gdp growth rate, inflation rate. dependent variable: poverty rate. predictors: total national debt outstanding, total revenue, total expenditure. *p-value < 0.05 (significant) hierarchical regression analysis the results of the hierarchical regression analysis in table 3 provide valuable provide valuable insights into how both control and explanatory variables affect poverty rate. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 12 | p a g e in the initial model that includes the control variables only, the r-squared is 0.269, indicating that approximately 26.9% of the variations in poverty rate is explained by these three variables. with an fstatistic of 4.791 and a p-value of 0.006, which is below 0.05 threshold, the model is statistically significantconfirming that it has explanatory power. among the control variables, gdp growth rate has a positive and strong impact on poverty rate, with a coefficient of 1.512 and p-value of 0.002. this suggests that a unit increase in gdp growth rate causes a rise in poverty rate by 1. 512.this is possibly as a result of the growth patterns that disproportionately benefit higher-income groups. in contrast, inflationrate has a negative statistically non-significant effect (coefficient = -0.108, p = 0.473), suggesting that inflation does not have a meaningful effect on poverty in this model. unemployment has a very small impact (coefficient = -0.003) and is also nonsignificant (p = 0.987), indicating no meaningful connection exists between it and poverty amidst other variables. in the second model, the independent variables (public revenue, public expenditure, and national debt) are added. this inclusion increases the r-squared to 0.304, meaning that the extended model explains 30.4% of the changes in poverty rate. the f-statistic is 2.617 with a p-value of 0.033, indicating the full model is statistically robust at 5% level. the r-squared change is 0.035, and this increase is significant, implying that adding the explanatory variables provides additional explanatory value. public revenue has a positive and non-significant impact on poverty rate (coefficient = 0.001, p = 0.348). this indicates that a unit increase in public revenue will cause 0.001 rise in poverty level. this result agrees with the conclusion by usman and idoko (2021) who investigated the impact of tax revenue on poverty reduction in nigeria from 1990 to 2019andfoundthat both ppt, cit and vat have positive link with poverty reduction. public expenditure has an adverse and weak impact on poverty rate (coefficient = -0.002, p = 0.481). even though this result conflicts with that of birowo (2011), it conforms with oduro (2001), megbowon et al. (2020) and aladelusi and isiaka (2023) and kwode (2024) that all examined the effect of public expenditure on poverty rate in nigeria and discovered that public spending decreases poverty incidence.. public debt has positive but non-significant impact on poverty rate (coefficient = 0.000, p = 0.448).this result is in consonance with the conclusions in oyedele et al. (2013), ozigbui2018) and nimvyap et al.(2023) who, after investigating the influence of external debt on poverty reduction in nigeria found that poverty rate increases along with external debt in nigeria. the results of the study completely show that while the inclusion of the public finance instruments in the model improves the latter slightly, they do not have strong direct impacts on poverty when controlling for economic factors like gdp growth rate inflation, and unemployment. further, the analysis discloses that gdp growth rate is the most influential and strong predictor of poverty among the variables studied, even though it positive link with poverty may seem counterintuitive. the inclusion public finance instruments (revenue, expenditure and debt) modestly improves the model’s explanatory power, but individually, they do not significantly affect the poverty rate. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 13 | p a g e table 3: result of hierarchical regression analysis for poverty rate predictors b r2 δ r2 f-stat step 1 control variable .269 4.791 (.006) gdp growth rate 1.512 (.002) inflation rate -.108 (.473) unemployment -.003 (.987) step 2 independent variable .304 .035* 2.617 (.033) public revenue .001 (.348) public expenditure -.002 (.481) public. debt outstanding .000 (.448) control variable: unemployment, gdp growth rate, inflation rate. dependent variable: poverty rate. predictors: total national debt outstanding, total revenue, total expenditure. *p-value < 0.05 (significant) https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 14 | p a g e table 4: regression coefficientsa model unstandardized coefficients standardiz ed coefficient s t sig. collinearity statistics b std. error beta toleran ce vif 1 (constant) 51.913 5.183 10.017 .000 gdp growth rate 1.512 .452 .478 3.346 .002 .919 1.088 inflation rate -.108 .149 -.109 -.724 .473 .821 1.219 unemployment -.003 .151 -.002 -.017 .987 .889 1.125 2 (constant) 50.662 5.420 9.347 .000 gdp growth rate 1.348 .493 .426 2.735 .010 .798 1.254 inflation rate -.101 .155 -.102 -.652 .518 .790 1.266 unemployment -.075 .226 -.072 -.333 .741 .410 2.442 public revenue .001 .001 .382 .952 .348 .420 2.339 publicl expenditure -.002 .003 -.631 -.713 .481 .925 3.588 public debt .000 .001 .481 .768 .448 .849 4.339 a. dependent variable: poverty rate diagnostic plots https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 15 | p a g e fig 1: diagnostic plot diagnostic plot the diagnostic plots as shown in fig 1 for the regression model, plus the standardized residuals plot, normal q-q plot, half-normal plot, and fitted values vs. residuals plot, show that the model assumptions are largely met. in the standardized residuals plot, a random scatter around zero suggests a good fit, while the normal q-q plot indicates that the residuals approximate a normal distribution, with any deviations being minor. the half-normal plot similarly indicates that there are no significant outliers, and that the fitted values vs. residuals plot reveals a consistent, random scatter around zero. this confirms the absence of heteroscedasticity. overall, these findings suggest that the model is appropriate and robust, with only minor deviations from ideal conditions. along with the diagnostic plot at fig 1,the line plots all confirm the robustness of the regression. 5.0 conclusion and recommendation the study evaluated the impact of public finance instruments on poverty reduction in nigeria. its specific aims were to establish the effect of public revenue, public expenditure and public debt on poverty rate for1981 to 2024.unemployment, inflation and gdp growth rates were introduced in the model as control variables .the data-set were analyzed using correlation matrix and hierarchical regression model. results show that none of the explanatory variables is statistically strong individually. the effects of public revenue and public debt on poverty incidence were found to be both positive and non-significant while public spending has adverse and weak effect on poverty rate. further, the variables of the study were found to be all moving together in the same direction. the study recommends as follows: 1.in order to better the general wellbeing of the populace, public revenue should be wisely allocated to the construction of high-quality infrastructure, namely, schools, railroads, healthcare facilities and other commercial establishments throughout the states to help minimize the disparity in income between the nation's wealthiest and least fortunate citizens. 2. there ought to be a more hoollistic and sustained policy interventions, particularly in addressing structural barriers to poverty alleviation and improving the efficiency of public spending in nigeria’s socioeconomic development initiatives. 3. results -oriented budgeting approach ought to be adopted by the government as would create the required effect on penury and inequity. 4. governments should increase budgetary provisions or allocations to their poverty alleviation programmes and ensure sound management and efficient project implantation. in addition, it should encourage participation in the budget process. 5. government should review its policies on tax holidays and external borrowing and mobilize domestic savings efforts to tackle the nuisance of indigence in nigeria. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 16 | p a g e 6. finally, since a strong interrelationship exists among the variables used in this study, government is advised to fine-tune their public finance instruments to allow for the stimulation of the economy, reduce income imbalance and poverty level significantly. references abianga, e. u. 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(2007). fiscal policy and poverty alleviation: some policy options for nigeria. unpublished manuscript. odior, e. s. o. (2014). government expenditure on education and poverty reduction: implications for achieving the mdgs in nigeria—a computable general equilibrium micro-simulation analysis. asian economic and financial review, 4(2), 150–172. olasehinde, o. d., & adekoya, r. b. (2014). agricultural financing: a panacea to unemployment in nigeria. journal of business and technological education (jobted), 8(1), 75–80. oyedele, s. o., emerah, a. a., & ogege, s. (2013). external debt, debt servicing, and poverty reduction in nigeria. journal of economics and sustainable development, 4(19), 174–179. ozigbu, j. c. (2018). public debt sustainability and incidences of poverty: empirical evidence from nigeria. international journal of development and economic sustainability, 6(3), 12–26. perez-montiel, j. (2020). government public investment dynamic multiplier effects: an empirical analysis for spain. ssrn. https://ssrn.com/abstract=3634081 udoka, c. o., & anyingang, r. a. (2010). relationship between external debt management policies and economic growth in nigeria (1970–2006). international journal of financial research, 1(1), 2– 18. usman, i. c., & idoko, a. s. (2021). effect of taxation on poverty in nigeria. international journal of economics and development policy (ijedp), 4(1), 40–54. ventura, l. (2024). poorest countries in the world 2024. global finance magazine. https://gfmag.com/data/economic-data/poorest-country-in-the-world/ wilhelm, v., & fiestas, i. (2005). exploring the link between public spending and poverty reduction: lessons from the 90s. the world bank. yaru, m. a., & ohiaka, u. a. (2022). indirect taxation and poverty in sub-saharan africa: an empirical evidence from panel data analysis. african journal of economic review, 10(5), 26–43. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com https://ssrn.com/abstract=3634081 https://gfmag.com/data/economic-data/poorest-country-in-the-world/ american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 20 | p a g e appendix 1 annual historical data year public revenue (n’billion) public expenditure n’billion) public debt (n’billion) gdp growth rate inflation rate unempt poverty rate 1981 13.3 11.41 13.52 -6.80 20.90 3.90 27.20 1982 11.4 11.92 23.83 -6.80 7.70 3.90 27.20 1983 10.5 9.64 82.80 -10.93 23.20 3.90 27.20 1984 11.3 9.93 40.48 -1.11 39.60 3.90 27.20 1985 15.1 13.04 45.25 5.91 5.50 6.10 46.30 1986 12.6 16.22 69.89 0.06 5.40 5.30 46.30 1987 25.4 22.02 137.52 3.20 10.20 7.00 45.40 1888 27.8 27.75 180.59 7.33 38.30 5.30 42.70 1989 53.9 41.03 287.44 1.92 40.90 4.00 42.70 1990 98.1 60.27 382.70 11.78 7.50 3.50 44.00 1991 101.0 66.58 446.75 0.36 13.00 3.10 44.00 1992 190.5 92.80 722.22 4.63 44.50 3.40 42.70 1993 192.8 191.23 806.98 -2.04 57.20 2.70 42.70 1994 201.9 160.89 1,056.69 -1.82 57.00 2.00 42.70 1995 460.0 248.77 1,194.60 -0.08 72.80 1.80 60.00 1996 523.6 337.22 1,036.70 4.19 29.30 3.80 65.60 1997 582.8 428.22 1,097.70 2.93 8.50 3.20 74.00 1998 463.6 487.11 1,193.85 2.58 10.00 3.20 74.00 1999 949.2 947.69 3,312.18 0.58 6.60 8.20 74.00 2000 1,906.2 701.05 3,995.63 5.01 6.90 13.10 88.00 2001 2,231.6 1,018.00 4,192.66 5.92 18.90 13.60 88.00 2002 1,731.8 1,018.18 5,098.88 15.33 12.90 12.60 65.70 2003 2,575.1 1,225.99 5,808.01 7.35 14.00 14.80 65.00 2004 3,920.5 1,504.20 6,260.60 9.25 15.00 13.40 54.40 2005 5,547.5 1,919.70 4,220.58 6.44 17.90 11.90 65.70 2006 5,965.1 2,038.00 2,204.72 6.06 8.50 12.30 65.70 2007 5,727.5 2,450.90 2,608.03 6.59 5.40 12.70 59.30 2008 7,866.6 3,240.82 2,844.06 6.76 15.10 14.90 59.30 2009 4,844.6 3,452.99 3,818.47 8.04 13.90 19.70 59.30 2010 7,303.7 4,194.58 5,241.66 9.13 11.80 21.40 64.90 2011 11,116.8 4,712.06 6,519.69 5.31 10.30 23.90 64.90 2012 10,654.7 4,605.30 7,564.44 4.21 12.00 27.40 68.20 https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april -june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 21 | p a g e 2013 9,759.8 5,185.32 8,505.71 5.49 8.00 24.70 67.00 2014 10,068.9 4,587.39 9,535.53 6.22 8.00 25.10 46.00 2015 6,912.5 4,988.86 10,948.51 2.79 9.60 29.20 40.75 2016 5,616.4 5,858.56 14,537.12 -1.58 18.55 35.20 61.33 2017 7,444.8 6,456.70 18,376.91 0.82 15.37 40.87 61.33 2018 9,544.3 7,813.74 20,533.64 1.91 11.44 43.27 40.10 2019 9,819.8 9,712.22 23,295.06 2.27 11.98 43.27 39.09 2020 8,569.2 10,232.33 28,729.51 -1.92 15.75 56.10 39.10 2021 10,345.0 12,164.15 35,097.79 3.40 15.63 56.10 63.00 2022 12,586.53 14,946.25 40,912.61 3.10 21.34 5.30 62.90 2023 12,370.0 19,808.44 91,477.86 2.74 28.92 5.40 62.90 2024 18,320 27.500.00 144,670.00 3.40 12.48 5.30 47.00 source: nbs, cbn and world bank, cbn statistical bulletin https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 30 | p a g e effect of inflation on business profitability and accounting practices in nigeria 1justina chioma agu ph.d., 2festus ndubuisi nkwo and 3amaechi marcellus chukwu department of business administration and management, imt, enugu state, nigeria department of accountancy, gregory university uturu, abia state, nigeria department of marketing, faculty of business administration, university of nigeria, enugu campus doi: https://doi.org/10.5281/zenodo.14449011 abstract: this study investigates the effect of inflation on business profitability and accounting practices in nigeria, with a focus on how businesses are coping with rising costs and adjusting their financial management strategies. a survey of 222 businesses in nigeria was conducted to examine the effects of inflation on profitability, evaluate the effectiveness of current accounting practices, and explore strategies employed to mitigate inflation's impact. the results show that inflation has primarily reduced profitability, with 54.1% of businesses reporting moderate to significant reductions in profitability. additionally, 58.5% of businesses indicated that their accounting practices were either effective or very effective in adjusting to inflation, while 22.5% felt their systems were ineffective. strategies most commonly adopted to mitigate inflation’s impact include raising prices (40.5%), reducing operating costs (33.8%), and enhancing operational efficiency (13.5%). the study highlights the importance of regularly updating financial statements and adjusting budget forecasts to better reflect inflationary trends. it concludes that while many businesses are taking proactive steps to manage inflation, there remains a need for continued improvements in accounting practices and long-term strategic planning. the findings provide valuable insights for businesses looking to navigate inflationary challenges and maintain financial stability. keywords: inflation, business profitability, accounting practices, cost management & financial stability 1. introduction inflation, a persistent increase in the general price level of goods and services over time, significantly impacts the economy by reducing purchasing power and influencing business operations. in nigeria, inflation has been a recurrent challenge, stemming from factors such as exchange rate volatility, fiscal deficits, and import dependence. this economic phenomenon affects businesses' profitability by increasing operational costs and altering consumer spending patterns. consequently, companies are compelled to adapt their accounting practices to reflect the dynamic economic environment, ensuring accurate financial reporting and informed decision-making (ibrahim, et al., 2023). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 31 | p a g e the relationship between inflation and business profitability is intricate. inflationary pressures can erode profit margins, particularly for firms unable to adjust prices in line with rising costs. additionally, fluctuations in the inflation rate introduce uncertainties that may deter investment and disrupt longterm business planning (umeh et al., 2020). accounting practices are also affected as traditional historical cost accounting fails to capture the real value of assets and liabilities during periods of high inflation. this shortcoming has prompted the adoption of alternative methods, such as inflationadjusted accounting, to provide a more accurate reflection of financial positions (okonkwo et al., 2023). in nigeria, the impact of inflation on businesses varies across sectors, with small and medium-sized enterprises (smes) being particularly vulnerable due to their limited capacity to absorb cost increases. inflation-adjusted financial reporting is increasingly recognized as a vital tool in mitigating the adverse effects of inflation on profitability and fostering transparency in financial statements (adeoye & olufemi, 2019). moreover, government policies, including monetary tightening and fiscal interventions, play a critical role in managing inflation and its implications for businesses. recent studies emphasize the need for businesses to adopt proactive measures in managing inflationary risks. strategies such as price adjustments, cost management, and leveraging technology for efficient operations have been highlighted as crucial for maintaining profitability in an inflationary economy (okorie et al., 2022). furthermore, aligning accounting practices with international standards that address inflation is essential to enhance the reliability and comparability of financial information. statement of the problem in a stable economic environment, businesses typically operate efficiently, with profitability driven by sound management, innovation and market dynamics. accounting systems in such environments reflect the true financial health of businesses, enabling stakeholders to make well-informed decisions and fostering growth and stability. this ideal scenario ensures that companies can adapt to market conditions, thrive, and remain competitive both locally and globally. however, in nigeria, persistent inflation disrupts this balance, creating significant challenges for businesses. the rising costs of goods and services, coupled with shrinking profit margins, force businesses to adjust their pricing strategies while managing increasing operational expenses. inflation diminishes the value of money, reducing consumer purchasing power and creating financial instability. moreover, traditional accounting practices, particularly historical cost accounting, fall short in capturing the real financial implications of inflation. this misalignment leads to inaccurate financial reporting, which can misguide decision-making and diminish stakeholder confidence. if these issues are not addressed, the long-term sustainability of businesses in nigeria will be at risk. the continuing pressure of inflation could result in widespread closures, particularly among small and medium-sized enterprises, leading to job losses and further economic stagnation. inaccurate financial reporting could also compromise the transparency and reliability of business practices, ultimately mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 32 | p a g e deterring potential investors. the failure to effectively manage inflationary risks through updated accounting methods and strategic business practices could hinder nigeria’s economic growth and its ability to integrate into the global economy. without resolving these challenges, the country risks stalling its progress, limiting opportunities for expansion and development. objectives of the study the primary purpose of this study is to critically examine the effect of inflation on business profitability and accounting practices in nigeria. the specific objectives of the study are to: i. to examine the impact of inflation on business profitability in nigeria. ii. to evaluate the effectiveness of current accounting practices in managing inflation in nigerian businesses. iii. to explore strategies businesses can adopt to mitigate the effects of inflation on profitability and accounting practices. research questions the study provided answers to the following research questions. i. how does inflation impact the profitability of businesses in nigeria? ii. to what extent do current accounting practices in nigeria address the challenges posed by inflation? iii. what strategies can businesses in nigeria adopt to mitigate the effects of inflation on profitability and accounting practices? statement of hypotheses the following hypotheses in null form (h0) guided this study i. inflation has no significant impact on the profitability of businesses in nigeria. ii. current accounting practices in nigeria do not effectively address the challenges posed by inflation. iii. businesses in nigeria do not adopt effective strategies to mitigate the effects of inflation on profitability and accounting practices. significance of the study the significance of this study lies in its potential to benefit a wide range of individuals and institutions within the nigerian business and economic landscape. i. businesses and entrepreneurs: the study will provide insights into how inflation impacts profitability, allowing businesses, particularly small and medium-sized enterprises, to better understand the inflationary pressures they face. it will also highlight effective strategies that can be adopted to maintain profitability in an inflationary environment, thereby improving their resilience and long-term sustainability. ii. accounting professionals and firms: accounting practitioners will benefit from a deeper understanding of the limitations of traditional accounting practices in inflationary periods. the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 33 | p a g e study’s findings could guide accountants and auditors in adopting more effective inflationadjusted accounting methods, ensuring more accurate financial reporting that reflects the true economic conditions. iii. policy makers and government institutions: the government and policymakers can use the findings to formulate better fiscal and monetary policies that address the negative effects of inflation on businesses. the study may also serve as a basis for designing supportive measures for businesses, especially smes, to protect them from the adverse impacts of inflation. iv. academic researchers and institutions: the study will contribute to the body of knowledge on inflation’s effects on business operations and accounting practices. it provides a foundation for future research in the areas of business economics, finance, and accounting, offering valuable data and theoretical insights that can be built upon. v. investors and financial institutions: investors can benefit by understanding the relationship between inflation, business profitability, and accounting practices, helping them make more informed investment decisions. financial institutions can also use the findings to assess the financial health of businesses in an inflationary environment, providing better guidance on lending and investment strategies. definition of terms the following terms operationalized the study: i. inflation: this refers to a consistent and significant rise in the general price levels of goods and services in an economy over a specific period. inflation reduces the purchasing power of money, meaning that the same amount of money buys fewer goods or services as time progresses. it is often measured using indicators such as the consumer price index (cpi) or the producer price index (ppi). in the context of this study, inflation represents an external economic factor influencing the cost of operations and profitability of businesses in nigeria. ii. business profitability: business profitability is the ability of a company to generate revenue that exceeds its total costs, including operating expenses, taxes, and other liabilities, over a given period. profitability is a key indicator of financial performance, commonly assessed through metrics such as net profit margin, return on investment (roi), and gross profit. for this study, profitability highlights how inflation impacts businesses' capacity to maintain sustainable earnings in the nigerian economic environment. iii. accounting practices: these are the standardized methods, guidelines, and rules used by businesses to record, process, and report financial information. accounting practices ensure consistency and accuracy in financial reporting. this study focuses on how businesses in nigeria adapt their accounting practices, such as preparing financial statements, valuing assets, and reporting liabilities, to reflect the economic realities of inflation. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 34 | p a g e iv. small and medium-sized enterprises (smes): smes refer to businesses with limited financial resources, workforce, and operational scale. they are characterized by specific thresholds in revenue, assets, or the number of employees, as defined by national regulations. in nigeria, smes are crucial to economic development but are particularly vulnerable to inflation due to their limited capacity to absorb rising costs or adjust pricing strategies. v. inflation-adjusted accounting: this is a financial reporting method that modifies traditional accounting statements to incorporate the effects of inflation. it ensures that financial reports reflect the true economic value of assets, liabilities, and profits, rather than nominal figures that fail to account for price level changes. in this study, inflation-adjusted accounting is examined as a potential solution to the shortcomings of conventional accounting methods in accurately reflecting business performance during inflationary periods. vi. purchasing power: this term refers to the ability of a unit of currency to acquire goods and services. inflation erodes purchasing power, meaning that consumers and businesses can afford less with the same amount of money. in the context of this study, purchasing power is a critical factor influencing consumer behavior, pricing strategies, and overall business profitability in nigeria. vii. monetary policy: this is the set of economic strategies and actions undertaken by a country’s central bank to regulate the money supply, interest rates, and inflation levels. in nigeria, monetary policy aims to stabilize the economy, manage inflation, and foster sustainable growth. this study considers the implications of monetary policy on the inflationary environment and its indirect impact on business operations and accounting practices. viii. historical cost accounting: historical cost accounting is a traditional accounting method where assets, liabilities, and transactions are recorded at their original purchase price, without adjustments for inflation or other economic changes. this approach may lead to financial statements that do not accurately reflect the current economic conditions. this study critiques historical cost accounting in the context of nigerian businesses and explores alternatives that better address the challenges posed by inflation. 2. literature review conceptual review concept of inflation inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time, leading to a decrease in the purchasing power of money. it is often measured by indices such as the consumer price index (cpi) or the producer price index (ppi). inflation is a critical economic indicator, as it affects not only consumer spending but also investment decisions and government policies (adebayo & yusuf, 2021). economists typically classify inflation into demand-pull mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 35 | p a g e inflation, caused by excessive demand, and cost-push inflation, which arises from rising production costs (olowo & adeoti, 2020). the causes of inflation are multifaceted, encompassing monetary, fiscal, and structural factors. excessive money supply, a common monetary cause, arises when a country's central bank increases the money supply faster than the growth of goods and services. fiscal policies, such as high government spending, can also trigger inflation. structural issues like supply chain disruptions and labor shortages further exacerbate inflationary pressures (okoye & mba, 2022). understanding these causes is essential for policymakers to develop effective strategies to control inflation. inflation has both positive and negative effects on the economy. moderate inflation can encourage spending and investment, as consumers and businesses anticipate higher prices in the future. however, high inflation erodes purchasing power, reduces the real value of savings, and creates uncertainty, discouraging long-term investments (chukwuemeka, 2023). for low-income groups, inflation exacerbates inequalities by increasing the cost of living disproportionately. control measures for inflation include monetary policies like interest rate adjustments, fiscal measures such as reducing government spending, and structural reforms to address supply-side constraints. for instance, increasing interest rates can curb excessive spending and borrowing, while supply-side reforms can mitigate production bottlenecks (edeh & onyekachi, 2024). the effectiveness of these measures depends on their timely and coordinated implementation by relevant authorities. moreover, inflation has global implications, particularly in a highly interconnected world economy. rising inflation in one country can spill over to others through trade and financial markets. this underscores the importance of international cooperation and sound domestic policies in addressing inflationary challenges (ibrahim & gana, 2019). the persistent need to balance inflation control with economic growth remains a critical task for policymakers worldwide. business profitability business profitability refers to the ability of a business to generate earnings that exceed its costs and expenses over a specific period. it is a crucial indicator of a company's financial health and sustainability. profitability is typically assessed through metrics like gross profit margin, net profit margin, and return on investment (roi), which provide insights into how efficiently resources are utilized to generate income (oluwole & adekunle, 2020). these metrics help stakeholders evaluate performance and inform strategic decisions. the determinants of profitability vary across industries and market conditions. internal factors, such as operational efficiency, innovation, and cost management, play a significant role. external factors, including market demand, economic policies, and competition, also influence profitability. for example, businesses that adopt advanced technologies often gain competitive advantages, enhancing their profitability (okafor & njoku, 2023). understanding these determinants enables businesses to align their strategies with prevailing conditions. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 36 | p a g e profitability drives growth and resilience in businesses by facilitating reinvestment and expansion. companies that consistently generate profits can finance new projects, acquire assets, and attract investors without relying heavily on debt. additionally, profitability provides a buffer against economic downturns, ensuring long-term stability (ibrahim & sanni, 2022). however, excessive focus on shortterm profits may lead to unethical practices or undermine sustainability. effective strategies for enhancing profitability include optimizing supply chain operations, improving customer satisfaction, and diversifying revenue streams. for instance, streamlining production processes reduces waste, lowering costs and increasing margins. similarly, leveraging customer feedback to improve product offerings can strengthen customer loyalty, boosting sales (ezeokafor & agbo, 2021). businesses must adopt a balanced approach, integrating innovation with ethical practices to sustain profitability. moreso, profitability influences broader economic development, as profitable businesses contribute to job creation, government revenues, and community investments. in a globalized economy, enhancing profitability requires adaptability to changing market trends and regulatory environments (chinedu & okorie, 2019). policymakers and business leaders must collaborate to create conducive conditions that foster innovation and fair competition, thereby promoting sustainable profitability. accounting practices accounting practices refer to the standardized methods and procedures that organizations use to record, process, and report financial transactions. these practices ensure consistency, accuracy, and compliance with regulatory frameworks, such as the international financial reporting standards (ifrs) and generally accepted accounting principles (gaap) (oladele & babalola, 2021). proper accounting practices are essential for financial transparency, enabling stakeholders to make informed decisions based on reliable financial statements. the evolution of accounting practices is driven by advancements in technology, globalization, and changing regulatory requirements. automation tools, such as enterprise resource planning (erp) systems, have streamlined accounting processes, reducing errors and improving efficiency (ogundele & akpan, 2023). additionally, global economic integration necessitates harmonized accounting standards to facilitate cross-border investments and financial comparability. adapting to these developments is crucial for organizations to maintain competitiveness and compliance. accounting practices encompass various activities, including bookkeeping, budgeting, auditing, and financial reporting. bookkeeping involves systematically recording transactions, while budgeting focuses on planning future financial activities. auditing ensures the accuracy of financial reports and compliance with regulations, fostering trust among stakeholders (igbokwe & okpara, 2019). these activities collectively contribute to robust financial management and organizational accountability. challenges in accounting practices arise from issues such as regulatory complexities, ethical dilemmas, and technological disruptions. for instance, discrepancies in tax laws across jurisdictions complicate mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 37 | p a g e compliance, while the rise of digital currencies introduces new accounting considerations (emefiele & chukwuka, 2022). organizations must invest in training and technology to address these challenges effectively. furthermore, the role of accounting practices extends beyond organizational boundaries, influencing economic stability and growth. sound accounting practices promote investor confidence, enhance fiscal discipline, and facilitate sustainable development (ajiboye & fagbemi, 2020). as financial systems evolve, adopting innovative and ethical accounting practices will remain central to achieving long-term success. inflation management inflation management refers to the strategic measures undertaken by governments, central banks, and financial institutions to control and stabilize the rate of inflation within an economy (olalekan & abdulrahman, 2021). these measures aim to maintain price stability, safeguard purchasing power, and foster economic growth. central banks play a pivotal role by using monetary policy tools such as interest rate adjustments and open market operations to influence inflationary trends (adeyemi & umeh, 2021). effective inflation management ensures a balance between economic growth and price stability. the approaches to managing inflation can be broadly classified into monetary, fiscal, and structural policies. monetary policies focus on regulating the money supply and credit availability to curb excessive demand (njoku & obi, 2019). fiscal policies involve adjustments in government spending and taxation to control inflationary pressures. structural reforms, such as improving supply chains and reducing production bottlenecks, address cost-push inflation (ibrahim & omole, 2020). a combination of these measures is often required to achieve sustainable outcomes. inflation management significantly impacts various sectors of the economy. for example, wellregulated inflation supports investment by reducing uncertainty and fostering business confidence. conversely, poor inflation control can lead to economic instability, eroding the real value of wages and savings (okafor & nnamdi, 2022). governments must proactively assess inflation trends and implement timely measures to mitigate adverse effects. challenges in inflation management include external shocks, such as global commodity price fluctuations and geopolitical tensions. these factors complicate policy responses and require adaptive strategies. additionally, high levels of public debt can constrain the effectiveness of fiscal policies, making monetary policy adjustments more critical (ezeobi & amadi 2023). addressing these challenges requires coordinated efforts at both national and international levels. moreso, the success of inflation management relies on a comprehensive understanding of economic dynamics and a commitment to implementing adaptive, transparent, and accountable policies. collaborative efforts between policymakers, businesses, and international organizations are essential to address inflationary challenges and achieve long-term economic stability. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 38 | p a g e profitability strategies profitability strategies refer to the comprehensive plans and actions implemented by organizations to maximize financial gains while maintaining operational efficiency. these strategies focus on increasing revenue, reducing costs, and optimizing resource utilization to sustain a competitive advantage. key approaches include market expansion, product diversification, and technological innovation (ahmed & suleiman, 2020). organizations must analyze their financial performance regularly to tailor strategies that align with market conditions and business goals. a core profitability strategy is cost management, which involves identifying and minimizing unnecessary expenditures without compromising quality. effective cost control enhances profit margins by optimizing operational processes and adopting lean management techniques. for instance, digital transformation initiatives such as automation and cloud computing have proven to reduce costs significantly while improving service delivery (bamidele & akinyemi, 2021). revenue growth is another pillar of profitability strategies, achieved through enhanced customer engagement and market penetration. businesses can leverage data analytics to understand consumer preferences, enabling targeted marketing and personalized offerings. moreover, implementing loyalty programs strengthens customer retention, fostering steady revenue streams (onyebuchi & ezenwa, 2019). innovations in product and service delivery also contribute to competitive differentiation and increased profitability. strategic partnerships and diversification further bolster profitability. collaborating with complementary businesses expands market reach and reduces risks associated with over-reliance on specific revenue sources. similarly, diversification into new markets or product categories cushions businesses against economic volatility and creates new profit opportunities (chukwuemeka & nwosu, 2023). furthermore, long-term profitability strategies emphasize sustainable practices and corporate social responsibility (okoro & ubah, 2022). adopting environmentally friendly operations and engaging in community development enhances brand reputation and attracts eco-conscious consumers. these approaches balance economic objectives with social and environmental responsibilities, ensuring holistic growth and resilience. financial reporting financial reporting involves the systematic process of preparing and presenting financial statements to provide stakeholders with an accurate representation of an organization’s financial performance and position. these reports include the balance sheet, income statement, and cash flow statement, which collectively offer insights into operational efficiency, liquidity, and profitability (adekunle & fashola, 2021). financial reporting adheres to frameworks such as the international financial reporting standards (ifrs) or generally accepted accounting principles (gaap) to ensure consistency and comparability. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 39 | p a g e transparency and accountability are central to financial reporting. by disclosing reliable financial information, organizations enhance investor confidence and facilitate informed decision-making. advances in digital technology, such as blockchain, have further improved the accuracy and traceability of financial transactions, enabling more robust reporting mechanisms (ogbonna & ezeani, 2019). accurate financial reporting is vital for regulatory compliance and to mitigate the risks of financial mismanagement. the evolution of financial reporting practices has been driven by globalization and dynamic market conditions. organizations operating across borders must adhere to international standards to attract global investors and maintain competitiveness. additionally, integrating environmental, social, and governance (esg) metrics into financial reports is becoming increasingly important for stakeholders seeking sustainable investment options (abiola & nwachukwu, 2023). despite its importance, financial reporting faces challenges such as fraudulent reporting and noncompliance. complex financial instruments and inadequate regulatory oversight contribute to misreporting issues. to address these challenges, organizations must implement rigorous internal controls and leverage advanced auditing technologies (emeka & chigozie, 2022). training employees on ethical practices and regulatory updates is also critical in ensuring accurate reporting. moreover, the future of financial reporting lies in the adoption of cutting-edge technologies and data analytics. the use of artificial intelligence and real-time reporting tools allows organizations to identify trends, predict risks, and enhance decision-making processes (adebayo & okonkwo, 2020). these advancements, coupled with a strong regulatory framework, are essential to fostering trust and ensuring the long-term reliability of financial reports. theoretical review this study was theoretically underpinned on purchasing power parity (ppp) theory purchasing power parity (ppp) theory the purchasing power parity (ppp) theory, developed by economist gustav cassel, postulates that in the absence of transportation costs and other trade barriers, the exchange rate between two currencies should adjust to reflect changes in the price levels of the two countries. the theory essentially suggests that inflation differences between countries influence their exchange rates, ultimately impacting the real purchasing power of currencies. relevance to the study i. currency depreciation and business costs: the ppp theory explains how inflation-driven depreciation of the naira increases the cost of imported goods and materials, directly affecting business profitability, especially for industries reliant on foreign inputs. ii. impact on revenue and pricing strategies: businesses must adjust pricing strategies in response to inflation-induced changes in purchasing power. ppp theory sheds light on the link between inflation and pricing power, aiding in assessing revenue sustainability. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 40 | p a g e iii. accounting for real value: traditional accounting practices often overlook the impact of inflation on the real value of financial statements. ppp theory emphasizes the importance of inflationadjusted financial reporting, which ensures that assets, liabilities, and revenues are accurately represented. iv. inflation’s role in investment decisions: the theory highlights how inflation influences the cost of capital and returns on investment. businesses in nigeria can use this understanding to make better financial and operational decisions in an inflation-prone economy. v. global relevance and adaptation: for nigerian businesses aiming to comply with international accounting standards, ppp theory provides a framework for understanding how inflationary differences influence financial statements and global competitiveness. empirical review olumide (2018) examined the impact of inflation on business profitability in small and medium enterprises (smes) in nigeria using a descriptive survey design. data from 120 sme owners in lagos state were analyzed through regression techniques. the study found that inflation negatively affects profitability by increasing costs and reducing profit margins. recommendations included enhancing monetary policies to stabilize inflation, which could help preserve purchasing power and improve business performance in the sme sector. adekunle and bello (2020) evaluated inflationary trends and their effects on corporate profitability in the nigerian manufacturing sector. panel data from 25 manufacturing firms listed on the nigerian stock exchange (2010–2019) were analyzed. results indicated moderate inflation positively affected profitability through price adjustments, while high inflation caused rising production costs and reduced profitability. the study advocated for inflation-targeting strategies as a means to sustain manufacturing sector stability and growth in nigeria. amadi and okafor (2021) studied inflationary pressures and business profitability in the nigerian retail sector through a qualitative case study. they conducted interviews with financial managers of five large retail chains and analyzed financial documents (2015–2020). findings revealed inflation significantly increased operational costs, reducing profit margins. retailers implemented dynamic pricing strategies, though these led to reduced customer patronage. recommendations included leveraging technological innovations to optimize costs and improve retail sector profitability amidst inflationary pressures. hassan and ibrahim (2022) investigated the effects of inflation on profitability and sustainability of agribusiness in northern nigeria using a mixed-methods approach. surveys of 200 agribusiness operators and focus group discussions revealed inflation increased input costs, reduced production levels, and negatively impacted profitability. exchange rate fluctuations further exacerbated challenges for businesses relying on foreign inputs. recommendations included government subsidies for local mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 41 | p a g e inputs, inflation control measures, and support for agribusiness sustainability through policy reforms and financial incentives. umeh (2023) analyzed analyzing the long-term effects of inflation on corporate profitability in nigeria’s banking sector using time-series econometrics. employing the ardl model, the study examined data spanning 1990–2022. findings showed inflation had long-term negative effects on bank profitability by reducing lending rates and increasing operational costs. short-term impacts were mitigated through inflation-indexed financial products. recommendations focused on economic stabilization through policy reforms to protect banking sector profitability and ensure financial stability amidst inflationary trends. 3. methodology research design this study adopted a survey research design to examine the effects of inflation on business profitability and accounting practices in nigeria. the survey method was selected due to its ability to gather data from a broad sample of individuals, which would provide insights into the experiences and perspectives of businesses dealing with inflation. the research design allows for quantitative data collection and the generalization of findings from the sample to the broader population of businesses in nigeria. setting the research was carried out in nigeria, a country currently experiencing fluctuating inflation rates that have a significant impact on various sectors. the study focused on businesses located in urban and semi-urban areas, particularly in cities where the effects of inflation are likely to be more pronounced. these cities include lagos, abuja, enugu and port harcourt. the choice of setting allowed the research to capture the diverse impact of inflation on businesses of varying sizes and industries. this setting was crucial as it provided access to a wide range of businesses, from small local shops to large corporations, which all experience inflation differently. population of the study the target population for this study consisted of business owners, managers, and accountants employed in businesses within nigeria. this group was chosen because they are directly involved in business operations and accounting practices and are likely to have firsthand knowledge of how inflation affects their day-to-day decisions and profitability. a population size of 500 businesses was estimated, including a mix of small, medium, and large businesses across various sectors such as retail, manufacturing, services, and agriculture. this diverse group was selected to ensure that the study captured a variety of experiences and perspectives regarding the effects of inflation on business practices. sample size to determine the sample size for the study, taro yamane’s formula was applied. the formula for calculating the sample size is: mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 42 | p a g e n = n 1+n(e)2 where: • n is the sample size • n is the total population (500) • e is the margin of error, which was set at 0.05 (a 95% confidence level) substituting the values into the formula: n = 500 1+500(0.05)2 n = 500 1+500(0.0025) n = 500 2.25 n = 222 thus, the sample size was determined to be approximately 222 respondents. this sample size was sufficient to ensure the reliability and accuracy of the findings, providing a good representation of the target population. the sample size was also large enough to allow for statistical analysis and meaningful interpretation of the data. sampling techniques the sampling technique employed in this study was simple random sampling. this technique was chosen to ensure that each business in the target population had an equal chance of being selected. simple random sampling eliminates bias and enhances the generalizability of the results. the sampling frame was created by listing all businesses in the target cities, and respondents were randomly selected from this list. this approach ensured that the sample was representative of businesses from various industries and sectors, allowing for a broad understanding of inflation’s impact on business practices across the country. instrument for data collection the primary instrument for data collection was a structured questionnaire, which was carefully designed to capture both qualitative and quantitative data. the questionnaire consisted of closed-ended questions, which allowed for the collection of specific data on the effects of inflation on business profitability and accounting practices, as well as open-ended questions that enabled respondents to elaborate on their experiences. the closed-ended questions included likert-scale items, multiplechoice questions, and dichotomous (yes/no) questions, all of which were aimed at quantifying the respondents' views. the open-ended questions allowed participants to provide detailed insights into mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 43 | p a g e how inflation has affected their businesses. the questionnaire was developed based on the research objectives and previous literature on inflation's impact on business operations. validity of the instrument the validity of the instrument was ensured through a multi-step process. first, the questionnaire was reviewed by experts in business management, accounting, and economics to assess its content and relevance to the research topic. these experts provided feedback on the clarity, wording, and structure of the questions, ensuring that they effectively captured the key aspects of the study. furthermore, a pilot study was conducted with a small sample of 20 respondents who shared characteristics similar to the target population. the feedback from the pilot study helped to refine the instrument by addressing ambiguities and ensuring that all questions were clear and comprehensible. based on the feedback, necessary modifications were made to improve the validity of the instrument. reliability of the instrument the reliability of the questionnaire was tested using cronbach’s alpha coefficient, a measure of internal consistency. cronbach’s alpha is a statistical tool used to assess the reliability of a set of items or questions in a survey. a coefficient value of 0.70 or higher is typically considered acceptable for reliability. the reliability test was performed on a pilot sample, and the resulting cronbach’s alpha value was 0.85, indicating that the instrument was highly reliable and consistent in measuring the variables of interest. method of data collection data was collected using two primary methods: surveys and interviews. the survey questionnaires were distributed to the selected respondents through both online platforms and face-to-face interactions. online surveys were sent to business owners and accountants via email, while physical surveys were distributed in person to respondents who preferred that method. in addition to the surveys, in-depth interviews were conducted with a smaller subset of respondents to gain more detailed insights into their experiences with inflation. the interviews provided an opportunity to explore the qualitative aspects of inflation’s effects on business profitability and accounting practices, offering a deeper understanding beyond the quantitative data obtained from the surveys. method of data analysis the data collected from the surveys and interviews were analyzed using descriptive statistics. descriptive statistics were employed to summarize and present the data in a meaningful way, using measures such as frequencies, percentages, and means. a frequency table was constructed to display the distribution of responses to key survey questions, allowing for an easy comparison of the data across different business sectors. the results from the interviews were analyzed qualitatively, with common themes and patterns identified to provide further context and understanding of the quantitative findings. the combination of descriptive statistics and qualitative analysis enabled a comprehensive interpretation of the effects of inflation on business profitability and accounting practices in nigeria. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 44 | p a g e 4. data presentation and analysis table 1: how has inflation affected your business profitability over the past year? options/responses frequency percentage (%) significantly reduced profitability 45 20.3 slightly reduced profitability 75 33.8 no impact on profitability 60 27.0 slightly increased profitability 30 13.5 significantly increased profitability 12 5.4 total 222 100.0 source: field survey, 2024 this table illustrates the respondents' views on how inflation has affected their business profitability over the past year. the data shows that 33.8% of respondents reported a slight reduction in profitability, while 20.3% indicated a significant reduction. a further 27% of respondents noted that inflation had no impact on their profitability. only 13.5% observed a slight increase, and 5.4% saw a significant increase in profitability. the majority of respondents view inflation as having a negative impact on their business profitability, though a small number have experienced either no impact or a positive effect. table 2: to what extent do inflationary pressures increase your cost of doing business? options/responses frequency percentage (%) very high extent 80 36.0 high extent 70 31.5 moderate extent 45 20.3 low extent 15 6.8 no impact 12 5.4 total 222 100.0 source: field survey, 2024 this table illustrates the respondents' views on the extent to which inflationary pressures have increased their cost of doing business. the majority of respondents, 36%, indicated that inflation has increased their business costs to a very high extent, followed by 31.5% who reported a high extent of cost increase. a smaller portion, 20.3%, felt the impact was moderate. only 6.8% noted a low extent of inflation's impact on their costs, and 5.4% reported no impact at all. this suggests that inflation has significantly affected the cost structure of most businesses, with the majority experiencing substantial cost increases due to inflationary pressures. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 45 | p a g e table 3: how effective are your current accounting practices in adjusting to inflationrelated challenges? options/responses frequency percentage (%) very effective 40 18.0 effective 80 36.0 neutral 50 22.5 ineffective 30 13.5 very ineffective 22 9.9 total 222 100.0 source: field survey, 2024 this table illustrates the respondents' views on the effectiveness of their current accounting practices in adjusting to inflation-related challenges. the data shows that 36% of respondents rated their accounting practices as effective in dealing with inflation, while 18% found them to be very effective. a significant portion, 22.5%, felt neutral about the effectiveness of their accounting practices, indicating that they did not see a strong impact either way. however, 13.5% of respondents believed their accounting practices were ineffective, and 9.9% felt they were very ineffective in addressing inflation's challenges. this suggests that while many businesses have somewhat effective accounting practices, there is a considerable portion that struggles with adapting their systems to cope with inflationary pressures. table 4: have you had to modify your accounting practices due to inflation? options/responses frequency percentage (%) yes, significantly 60 27.0 yes, moderately 90 40.5 no, not at all 45 20.3 no, but we are considering modifications 27 12.2 total 222 100.0 source: field survey, 2024 this table illustrates the respondents' views on whether they have had to modify their accounting practices due to inflation. the majority of respondents, 40.5%, reported that they had made moderate modifications to their accounting practices in response to inflation, while 27% stated that they had made significant changes. a smaller portion, 20.3%, indicated that no modifications had been necessary, suggesting that their existing accounting practices were sufficient to cope with inflation. additionally, 12.2% of respondents stated that they had not yet made changes but were considering modifications. this indicates that while many businesses have adjusted their accounting practices to some degree, a significant number are still contemplating the need for further changes. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 46 | p a g e table 5: which of the following strategies has your business adopted to mitigate inflation’s impact on profitability? options/responses frequency percentage (%) raising prices for products/services 90 40.5 reducing operating costs 75 33.8 enhancing operational efficiency 30 13.5 diversifying product offerings 15 6.8 other (please specify) 12 5.4 total 222 100.0 source: field survey, 2024 this table illustrates the strategies that respondents have adopted to mitigate inflation’s impact on profitability. the most common strategy, adopted by 40.5% of respondents, was raising prices for products or services to offset rising costs. a significant portion, 33.8%, focused on reducing operating costs to maintain profitability. some businesses, 13.5%, enhanced operational efficiency as a means to manage inflation, while 6.8% turned to diversifying their product offerings. a smaller number, 5.4%, employed other unspecified strategies. this suggests that while price adjustments and cost reduction are the most common responses, businesses are also exploring alternative ways to adapt to inflationary pressures. table 6: which strategy do you believe would be most effective in managing the impact of inflation on accounting practices? options/responses frequency percentage (%) regularly updating financial statements to reflect inflationary trends 70 31.5 adjusting budget forecasts based on inflation projections 80 36.0 implementing cost-control measures in accounting systems 45 20.3 training staff to manage inflation-related financial changes 20 9.0 other (please specify) 7 3.2 total 222 100.0 source: field survey, 2024 this table illustrates the respondents' views on which strategy would be most effective in managing the impact of inflation on accounting practices. the most popular strategy, selected by 36% of respondents, was adjusting budget forecasts based on inflation projections, reflecting a proactive approach to managing financial impacts. a close second, with 31.5%, was regularly updating financial statements to better reflect inflationary trends. about 20.3% of respondents believed that implementing cost-control mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 47 | p a g e measures in accounting systems would be effective, while 9% thought training staff to manage inflationrelated financial changes would be key. a small number, 3.2%, cited other strategies. these results indicate that businesses are most focused on anticipating inflationary effects and adapting their accounting systems to reflect these changes in a timely manner. 5. summary of findings, conclusion and recommendations summary of findings the following summarizes the key findings: i. the study found that inflation has generally had a negative impact on business profitability in nigeria. a significant portion of respondents (54.1%) reported that inflation either moderately or significantly reduced their profitability. however, some businesses (19.0%) experienced no impact, and a small minority (18.9%) reported a slight or significant increase in profitability. this indicates that while most businesses are struggling with inflation, there are a few that have found ways to adapt and even benefit. ii. the findings reveal that many businesses in nigeria feel their accounting practices have been somewhat effective in addressing inflation-related challenges. over 50% of respondents rated their accounting practices as either effective or very effective. however, there remains a significant portion (22.5%) who felt their practices were either neutral or ineffective in managing inflation. this highlights the need for businesses to further refine their accounting systems to better cope with the ongoing inflationary pressures. iii. the study shows that businesses in nigeria are employing a variety of strategies to mitigate the effects of inflation on profitability and accounting practices. the most common strategy (40.5%) is raising prices for products and services, followed by reducing operating costs (33.8%). other strategies such as enhancing operational efficiency and diversifying product offerings are less commonly used. additionally, businesses are focusing on adjusting budget forecasts and regularly updating financial statements to better manage inflation’s impact on their accounting practices. these findings underscore the importance of proactive financial planning and strategic price management in mitigating the challenges posed by inflation. conclusion the findings of this study provide a comprehensive overview of the impact of inflation on business profitability and accounting practices in nigeria. it is evident that inflation has had a substantial negative effect on most businesses, with the majority of respondents reporting a decrease in profitability. this is largely due to the increasing cost of doing business, as inflation drives up prices for raw materials, labor, and other operational expenses. despite these challenges, a small segment of businesses have been able to either maintain or even increase profitability, suggesting that there are certain strategies and practices that can help businesses mitigate the adverse effects of inflation. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 48 | p a g e in terms of accounting practices, the study shows that many businesses have attempted to adjust their systems in response to inflationary pressures. while over half of the respondents indicated that their accounting practices were either effective or very effective in coping with inflation, a significant portion felt that their accounting systems were inadequate or neutral in addressing inflation's impact. this highlights a key area for improvement, as businesses must ensure that their financial management systems are agile enough to adapt to the ongoing challenges posed by inflation. the strategies employed by businesses to mitigate inflation’s impact on profitability were varied, with the most common strategies being price increases and cost reductions. these strategies reflect a reactive approach, focusing on managing immediate impacts. however, some businesses also adopted longerterm strategies, such as enhancing operational efficiency and diversifying their product offerings, to ensure sustained profitability. additionally, businesses recognize the importance of proactive financial planning, with many emphasizing the need for regularly updating financial statements and adjusting budget forecasts in response to inflation. these actions are critical for businesses to maintain financial stability and effectively manage their resources in an inflationary environment. in conclusion, while inflation continues to present significant challenges for businesses in nigeria, those who are proactive in adjusting their accounting practices and adopting strategic measures to mitigate its effects are better positioned to navigate the financial uncertainty that comes with inflation. it is clear that businesses need to continuously evaluate and adapt their financial management practices to remain resilient in the face of inflation. the findings suggest that a combination of effective accounting practices, strategic pricing, cost management, and long-term planning will help businesses weather the storm and continue to thrive despite the inflationary environment. recommendations based on the findings of this study, the following recommendations are proposed: i. businesses should invest in strengthening their accounting systems to ensure they can effectively manage the challenges posed by inflation. this includes regularly updating financial statements to reflect inflationary trends and adjusting budget forecasts based on inflation projections. adopting advanced accounting software and tools that allow for real-time adjustments and scenario analysis can help businesses better anticipate and respond to inflationary pressures, ultimately improving financial decision-making and sustainability. ii. in addition to raising prices and reducing costs, businesses should consider diversifying their strategies to better mitigate inflation’s effects. this could involve exploring new revenue streams, diversifying product lines, or enhancing operational efficiency. investing in employee training to improve productivity and exploring technology-driven solutions to streamline operations could help reduce the overall impact of inflation on profitability. iii. businesses should prioritize long-term financial planning and risk management strategies to better cope with future inflationary challenges. developing and regularly reviewing inflationmailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 49 | p a g e sensitive financial plans will enable businesses to anticipate cost fluctuations and adjust their strategies accordingly. additionally, businesses should consider establishing financial reserves or hedging strategies to protect against extreme inflationary periods. fostering a culture of forwardthinking and resilience will help businesses not only survive during inflationary times but also thrive in a rapidly changing economic environment. references abiola, 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(2023). technology adoption in accounting: implications for efficiency. international journal of accounting innovations, 20(1), 45-60. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 52 | p a g e okoro, e., & ubah, p. (2022). balancing profitability and sustainability in modern enterprises. african journal of corporate responsibility, 17(2), 113-129. olalekan, j., & abdulrahman, m. (2021). inflationary trends and business performance: evidence from nigeria. nigerian economic journal, 29(4), 112-128. umeh, b., obinna, k., & aluko, p. (2020). inflation dynamics and their effects on corporate profitability: a nigerian perspective. international journal of finance, 18(7), 109-124. umeh, c. (2023). analyzing the long-term effects of inflation on corporate profitability in nigeria’s banking sector. okafor, i., & nnamdi, j. (2022). the socio-economic effects of inflationary trends in sub-saharan africa. journal of development economics, 29(1), 74-91. umeh, b., obinna, k., & aluko, p. (2020). inflation dynamics and their effects on corporate profitability: a nigerian perspective. international journal of finance, 18(7), 109-124. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 44 | p a g e effects of dollarization on consumption and balance of payment expenditure in nigeria 1dr. saviour sebastian udo and 1mr. james uffot james 1department of economics, akwa ibom state college of education, afaha nsit, akwa ibom state, nigeria sasedo2016@mail.com doi: https://doi.org/10.5281/zenodo.14871085 abstract: the study examined the impacts of dollarization on bop and consumption expenditure in nigeria. consequently, specific objectives were formulated as follows: accessing the impact of dollarization on balance of payment position in nigeria and examining the impact of dollarization on consumption expenditure in nigeria. since the data were time series data, they were subjected to adf test to ascertain the level of stationarity and the result shows mixed order of integration (order zero and one). based on this scenario, the study decides to estimate the equations using the autoregressive distr ibutive lag (ardl) co-integration technique. the result shows a positive impact of dollarization on balance of payments. the result also shows that domestic interest rate and exchange rate have positive and significant impact on balance of payment. this means, an increase in exchange rate has severe impact on balance of payments as indicated by the coefficients of the variable in the short run. the statistical significance of the variable further confirmed its impact on the balance of payments. from the outcome of the consumption expenditure equation, dollarization has both positive and negative impact on consumption expenditure. this is as a result of the fact that most of the consumer goods in nigeria are made of imported foreign goods and as exchange rate falls consumption expenditure falls. the inflation rate does not have a statistically significant impact on consumption because if consumers expect that prices will rise in the near future; they hasten to spend large sum out of a given income to take advantage of current low prices. mailto:sasedo2016@mail.com https://doi.org/10.5281/zenodo.14870639 american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 45 | p a g e keywords: dollarization, balance of payment, exchange rate, inflation rate and consumption. 1.0 introduction in recent times dollarization has almost taken over the area of economics and many institutions like the central banks of many nations. this scenario has affected macroeconomic policies of many countries. the term “dollarization” can also be seen as the replacement of domestic currency with foreign currency mostly dollar so as to ease economic dealings in an economy by various economic mediators in connection with the level of economic activities. this can also be referred to currency substitution (cs). because of predominant and obstinate macroeconomic instability in countries of the world, financial institutions, experts and governments of nations resort to guarding the actual value of their wealth by increasing their holdings of foreign currency. because of economic imbalances between the developed and less develop nations, most transaction are done in foreign currency. looking at nigeria as a case study, most contracts awarded by government are done in us dollars and even some of our ministers were paid in dollars. the nigerian government will employ a foreigner and pay them in dollars. economic crises and collapses in the domestic structural economic dynamics can be caused by currency fluctuations, large debt burdens, and unmanaged inflation rate. from the above illustrations, macroeconomic stability controls interest rate fluctuations. it is on this premise that piontkovsky (2003) opined that the dollarization otherwise known as currency substitution poses more challenge to monetary authorities in implementing their goals. this situation will cause financing of deficit budget to become more inflationary. therefore, to bridge the fiscal gap it requires a higher growth of the monetary base. the way the managers of the economy set the structure of dollarization, makes it more interesting. this is to say, the turning of many economies to see dollar as the only currency that keep an economy growing, makes the macroeconomic atmosphere defective in most unindustrialized economies. worthy of note is between 1980s and 1990s, where many countries in asia and africa were known for colossal depreciation of their currencies as they made effort to reduce the effect of black market for american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 46 | p a g e foreign exchange which had been in existence for many years (ekpo, 2020). studies reveals that consumption according to alimi (2013) takes the major percentage of the gross domestic product (gdp) in most developing countries. this consumption expenditure has affected between 50% and 70% of spending in most economies. experience in nigeria reveals that, in the 1980’s,1990’s, 2000’s and in the 21st century, average aggregate consumption expenditure stood at average of 75, 88.8, 83.9 and 84.2 per cent, respectively (cbn, 2020). records also indicated that, average private investment expenditure was 18.7%, 11.5%, 11.5% and 12.0% respectively for gdp, within the same period, i.e. between 1980 and 2021. records further reveals that balance of payment (bop) for the same periods stood at between 2.6% and 3.6% respectively (cbn. 2019). in the keynesian transaction demand motive for holding money, a theoretical relationship is established to exist between agents’ preference for foreign currency and demand for consumables by households. in the theory, consumption is seen as a critical and the largest component of aggregate demand that exerts tremendous influence on general economic performance through the mechanism of the multiplier (afonso, 2000). the theory also opined that, acute inflation period brings different categories of agents affected unreasonably by the bad effects of inflation on their purchasing power. by this it means that, agents with higher income would mostly have access to many leverages including substituting external currency for domestic currency. those at the lower strata of society who are by far the greater segment, the low-income groups and who have no alternative to the biting effects of inflation would mostly want to discharge their idle balances instead of exposing it to the menace of depreciation. by this it means that, aggregate consumption in the economy will be affected. however, those with higher income looking for safe environment in such uncertain economic environment would be constrained by ineptitudes in the capital market, which should be a natural resort in such times. alemán (1995) in a publication posited that: “due to the absence of capital markets in general and well-established and efficient capital markets in particular in almost every developing economy, individuals in this case are only able to hold their savings or their assets in the form of domestic currency. if this domestic currency is forced to depreciate continuously (i.e., if the inflation american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 47 | p a g e rate is constant, and positive) then the opportunity cost of holding real monetary balances will increase continuously. the theory also opined that investment demand is affected by agents’ preference for foreign currency. it was equally opined in the theory that, since dollarization has implications for monetary policy mostly as it affects the mobilization of savings, investment would be conceded by the inadequacy of savings. this is because agents may not be having confidence in monetary policy and as such may want to hoard their money balances in other stable and hard currencies to protect their wealth. this will make the process of effective financial intermediation to suffer setbacks and have negative implications on the nation (nyong, 2019). considering the above scenario, this study offers to integrate in the dollarization model other measures of macroeconomic performance not considered in other studies reviewed. the model will include: economic performance through spending (consumption and investment expenditures), and balance of payments (bop) equilibrium. the choice of these is because consumption is regarded by many literatures as a large component of aggregate demand and is noted to be about two-third of all spending and hence the response of consumption to changes in income is a vital component in macroeconomic analysis. also, the choice of bop as integrated variable in the model is because, the major monetary policy objective in nigeria is maintaining a healthy bop position thus improving standard of living of the citizenry. these are the reasons for this study and gaps to be filled in relation to existing literature. 1.1 objectives of the study the objectives of this study are to examine the impact of dollarization on balance of payment position in nigeria and on consumption expenditure in nigeria 2.1 theoretical literature the theories to consider in this context include: the keynesian money demand theory, and money inthe-utility function. 2.1.1 keynesian theory of money demand american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 48 | p a g e this theory was propounded first by john m. keynesian in 1936 in his wellknown book, “the general theory of employment, interest and money” (1936). the theory opines that demand for money is the desire for holding financial assets in the form of money by the economic agent. the theory argued that people prefer to hold money in other to meet up with their day-to-day transactions of personal and business exchange (transaction demand for money). the precautionary motive relates to the desire to provide for contingencies requiring sudden expenditures and for unforeseen opportunities of advantageous purchases. both individuals and businessmen keep cash in reserve to meet unexpected needs. while individuals hold some cash to provide for illness, accidents, unemployment and other unforeseen contingencies, business keeps cash in reserve to meet up with unfavorable conditions or to gain from unexpected deals. the theory opined that the precautionary demand for money is also a function of the level of income. the speculative motive implies that economic agents hold money in order to secure profit. money held for speculative purposes is a liquid store of value which can be invested at an opportune moment in interest-bearing bonds or securities. bond prices and the rate of interest are inversely related to each other. in the argument, keynes argued that low bond prices are indicative of high-interest rates, and high bond prices reflect low-interest rates. a bond carries a fixed rate of interest. 2.1.2 money in-the-utility function this theory was put forward by sidrauski (1967). the theory popularly known as “miuf theory” argued that “people have a tendency to hold certain amount of cash because they derive utility from holding it”. the miuf theory assumes that money yields utility at every function. the model enables researchers to study the impact of money on the real economy, impact of money on prices as well as optimal rate of inflation. in a similar case, poterba and rotemberg (1986) in their argument maintain that the convenient fiction that movements in per capita consumption, as well as real asset holdings, can be attributed to the optimizing behaviour of a rational representative consumer. thus, having constant preferences, and derives utility by consuming and by holding assets. this means that, households’ income can be spent on consumption, invested as capital, saved as bonds or kept as money. american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 49 | p a g e 2.2 review of empirical literature saviour, salamat and james (2024) in their study examined the impact of currency substitution on private investment expenditure in nigeria. central bank of nigeria (cbn) yearly statistical bulletin formed the major source of data for their study. the study employed the ardl estimation technique to estimate the long and short run parameters. the results of the study showed that domestic interest rate (dir) coefficient has a negative relationship to the private investment with changes in currency substitution in nigeria. based on the above findings, the study therefore suggested that government should through its policy makers strengthen the domestic currency for effective interest rate policy to invoke greater confidence among domestic private investors to induce increased investment and growth. saviour, ferdinand, jacob (2022), in their study investigated the effects of selected macroeconomic variables on stock market performance in nigeria. the study employed time-series data obtained from the central bank of nigeria's statistical bulletin and world development indicators. stock market performance was measured using the all-shares index while the identified macroeconomic variables included gdp growth, broad money supply, exchange rate, savings interest rate, and inflation rate. an autoregressive distributive lag (ardl) estimation technique was used to establish the long run relationship among the variables, and it was revealed that a long run relationship existed among the variables in the estimated model. the result shows that macroeconomic variables such as gross domestic product, broad money supply, exchange rate, and savings interest rate have a positive effect on stock market performance in nigeria. on the other hand, the results showed that the inflation rate has a negative effect on stock market performance in nigeria. predicated on the result, the study recommended that policies to increase gross domestic product, exchange rate, interest rate, and money supply should be implemented because they can lead to an improvement in the performance of the stock market, while the inflation rate should be maintained at a single digit to prevent its negative effect on the performance of the stock market in nigeria. american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 50 | p a g e adom, sharma and morshed (2006) in their study examined the presence of currency substitution in eight african countries of egypt, morocco, ghana, kenya, south africa, tunisia, zambia and nigeria from 1976 to 2005. the study used both regional and us dollars as the measured currency. the outcome divulges the prevalence of currency substitution in nigeria and south africa out of the eight countries reviewed, with the us dollars as the anchor currency effiom and ubi (2010) examine the vulnerability of the nigerian economy to currency substitution using annual time series data from 1970 to 2008. they used vector error correction model (vecm). the study used exchange rate and us treasury bills rate variables as proxies for cs, they showed that with persistent inflation and depreciation of the naira occasioned by exchange rate instability and monetary policy inconsistency, the nigerian economy is vulnerable to cs. adamu (2016) used the johansen cointegration test and error correction mechanism (ecm) to find out the existence, extent of currency substitution and its effects on the demand for money in nigeria. the study used time series data for the period 1980 to 2014, it was found out that the expected rate of depreciation, inflation rate, election period, and crude oil price as well as foreign rate of interest determine the extent of currency substitution in nigeria. kumamoto and kumamoto (2019) adopted the threshold arch model to examine how currency substitution diffuses foreign monetary policy shocks to domestic nations and appraised how the central bank retorts to real exchange rate actions in three inflation-targeting nations of america under currency substitution, namely chile, mexico, and peru, from 2000 to 2011. the result of the study revealed that the degree of currency substitution is higher in mexico, while it is insignificance in chile and peru. the result also revealed that domestic monetary policy had influenced the domestic economy through the real interest rate channel. however, the foreign monetary policy had a significant impact in mexico, but had insignificant impact in chile and peru. 2.3 research gap based on the literature reviewed above, there are very few studies carried out in nigeria on dollarization but the few focused on determining the presence of dollar in nigeria, others investigated its causes, american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 51 | p a g e while few sought to examine its effects on either the demand for money in nigeria or its impact on macroeconomic performance using inflation rate and gdp as a proxy for economic performance. the impact of dollarization on other indicators of macroeconomic performance, like balance of payment and consumption in nigeria has not been examined to the best of our knowledge. the gap in this study is to establish a nexus between dollarization and these variables. 3. research methodology 3.1 research design the study uses the quasi experimental design approach (empirical analysis) to analyze the relationship between dollarization and macroeconomic performance. this is to enable the researcher describe the phenomenon in context and establishes a functional relationship between the dependent and explanatory variables. since the study is on the effect of dollarization on macroeconomic performance, two equations are used to capture balance of payment and consumption expenditure in the model as follows: bop = f(dl, cpi, dir,exr, fir,y) (1) cons = f(dl, cpi, dir,exr, fir, y) (2) where: bop = balance of payment proxied by current account balance cons = aggregate consumption expenditure dl = dollarization index proxied by (fcd/m2) exr = real exchange rate cpi = consumer price index dir = domestic interest rate (proxied by real interest rate) fir = foreign interest rate proxied by us treasury bills rate y = real income proxied by real gross domestic product (rgdp) the econometric specification of equations assumes the form: bop = α0 + α1dl + α2exr + α3cpi + α4fir + α5dir + α6rgdp + µ1 (3) american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 52 | p a g e cons = ∂0 + ∂1dl + ∂2exr + ∂3cpi + ∂4fir + ∂5dir + ∂6rgdp + µ2 (4) where: µ = stochastic error term α0 to α6 and ∂0 to ∂6 are the parameters to be estimated. 3.2 a priori expectation on a priori α0, α1, α2, α4, α5, α6 ˃ 0 and ∂0, ∂1, ∂2, ∂4, ∂5, ∂5, β6 ˃ 0 while α3, ∂3, β3 ˂ 0 3.3 data sources the study used secondary time series data gotten from cbn statistical bulletin of various issues, cbn annual statement of account (2016), naira metrics (2016), world development indicators (2018), knoema.com as well as indexmundi.com. while data for us treasury bills (tb) proxy for foreign interest rate (fir) were sourced from the board of governors of the federal reserve system (us). 3.4 model estimation procedure since time series data is used in this study, preliminary tests on the variables like unit root is use to test the stationarity properties of all the data to ensure that the estimated result are not spurious and that estimated parameters from the specified models are valid and consistent. the study also test for any long run relationship among the variables using the autoregressive distributed lag (ardl) bound testing approach. the ardl estimation technique is employed to estimate the long and short run parameters. table 1: unit root test result for augmented dickey fuller variables adf levels first difference remark bop -100.31 -108.44 i(0) cpi 3.30 -3.55 i(1) dl -3.03 -5.48 i(1) dir -6.47 -7.27 i(1) exr -1.22 -3.82 i(1) american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 53 | p a g e fir -4.56 -3.66 i(0) cons -2.34 -8.33 i(1) source: author`s computation, 2025 the augmented dickey fuller (adf) was employed to determine the stationarity properties of the variables. the null hypothesis which represent the existence of unit root was tested against the alternative, i.e. the absence of unit root. this results shows that, the adf test results are a mixture of i(0) and i(1) series. this means that they are integrated of different orders. for instance, bop and fir are stationary at levels, while cpi, dir, cons, exr and dl are stationary after first differencing. table 2: ardl long run results of bop equation variable coefficient std. error t-statistic prob. log(cpi) -0.42166 0.095178 -4.43025* 0.0001 log(dl) -0.17252 0.058294 -2.95943* 0.0052 log(dir) -0.04444 0.086091 -0.51623 0.6086 log(exr) -0.12148 0.054982 -2.20946* 0.0331 log(fir) 0.237823 0.073602 3.231225* 0.0025 c -10.1843 23.95511 -0.42514 0.6856 cointeq(-1) r2 adjusted r2 -0.66695 0.942899 0.685945 0.119422 d-w f-stat. -5.58484* 2.423537 13.669518 0.0013 note: * implies significance at 5 per cent level of significance. source: author`s computation, 2025 american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 54 | p a g e the ardl short run result of the balance of payments (bop) equation is presented in table 2. from the result it can be seen that the oneand two-years lags of balance of payments has a significant impact on balance of payments in the current year. the one-year lag of bop has a negative effect on bop in the current year, while the two-year lag of bop has positive impact on bop in the current year. it can also be seen that the current and one-year lag of inflation (cpi) has a positive and significant impact on bop, while the two-year lag of bop has a negative and non-significant impact on bop. the result indicates that dollarization index (dl) in the current year has a positive and significant impact on bop, while its oneand two-year lags have a negative and significant impact on bop. domestic interest rate (dir) and its one-year lag have a negative effect on bop, while the two-year lag of dir has a positive relationship with bop. however, the impact of dir on bop is not statistically significant, while its lags have a significant impact on bop. exchange rate (exr) has a negative and non-significant impact on bop. on the other hand, the oneand two-year lags of exr have a positive and significant impact on bop. foreign interest rate (fir) and its one-year lag have a statistically significant impact on bop. the impact of fir is negative, while the impact of its lag is positive. the two-year lag of fir has a positive but non-significant impact on bop. finally, the error correction coefficient (cointeq(-1)) is negative and statically significant. the adjusted r-squared of 0.68 indicates that about 68 percent of variation in the bop is explained by the regressors, 32 percent was unexplained which may be accounted for by other factors not included in the model. the f-statistic of about 13.66 shows that all the variables in the model are together as a group statistically significant. this means that the model has a good fit. durbin-watson (d-w) statistic of 2.423 indicates no autocorrelation in the model. therefore, the results can be used for economic forecast and economic policy. the ardl results of the balance of payments (bop) equation is also presented in table 2. from the result, it can be seen that dl, cpi, exr and dir has a negative impact on bop in the long run, while fir exhibit a positive relationship. this implies that, a 1% increase in the variables (dl, cpi, exr, and dir) will cause the bop to reduce by 17.2%, 42.2%, 12.1% and 4.45 respectively. similarly, a 1% increase american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 55 | p a g e in foreign interest rate (fir) variable will lead to increase in bop by 23.8% and 42.6% respectively. this indicate that, when fir increases, the current account of nigeria will increase. table 3: ardl long run results of consumption equation variable coefficient std. error t-statistic prob. log(cpi) 0.5124 0.12049 4.25262* 0.0054 log(dl) 0.260779 0.070801 3.683265* 0.0103 log(dir) -0.11143 0.084684 -1.31582 0.2363 log(exr) -0.13965 0.120757 -1.15646 0.2915 log(fir) -0.064 0.032191 -1.98806 0.094 c 0.6098 1.530966 0.398311 0.7042 cointeq(-1) r2 adjusted r2 -0.64816 0.996601 0.981307 0.267864 d-w f-stat. -2.41974* 2.598334 65.16295 0.0203 note: * implies significance at 5 per cent level of significance. source: author`s computation, 2025 the ardl result of the consumption model is presented in table 3. from the result it can be seen that the one and two-year lags of consumption expenditure (cons) have a positive and significant impact on consumption expenditure in the current year. it can also be seen that currency substitution (dl) and its one-year lag have a negative and statistically significant impact on cons, while the lag of dl has a positive and non-significant impact on cons. domestic interest rate (dir) and foreign interest rate (fir) have a positive and significant impact on cons. the lags of dir have a positive and nonamerican research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 56 | p a g e significant impact on cons, while the lag of fir has a negative and non-significant impact on cons. on the other hand, aggregate consumption expenditure equation result as presented in table 3 shows that dl, and cpi has a positive and statistically significant long-run impact on cons, and fir has a negative and non-significant long-run impact on cons. again, the implication of this is that a 1% increase in the variables will lead to an increase/(decrease) in aggregate consumption expenditure by 51.2%, 26.1%, 1.9%, (11.1%), (13.9%), and 6.4%) respectively from the result it can also be seen that exchange rate (exr) has a negative and significant impact on cons. however, the lags of exr have a negative and non-significant impact on cons. the inflation rate (cpi) and its lags do not have a statistically significant impact on cons. finally, the error correction coefficient (cointeq(-1)) is negative and statically significant. this satisfies the a-priori criteria and implies that the model has a rapid speed of adjustment because 64.81 per cent of the disequilibrium in the short-run is corrected in the long-run. the adjusted r-squared of 0.98 indicates that about 98 percent of variation in the bop is explained by the regressors while only 2 percent was unexplained which may be accounted for by other factors not included in the model. the f-statistic of about 65.16 shows that all the variables in the model are together as a group statistically significant. this means that the model has a good fit. durbin-watson (d-w) statistic of 2.598 indicates no autocorrelation in the model. therefore, the results can be used for economic forecast and economic policy. 4. discussion of findings the result of this study showed that the coefficient of dollarization is found to be negatively related to balance of payment. this suggest that dollarization impacts adversely on nigeria’s balance of payment position. this could be attributed to decrease in the wealth of residents holding foreign currency denominated deposit in the presence of the depreciation of domestic currency, thereby, resulting to a more stable capital market that put to an end sudden capital outflows, and a balance of payment that is less prone to crises. american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 57 | p a g e exchange rate was found to be negatively related to balance of payment, and consumption expenditure. this shows that, there is a negative relationship between exchange rate and the dependent variables, indicating that higher exchange rate worsens the balances of payment position as well as consumption expenditures. investors in foreign securities or other assets take into consideration the likely movement in exchange rate with the currency of the target country and weigh the country risk together with the other risk of investing. thus, this fluctuation affects the value of investments made in a foreign country. the coefficient of consumer price index (cpi), a measure for inflation was found to be positively related to balance of payment, and consumption in this study. it was discovered that, on the balance of payment equation, it was statistically significant and statistically insignificant in the consumption equation. a high inflation rate destabilizes price levels, making it far more difficult for investors to accurately predict future market behaviour. according to the result, foreign interest rate (fir) has significantly impacted on balance of payments and consumption expenditure. the coefficient of fir is negatively related to balance of payment, and positively related to consumption. the positive sign of foreign rate of interest suggest that economic agents tend to demand for domestic currency in order to increase their foreign currency assets denomination. finally, the domestic interest rate (dir) coefficient shows that it is negatively related to balance of payment. the ardl coefficients meet the three criteria for its acceptability given that it is negative, fractional and statistically significant. consequently, the estimated result confirms the presence of relationship among the variables in the models. it also shows that the speed of adjustments is high in all the estimated models. the values of the adjusted r-squared implies that the models have good fit as the independent variables have high explanatory power. the durbin-watson statistic connotes absence of autocorrelation in the estimated equations. 5. summary and recommendations 5.1 summary american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 58 | p a g e the study examined the impact of dollarization on bop and consumption expenditures in nigeria from 1981-2025. it adopts the autoregressive distributive lag in analyzing the models. in addition, the study reveals both positive and negative relationship between dollarization, domestic interest rate, exchange rate, foreign interest rate and macroeconomic variables such as balance of payments and consumption expenditure. it means that the continuous substitution of the naira for foreign currencies such as dollar, pound sterling and euro stand to worsen strength of our domestic currency and this is the reason our currency is not strong in international transaction. based on these results, the study concludes that any economy with prevailing and persistent macroeconomic instability like nigeria, the residents are likely to resort to protecting the real value of their wealth by increasing their holdings of foreign currency and hence causing economic imbalances. 5.2 recommendations based on the empirical findings and the conclusion drawn, the study recommends that: efforts should be made to strengthen the domestic currency by policy makers. this can be done through a combination of fiscal and monetary policies; fiscal policies to boost productivity, reduce frivolous imports, and monetary policies to regulate and stabilize the monetary sector. monetary authority should ensure that effective and efficient policy control on inflation, and exchange rate is put in place to reduce the rate of currency substitution in nigeria, thereby, boosting economic agent of domestic consumption. there is need to check mate the disparity between the foreign exchange market and the parallel foreign exchange market by the monetary authority in other to achieve the objective of having a realistic exchange rate. references adamu, m. b. (2016). currency substitution and the demand for money in nigeria: 1980 – 2014. a thesis submitted to the school of postgraduate studies, ahmadu bello university, zaria adom, a.d, sharma, s. c., & morshed, a. m. (2006). currency substitution in selected african countries afonso (2000). the science of monetary policy: a new keynesian perspective: journal of economic literature xxxvii (4): 1661-1707 akpan, e. o., & atan, j. a. (n.d). effects of exchange rate movements on economic growth in nigeria. cbn journal of applied statistics 2(2) alemán, e. j. (1995). "inflation, currency substitution, and dollarization: the case of argentina".fiu electronic theses and dissertations. 1224. american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 59 | p a g e alimi, r. s. (2013). keynes' absolute income hypothesis. retrieved from online at https://mpra.ub.unimuenchen.de/49310/ mpra paper no. 49310, posted 26 august 2013 14:05 utc amadi, s. n., akani, h.w. & ogbole, f. o. (2011). fiscal policy and macroeconomic performance in nigeria, 1970 – 2007. retrieve from anyawu, j.c. (2004). monetary economics: theory, policy, and institution. hybrid publishers ltd, onitsha, nigeria central bank of nigeria (2011). understanding monetary policy series no. 3. central bank of nigeria monetary policy framework central bank of nigeria (2014): annual report and statement of accounts, abuja, nigeria. www.cenbank.org central bank of nigeria (2019). annual report and statement of accounts, abuja, nigeria. www.cenbank.org effiom, l. & ubi, p. s. (2010). currency substitution phenomenon: is the nigerian economy immune? journal of economic theory 4(1) issn: 1994-8212 kumamoto, h. & kumamoto, m. (2017). currency substitution and monetary policy effects: the case of latin american countries. international journal of economics and finance; 9(2); 2017 issn 1916-971x e-issn 1916-9728 published by canadian center of science and education poterba, j. m & rotemberg, j. j. (1986). money in the utility function: an empirical implication. working paper no. 1796 saviour s. u., salamat a. u. and james, j. u. (2024), currency substitution and effects on private investment in nigeria. aksu annals of sustainable development, 2 (1) saviour s. u., ferdinand i. o, and a. o. jacob (2022), effects of selected macroeconomic variables on stock market performance in nigeria, malaysian e commerce journal 6(2) ugwu, o. j. & philip (2017). currency substitution in nigeria; international digital organization for scientific research issn: 2550-7966 idosr journal of humanities and social sciences 2(2): 165177 american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 101 | p a g e corporate governance and bankruptcy risk in commercial banks in nigeria 1ofurum christmas ifeanyi d. and 2nwachukwu rapheal 1department of accountancy, alex ekwueme federal university, alike ikwo, ebonyi state 2department of accountancy, tansion university umunya, anambra state email: christmas.ofurum@funai.edu.ng/ chikwute@yahoo.com doi: https://doi.org/10.5281/zenodo.14888292 abstract: this study determined the effect of corporate governance on bankruptcy risk in commercial banks in nigeria, using risk management committee and board of directors’ independence. ex post facto research design was adopted for the study. a sample of eight deposit money banks was used for the study. data were obtained from the annual reports and audited accounts of the banks under assessment. altman's original model for public companies was used to extract data and the formulated hypotheses were tested with regression analysis with aid of e-view 9.0. the analysis and hypotheses tested shows that risk management committee has no significant effect on bankruptcy risk commercial banks in nigeria. however, the study revealed that board of directors’ independence has a positive significant effect on bankruptcy risk commercial banks in nigeria. based on the results, the study recommended among others that risk management committee should be encouraged, since the committee can influence the capacity for problemsolving as the variety of perspectives that identifying the weakness of internal control and risk source that can easily use in checkmating bankruptcy. keywords: corporate governance, risk management committee, board of directors’ independence and bankruptcy risk introduction bankruptcy has often been discussed and investigated in the recent years. while there has been attention related to corporate bankruptcy in the accounting and finance literature, focus has been mainly on predicting bankruptcy based on financial data (altman, 2000). though, this phenomenon having already been observed in recent high-profile bankruptcy events, some studies has been carried out on corporate governance on the bankruptcy risk, it is an open empirical question how the relation of corporate governance to the likelihood of bankruptcy. strong corporate governance (scg) practice guarantees transparency and consistency in financial statements. firms can approach external sources at low costs when they have the confidence of investors (tricker & tricker, 2015). additionally, the implementation of scg practice ensures the mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:chikwute@yahoo.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 102 | p a g e usage of the optimal business strategy to maximize firm value and mitigate related risks in the future (husson-traore, 2009; manzaneque et al., 2016). the collapse of corporations resulting from the financial crisis of 2008 is evidence of the ramifications of weak corporate governance (wcg) implementation (kumar & singh, 2013; mehran et al., 2011). scg policies shield firms from the risk of financial distress or insolvency, which are among the biggest causes of bankruptcy. the role of scg adoption in mitigating financial distress has been well recognized in developed countries. many researchers have conducted empirical research on the impact of good corporate governance (cg) implementation on the probability of financial distress. these studies have homogenously proven the adverse effects of good cg practice on the likelihood of distress risk (bravo-urquiza & moreno-ureba, 2021; miglani et al., 2015). although developing countries appreciate the importance of cg, the benefits of cg, which have functioned only with good cg adoption, have not been a priority. therefore, cg implementation in transitional economies is lacking (nurunnabi, 2020). nigerian banking sector plays a very crucial role in the socio-economic development of the country and significantly contributes to the gross domestic product of the nation (ighoroje & egedi, 2015). however, the sector has over the years experienced turbulence and in some cases failure. between 2009 and 2019 according to ndic (2020), the central bank of nigeria (cbn) revoked the licenses of 8 failed banks. the federal high court issued orders for them to be wound up and appointed the nigeria deposit insurance corporation (ndic) as liquidator of the banks. the central bank of nigeria in these periods, withdrew the banking licenses of some of these banks and the ndic stepped in, creating bridge banks (temporary banks) to acquire the assets of the banks so as to continue operations on a fresh note (wurim, 2013). an efficient and effective banking sector in the economy is essential not only for the promotion of efficient intermediary role but also for the protection of depositors, encouragement of healthy competition, maintenance of confidence in, and stability of the system and protection against systemic risk and collapse. the gruesome impact of ill health in the banking sector has affected almost all facets of the society the government, regulatory authorities, creditors, equity investors, the bankers as well as the general public. this study therefore, ascertains the effect of corporate governance on bankruptcy risk in commercial banks in nigeria. specifically, the study sought to: 1. evaluate the effect of risk management committee on bankruptcy risk deposit money banks in nigeria. 2. assess the effect of board of directors’ independence on bankruptcy risk deposit money banks in nigeria. literature review corporate governance mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 103 | p a g e the set of recommendations and rewards called "cg" are used to direct and modify an employer's management (ehiedu, 2022; adeusi, akeke, aribaba & adebisi, 2017). ehiedu and ogbeta, (2014) opined that company governance is an institutional setup that restrains the excesses of commanding managers. ensuring that the agency is operated efficiently and buyers earn a fair go back is the center reason of corporate governance (kajola, 2018). if an employer is run with diligence, openness, accountability, and duty with the aim of maximizing shareholders' wealth, that company is taken into consideration to have complied with the cg rule (pandy, 2018). corporate governance is worried with how all parties (stakeholders) worried inside the firm's achievement attempt to guarantee that managers and different insiders are constantly taking proper movements or imposing approaches that shield the stakeholders' hobbies. corporate governance tools assure shareholders of adequate returns on investments. corporate governance changed into created to guard the hobbies of shareholders however an increasing number of gained significance has for other stakeholders and society (mohammad, aly, dixon, & startling, 2014). for corporate governance systems, another key component for a business enterprise is the presence of inner and external auditors. in this feel, literature has shown that the presence of internal and outside audit systems could have a huge impact on changes to a agency’s monetary overall performance and on its possibility of default (guo et al., 2016 and cenciarelli et al., 2018, amongst others). inner and outside auditors can guarantee the best of the information of the economic reviews furnished via the organization for buyers (bratten et al., 2013), and their role has relevant consequences for the duration of a economic crisis (cenciarelli et al., 2018). on this feel, also the presence of the audit committee will have a giant high-quality effect in stopping the danger of frauds and irregularities (beasley et al., 2000). for distressed companies especially, statutory auditors and outside auditors are obliged to choose the ability of the business enterprise to operate as a going concern entity for the following three hundred and sixty-five days. bankruptcy bankruptcy refers to the situation in which the debtor company becomes unable to repay its debts and can be considered to be the consequence of a company’s inability to survive market competition, reflected in terms of job losses, the destruction of assets, and in a low productivity (aleksanyan and huiban 2016). the risk of bankruptcy or insolvency risk shows the possibility that a company will be unable to meet its debt obligations, respectively the probability of a company to go bankrupt in the next few years. assessing of bankruptcy risk is important especially for investors in making equity or bond investment decisions, but also for managers in financial decision making of funding, investments and distribution policy. failure prediction models are important tools also for bankers, rating agencies, and even distressed firms themselves (altman et al. 2017). the essential information for executive financial decisions, but also for investors decisions are provided by financial statements. thus, companies’ financial managers should develop the financial mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 104 | p a g e performance analysis and problem-solving skills (scapens 2006), without limiting their duties in verifying accounting data (diakomihalis 2012) in order to maintain the firm attractive for investors. the image of financial performance of companies is affected by the estimation of its position in front of investors, creditors, and stakeholders (ryu & jang 2004). for this estimation there are used many indicators that reflect the company’s position such as: net working capital, net treasury, liquidity, solvency, profitability, funding capacity, cash-flow, etc., or a mix between them, such as z-scores. bankruptcy prediction in addition, a prediction (latin præ-, "before," and dicere, "to say"), or forecast, is a statement about a future event. a prediction is often, but not always, based upon experience or knowledge. there is no universal agreement about the exact difference between the two terms; different authors and disciplines ascribe different connotations. although future events are necessarily uncertain, so guaranteed accurate information about the future is in many cases impossible, prediction can be useful to assist in making plans about possible developments; howard h. stevenson writes that prediction in business "... is at least two things: important and hard (stevenson, 2008). n statistics, prediction is a part of statistical inference. one particular approach to such inference is known as predictive inference, but the prediction can be undertaken within any of the several approaches to statistical inference. indeed, one possible description of statistics is that it provides a means of transferring knowledge about a sample of a population to the whole population, and to other related populations, which is not necessarily the same as prediction over time. when information is transferred across time, often to specific points in time, the process is known as forecasting (cox, 2006). forecasting usually requires time series methods, while prediction is often performed on cross-sectional data. bankruptcy prediction has been one of the most challenging tasks in accounting since the study of fitzpatrick in 1930’s and during the last 60 years an impressive body of theoretical and especially empirical research concerning this topic has evolved (altman, 1968). the altman models have been challenged by approaches directly producing probabilities of bankruptcy, such as the logit model, as well as by more advanced machine-learning methods. direct application of the z-score or its variants has proved problematic in other countries, under other legal regimes (accounting principles), and in other time frames. however, indirect applications (e.g., models with the same variables estimated for a new data set) are still acceptable. let us cite here the paper by altman et al. (2017) that shows the validity of the z-score approach internationally with large data sets, also compared to logit models that performed similarly or better. it is also worth referencing the paper by barboza et al. (2017), which compares several machine-learning methods to discriminant analysis and logistic regression in predicting bankruptcy. it turns out that the altman zscore variables fare relatively well in other setups and models. mailto:contact@americaserial.com mailto:contact@americaserial.com https://en.wikipedia.org/wiki/latin https://en.wikipedia.org/wiki/forecasting https://en.wikipedia.org/wiki/event_(probability_theory) https://en.wikipedia.org/wiki/connotation https://en.wikipedia.org/wiki/uncertainty https://en.wikipedia.org/wiki/planning https://en.wikipedia.org/wiki/statistics https://en.wikipedia.org/wiki/statistical_inference https://en.wikipedia.org/wiki/predictive_inference https://en.wikipedia.org/wiki/forecasting https://en.wikipedia.org/wiki/time_series https://en.wikipedia.org/wiki/cross-sectional_data american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 105 | p a g e today a large area of finance is dedicated to forecasting financial distress or bankruptcy, employing appropriate methodology. nonetheless, it seems that the finance profession in academia still does not recognize this new methodology as staple content in core corporate finance and accounting courses. the notable exceptions are textbooks by damodaran (applied corporate finance, 5th ed., damodaran, 2015) and berk and demarzo (corporate finance, 4th ed., berk & demarzo 2017). the methodology of bankruptcy modelling may be attributed to financial micro econometrics and more recently, to advanced data analysis. financial micro econometrics “emerges as a natural consequence of applying statistical and econometric methods to corporate finance, accounting, and other fields of finance; the applied edge of research in accounting and corporate finance is inevitably linked with the use of notions such as statistical sample, population, and the operation on sets of microdata” (gruszczy´ nski 2018). corporate governance and bankruptcy risk bankruptcy is the consequence of financial distress, which happens when the company defaults its financial commitments. companies try to restructure their assets and liabilities to avoid bankruptcy and financial distress. recent studies have found that corporate governance mechanisms can improve a firm's ability to predict bankruptcy (dalia, 2023). for example, fich and slezak (2008) studied the effect of corporate governance characteristics on a company's ability to predict and avoid bankruptcy for a sample of 781 usa companies from 1992 to 2000. the results indicated that a large number of directors, the more independent directors, and the large ownership of inside directors have a significant negative effect on bankruptcy risk. companies with good governance are less likely to suffer financial distress. in this context, hui and jing-jing (2008) examined the relationship between corporate governance mechanisms and financial distress costs for a sample of 193 companies listed on the shanghai stock exchange during the period 2000-2006. the results demonstrated a significant negative impact of board independence and the proportion of companies' shares owned by the state on the costs of financial distress (dalia, 2023). further, board size and institutional ownership were found to have an insignificant impact on bankruptcy risk. conversely, darrat et al. (2014) studied the impact of corporate governance on bankruptcy risk for a sample of 217 usa bankrupt companies during 1996-2006. the results documented that the large number of directors reduced bankruptcy risk. these results also suggested that the proportion of inside directors is negatively associated with bankruptcy risk. shahwan and habib (2020) found an insignificant negative impact of the board of directors' structure, ownership structure, shareholders' rights, and investor relations on companies' financial distress. further, in the sri lankan context, uduwalage (2021) investigated the relationship between corporate governance mechanisms and a company's financial distress for a sample of 205 non-financial companies listed on the colombo stock exchange in 2012. uduwalage found that board size, board independence, board mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 106 | p a g e ownership, institutional ownership, and non-institutional ownership concentration enhanced a company's prediction of financial distress. empirical review begum, sarker and nahar (2023) investigated the relationship between corporate governance and the likelihood of financial distress. to evaluate the impact of corporate governance on financial distress, a multiple regression model and longitudinal panel data are used. corporate governance is determined by the board of directors, audit committee, and ownership structure, whereas the altman z-score is used to indicate financial distress. the findings imply that financial distress is influenced by corporate governance variables (board independence, auditor independence, auditor opinion, sponsor directors ownership, and foreign shareholders), and firm-level variables (sales growth, performance, liquidity, firm size). from an academic standpoint, this paper adds to our understanding of the association between corporate governance practices and the risk of financial distress in emerging markets like bangladesh. the findings may encourage bangladeshi listed companies to follow and implement good corporate governance practices, increasing investor, regulator, and stakeholder confidence. alberto, · et al (2022) compare the performance of corporate governance variables in predicting corporate defaults, using both the logit and random forest models, which previous researchers have deemed to be the most efficient machine learning techniques. they results show that the use of corporate governance variables – especially with regards to ceo renewal and stability in the composition of the board of directors – increases the accuracy of the random forest technique and influences the success of the turnaround process. this paper also confirms the random forest technique’s ability to significantly outperform the logit model in terms of accuracy. okoye and okoye (2022) investigated the effect of corporate governance on bankruptcy risk in deposit money banks in nigeria, using board of directors’ independence. ex post facto research design was adopted for the study. a sample of nine deposit money banks was used for the study. data were obtained from the annual reports and audited accounts of the banks under assessment. altman's original model for public companies was used to extract data and the formulated hypothesis was tested with regression analysis with aid of e-view 9.0. the analysis and hypothesis tested show that board of directors’ independence has a positive significant effect on bankruptcy risk of deposit money banks in nigeria. based on the findings, the study recommended that the board of directors' independence be strengthened in order for the board to be more effective at preventing and avoiding bankruptcy once the company becomes distressed. ayoola and obokoh (2018) investigated the effect of corporate governance on financial distress in the nigerian banking industry and examines the discriminatory power of corporate governance mechanism of the board, audit committee, executive management and auditor in one model for financial distress prediction. secondary data obtained from annual financial statements of twenty banks between 2005 and 2015 were used for the study. the data were analyzed using descriptive mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 107 | p a g e statistics and generalized quantile regression model. the empirical evidence from the study suggests that financially distressed banks are characterized by large board size with members who may not be well versed in banking complexities, chairmen and ceos with significant shareholding both individually and collectively. furthermore, the evidence also shows that distressed banks suffer major decline in customer deposits despite increase in size. the study concludes that financial distress can be caused by poor corporate governance mechanism. mwawughanga and ochiri (2017) examined the financial health of banks listed and also not listed in the nairobi stock exchange, kenya using the altman z score model of 2005.the cbk have the regulatory mandate to keep on check the financial health of banks considering that the kenyan economy largely depends on banks. following the many bank failures in kenya, the cbk and the kenya bankers association have been pushing for improvement including transparency on commercial banks. ever since the 2008 financial crisis, financial health of banks has been a concern to corporate managers and other stakeholders. this study therefore applies altman z score, a multivariant financial analysis model to gauge the financial health of banks in kenya. the ratios that form the model were the independent variables and they included working capital to total assets and retained earnings to total assets. studies on applicability of z score model appear rear/scanty especially on financial institutions and mainly focused on validity and effectiveness. the secondary data was extracted from audited annual reports and financial statements of banks’ respective websites and cbk for a period from 2010 to 2015. the annual financial statements included the statement of comprehensive income and statement of financial position. in the analysis multivariate discriminant statistical techniques as used by altman 2005 was applied. results indicated that during the period under study high percentage of kenyan banks were on grey zone. conclusions were made that altman model was an average tool which can only be relied alongside other measure. ezejiofor, nzewi and okoye (2014) assessed the extent to which we can rely on the altman model to predict possibility of corporate bankruptcy/ failure in nigerian banking sector. data were collected from annual reports and accounts of the banks. altman prediction was applied. findings show that the model was capable of measuring accurately the failure potential of sound and healthy banks. findings also show that altman bankruptcy prediction model could have successfully predicted the failure of the banks that actually went under in the nigerian banking sector. the implication of this finding is that the standard rating system of regulatory authorities for predicting the extent of failure in the nigerian banks is still low, hence, nigeria has had ample cases of bank failures in the past; it would have been prevented if they had applied a model similar to altman’s z-score. based on this, researcher recommends that effort should be made by the regulatory authorities and agencies in the financial sector to domesticate the altman’s model for a result-oriented monitoring of the health of banks. again, there is the need to bring financial system under control and make them to fit for the service and the interest of depositors and shareholders. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 108 | p a g e methodology research design due to the nature of the study, ex post facto research design was adopted. the study analyzed the audited accounts of banks. this involves use of financial accounts of the banks under assessment for the period, 2012-2023 to generate the financial ratios that discriminated the most in prediction of healthy banks using altman model. population of the study this population of this study consists of the 8 deposit money banks quoted on the nigerian exchange group. the study covered ten years annual reports and accounts of these banks from 2012 to 2023. sample size of the study as a result, the "purposive sampling technique was applied (non-random sample). in this method, the sample is chosen based on what the researcher thinks is appropriate for the study. the banks licence with international authorization was chosen which consist a total of eight (8) out of the twenty-two (22) deposit money banks which was inevitably excluded during the data collection process due to incomplete data, hence majority of the other banks are those that either emerged or acquired during the period the study covered without international authorization (see appendix for details). source of data collection to obtain reliable information that will help the researcher to ensure the effectiveness of the study in question, data were collected from only secondary sources. this data were obtained from the annual reports and audited accounts of the banks under assessment model specification the data required were those of the dependent variable that include: altman prediction model (working capital, retained earnings, earnings before interest and tax, equity as well as total assets and total book debts) and independent variables: risk management and board of directors. this was obtaining from the audited reports and accounts of the banks under assessment. the study will use altman model given as zeta “z” z=1.2x1 + 1.4x2+ 3.3x3 + 0.6x4 + 1.0 x5, where: x1 = working capital to total assets x2 = retained earnings to total assets x3 = earnings before interest and taxes to total asset x4 = value of equity to total book debt x5 = gross earnings to total assets the decision rule is that: (i). for z<1.81 bankruptcy region mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 109 | p a g e (ii). for 1.81<z>2.675 high bankruptcy potential (iii). for 2.675<z<2.99 low bankruptcy potential (iv). for z>2.99 strong (no sign of bankruptcy at all). the altman model will be modified thus to incorporate corporate governance: atmnit = a0 + β1rmcit +β2bindit + it urt ………………….…..…....(i) where; atmn= altman prediction model rmc= risk management committee bind = board independence method of data analysis data were analyzed with descriptive statistics, and the hypotheses will be tested with pearson correlation, and multiple regression analysis. since the focus of the study is to examine the effect of asset composition on financial performance, regression analysis becomes appropriate tool for it. descriptive statistics employed to summarily describe the mean, median, standard deviation, kurtosis and skewness of the study variables. inferential statistics will also be utilized with the aid of e-views 9 using: i. coefficient of correlation: which is a good measure of relationship between two variables that tell us about the strength of relationship and the direction of the relationship as well? ii. regressions analysis: regression analysis predicts the value the dependent variable based on the value of the independent variable and explains the impact or effect of changes in the values of the variables. decision rule accept the alternative hypothesis, if the probability value (p-value) of the test is less than 0.05 (5%). otherwise reject data analysis and results data analysis table 1: descriptive analysis atmn rmc bind mean 2.913370 14.29207 1.826087 median 3.023000 11.30000 2.000000 maximum 6.598000 38.66000 7.000000 minimum 0.399000 0.060000 0.000000 std. dev. 1.547708 12.27464 1.813313 skewness 0.121996 0.613932 1.183425 kurtosis 2.306899 2.328440 4.323895 jarque-bera 2.069699 7.508123 28.19293 probability 0.355280 0.023422 0.000001 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 110 | p a g e sum 268.0300 1314.870 168.0000 sum sq. dev. 217.9815 13710.67 299.2174 observations 96 96 96 table 1 shows the mean (average) for each of the variables, their maximum values, minimum values, standard deviation and jarque-bera (jb) statistics (normality test). the results in table 1 provided some insight into the nature of the nigerian banks that were used in this study. it was observed that on the average over the twelve (12) years periods (2012-2023), the sampled banks in nigeria were characterized by positive altman bankruptcy prediction model (2.770944), also, the large difference between the maximum and minimum value of the risk management committee (rmc) and board independence (bind). in this table, the jarque-bera (jb) which test for normality or the existence of outliers or extreme values among the variables shows that most of the variables are normally distributed at 5% level of significance. this means that any variable with outlier are not likely to distort our conclusion and are therefore reliable for drawing generalization. this also implies that the least square estimate can be used to estimate the pooled regression model. correlation analysis in examining the association among the variables, we employed the pearson correlation coefficient (correlation matrix) and the results are presented in table 2: table 2: correlation matrix analysis atmn rmc bind atmn 1 rmc 0.21505 1 bind 0.24597 0.30658 1 the use of correlation matrix in most regression analysis is to check for multi-colinearity and to explore the association between each explanatory variable (rmc and bind and the dependent variable (altman). finding from the correlation matrix table shows that all our independent variables, (rmc=0.215, bind= 0.246) were observed to be positively associated with altman bankruptcy prediction model in checking for multi-colinearity, we notice that no two explanatory variables were perfectly correlated. this means that there is no problem of multi-colinearity between the explanatory variables. multi-colinearity may result to wrong signs or implausible magnitudes in the estimated model coefficients, and the bias of the standard errors of the coefficients. test of hypotheses hypotheses one mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 111 | p a g e ho1: risk management committee has no significant effect on bankruptcy risk deposit money banks in nigeria. table 3: regression analysis between altman predicting model and risk management committee dependent variable: atmn method: least squares date: 12/21/24 time: 11:56 sample: 1 103 included observations: 96 variable coefficient std. error t-statistic prob. c 2.520241 0.257072 9.803644 0.0000 rmc 0.021909 0.013586 1.612562 0.1103 r-squared 0.027488 mean dependent var 2.837883 adjusted r-squared 0.016917 s.d. dependent var 1.615218 s.e. of regression 1.601498 akaike info criterion 3.800803 sum squared resid 235.9612 schwarz criterion 3.854915 log likelihood -176.6377 hannan-quinn criter. 3.822660 f-statistic 2.600357 durbin-watson stat 0.573375 prob(f-statistic) 0.110265 in table 3, a simple least square regression analysis was conducted to test the significant effect between risk management committee (rmc) and altman bankruptcy predicting model (atmn). the r-squared is coefficient of determination which tells us the variation in the dependent variable due to changes in the independent variable. from the findings in the table 3, the value of r squared was 0.027, an indication that there was variation of 3% on atmn due to changes in rmc. this implies that only 3% changes in atmn of the economy could be accounted for by rmc, while 97% was explained by unknown variables that were not included in the model. the probability of the slope coefficients indicates that; p (0.110 >0.05). the co-efficient value of; β1= -33.92274 implies that rmc is positively related to atmn, and this is not statistically significant at 5%. the durbin-watson statistic of 0.573375 which is less than 2 suggests that the model does not contain serial correlation. the f-statistic of the atmn regression is equal to 2.600357 and the associated probability f-statistic is equal to 0.008726, so the null hypothesis was rejected and the alternative hypothesis was accepted. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 112 | p a g e decision since the prob (f-statistic) of 0.110265 is less than the critical value of 5% (0.05), then, it would be upheld that risk management committee has significant effect on bankruptcy risk deposit money banks in nigeria, thus, hi is preferred over ho. hypothesis two ho5: board of directors’ independence has no significant effect on bankruptcy risk deposit money banks in nigeria. table 4: regression analysis between altman predicting model and board of directors’ independence dependent variable: cal_z_value method: least squares date: 12/21/24 time: 11:58 sample: 1 103 included observations: 96 variable coefficient std. error t-statistic prob. c 2.493799 0.234081 10.65359 0.0000 bind 2.166370 0.089006 2.869208 0.0547 r-squared 0.035838 mean dependent var 2.809208 adjusted r-squared 0.025580 s.d. dependent var 1.610316 s.e. of regression 1.589586 akaike info criterion 3.785438 sum squared resid 237.5178 schwarz criterion 3.838862 log likelihood -179.7010 hannan-quinn criter. 3.807033 f-statistic 3.493940 durbin-watson stat 0.595410 prob(f-statistic) 0.054707 in table 4, a simple least square regression analysis was conducted to test the significant effect between board of directors’ independence (bind) and altman bankruptcy predicting model (atmn). the r-squared is coefficient of determination which tells us the variation in the dependent variable due to changes in the independent variable. from the findings in the table 4, the value of r squared was 0.04, an indication that there was variation of 4% on atmn due to changes in bind. this implies that only 4% changes in atmn of the economy could be accounted for by bind, while 96% was explained by unknown variables that were not included in the model. the probability of the slope coefficients indicates that; p (0.05<0.05). the co-efficient value of; β1= 2.166370 implies that bind is positively related to atmn, and this is not statistically significant at 5%. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 113 | p a g e the durbin-watson statistic of 0.595410 which is less than 2 suggests that the model does not contain serial correlation. the f-statistic of the atmn regression is equal to 3.493940 and the associated probability f-statistic is equal to 0.054707, so the null hypothesis was rejected and the alternative hypothesis was accepted. decision since the prob (f-statistic) of 0.054707 is equal to critical value of 5% (0.05), then, it would be upheld that board of directors’ independence has a significant effect on bankruptcy risk deposit money banks in nigeria, thus, hi is preferred over ho. discussion and conclusion this study determined the effect of corporate governance on bankruptcy risk in commercial banks in nigeria, using risk management committee, and board of directors’ independence. the study used altman's original model for public companies to extract data and the formulated hypotheses were tested with regression analysis with aid of e-view 9.0. the data required were those of the dependent variable that include: altman prediction model (working capital, retained earnings, earnings before interest and tax, equity as well as total assets and total book debts) and independent variables: board size, audit tenure and board independence. this was obtaining from the audited reports and accounts of the banks under assessment. from the results, it was revealed that only board of directors’ independence has a statistically significant effect on bankruptcy risk commercial banks in nigeria, this result is in agreement with elshandidy (2013) argued that having a good number of independent directors on the board would foster greater financial stability of the company. however, risk management committee has no statistically significant effect on bankruptcy risk commercial banks in nigeria. these results are in line with the study of boo and sharma (2008) observe no association between audit committee independence and audit fees indicating that auditors will minimize their effort in the presence of independent audit committee. jensen and meckling (1976) argued that the relationship between managerial share ownership and corporate debt is complex. it is argued that managerial share ownership can reduce managerial incentives to consume perquisites, expropriate wealth and to engage in other non-maximizing behavior. based on the results, the study recommended the followings; 1. risk management committee should be encouraged, since the committee can influence the capacity for problem-solving as the variety of perspectives that identifying the weakness of internal control and risk source that can easily use in checkmating bankruptcy. 2. there is need to strengthen the board of director’s independency, so as to ensure board are more effective at preventing and avoiding bankruptcy once the company becomes distressed. references altman, e. i. 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(2021). predicting the risk of financial distress using corporate governance measures. pacific-basin finance journal, 68, 101334. https://doi.org/10.1016/j.pacfin.2020.101334 mehran, h., morrison, a. d., & shapiro, j. d. (2011). corporate governance and banks: what have we learned from the financial crisis? frb of new york staff report, 502. http://dx.doi.org/10.2139/ssrn.1880009 manzaneque, m., priego, a. m., & merino, e. (2016). corporate governance effect on financial distress likelihood: evidence from spain. revista de contabilidad, 19(1), 111–121. https://doi.org/10.1016/j.rcsar.2015.04.001 miglani, s., ahmed, k., & henry, d. (2015). voluntary corporate governance structure and financial distress: evidence from australia. journal of contemporary accounting & economics, 11(1), 18–30. https://doi.org/10.1016/j.jcae.2014.12.005 mohammad, i., aly, s., dixon, r., & startling, r. 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(2018). financial management (12th ed.). vikas publishing house. mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.1016/j.pacfin.2020.101334 http://dx.doi.org/10.2139/ssrn.1880009 https://doi.org/10.1016/j.rcsar.2015.04.001 https://doi.org/10.1016/j.jcae.2014.12.005 http://www.strategicjournals.com/ https://doi.org/10.24818/afa.2023.9.1 https://blogs.lse.ac.uk/covid19 http://www.ijaar.org/rjmp american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 117 | p a g e ryu, k., & soocheong, j. (2004). performance measurements through cash flow ratios and traditional ratios: a comparison of commercial and casino hotel companies. journal of hospitality financial management, 12, 15–25. stevenson, h. (1998). do lunch or be lunch. harvard business school press. scapens, r. w. (2006). understanding management accounting practices: a personal journey. british accounting review, 38, 1–30. tricker, b., & tricker, r. i. (2015). corporate governance: principles, policies, and practices. oxford university press. wurim, b. p. (2013). discriminant analysis and the prediction of corporate bankruptcy in the banking sector of nigeria. international journal of finance and accounting, 2(6), 319–325. https://doi.org/10.5923/j mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.5923/j american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 47 | p a g e internal marketing strategies and employee performance of commercial banks in uyo, akwa ibom state 1 aniebiet j etuk, 2aniekan eyo awah and 3aniefiok okon akpan 1department of marketing, akwa ibom state university, obio akpa campus 2&3department of marketing, university of uyo, akwa ibom state. email: aniekaneawah@uniuyo.edu.ng doi: https://doi.org/10.5281/zenodo.12795383 abstract: this study focused on the influence of internal marketing strategies on commercial banks in uyo metropolis, akwa ibom state. to achieve this objective, data were obtained using a survey of 143 respondents drawn from the banks staff. 131 copies of the questionnaire were returned in useable form representing approximately 92% return rate and analyzed using the simple regression model (srm) and hypotheses tested with linear regression at 0.05 level of significance. findings revealed that internal marketing strategies had significant influence on employee performance. this means that every unit that internal marketing strategies such as (motivation (rewards) and effective communication) increases employee performance will also increase. thus, we recommend that marketing managers of commercial banks should develop and implement structured rewards systems that recognize and incentivize high performance among employees, this could include bonuses, recognition programs and performance based promotions. they should enhance effective use of motivations (rewards) to increase employee performance. keywords: internal marketing, effective communication, motivation and employees performance introduction service marketing has evolved into a highly competitive discipline with many factors influencing service, quality and the ultimate source of deposit money banks. due to the nature of services often the main determinant of customer’s perception of service quality is their interaction with the bank staff and this helps banks to acknowledge the importance of employee in service delivery and quality (udonde, akpan and awah, 2022). internal marketing is an internal process of initiating, maintaining and developing relationships between employees, their management and the organization for the purpose of creating superior value for customers (gapp and merrilees, 2016). this view is upheld in literature by robert and steyn (2017) and ahmed and rafig (2011) who agreed that internal marketing (im) is the process whereby internal mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:aniekaneawah@uniuyo.edu.ng american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 48 | p a g e relationships are built with the aim of creating value. gapp and merilees (2016) view im as being an appropriate method for communicating an organization's brand internally. they describe im as a concept based on the believe that with a service value chain, a firm’s internal customers (employees) can be motivated to strive towards customer consciousness, market orientation and sales mindedness through the application of accepted internal marketing approaches. hence, employee satisfaction and employee performance are related in that both require the provision of rewards to satisfy wants and needs in order to do so banks need to treat employees in much the same way as they would do to their customers. accordingly, udonde, akpan and awah (2022) see the concept of internal marketing as a marketing activity which deals and focuses on employee satisfaction as well as a business philosophy which promote the firm and it policies to its employees as if they were the firm’s customers. according to them, excellent services to the firm’s customers are as a result of satisfied and committed employees. internal marketing relates with employee performance. it increases employee’s performance and retention, creates a customer oriented workforce, enhance relationship with the external businesses, facilitate a better flow of information, aid in empowering employees, increases compliance with protocols and standards as well as improving the reputation of the brand and profits (udonde, akpan and awah, 2022). unfortunately there have been several studies (see for example, amangala and wali, 2013; makaddem and adnani, 2019; udonde, akpan and awah, 2022; imani et. al. 2020 and anwan et, al. 2015) on internal marketing, but little or no effort have been done in the area of internal marketing and employee performance of deposit money banks in developing, economies like nigeria. more so, many studies on internal marketing have been focusing on aviation industry with very little or no effort on deposit money banks particularly in uyo, akwa ibom state. it is against this background that we attempt to investigate the influence of internal marketing on employee performance of deposit money banks with particular reference to deposit money banks in uyo metropolis, akwa ibom state. 1.2 objectives of the study the main objective of this study was to examine the influence of internal marketing on employee performance in commercial banks in uyo metropolis, akwa ibom state. the specific objectives therefore include to: 1. examine the effect of employee motivation (reward) on employee performance in commercial banks in uyo metropolis, akwa ibom state. 2. ascertain how effective communication influence employees performance in commercial banks in uyo metropolis, akwa ibom state. research questions this study attempt to provide answers to the following research questions 1. what is the effect of employee motivation (reward) on employee performance in commercial banks in uyo metropolis, akwa ibom state? mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 49 | p a g e 2. to what extent does effective communication influence employee performance in commercial banks in uyo metropolis, akwa ibom state? hypotheses the following hypotheses where postulated to guide the study ho1: employee motivation (reward) does not significantly affect employee performance in commercial banks. ho2: effective communication does not significantly influence employee performance in commercial banks review of related literature 2.1conceptual frame work 2.1.1 concept of internal marketing internal marketing (im) has in recent years embodied the philosophy and is defined by papasolomou and vromtis (2016) as any form of marketing within an organization which focuses on the staff and internal activities used in other to enhance external market place performance. gounaris (2016) agrees with leading im authors. ahmed and rafig (2002), in that im can be used to improve service quality and external marketing campaigns, but that it effects on both concepts is mediated by im's influence on employee satisfaction. im sees employees as internal customers, jobs as internal product which seek to offer internal products that will satisfy the needs and wants of these internal customers at the same time addressing the organizations objectives, it is seen as the effort of service firms which provides all members of the organization with a clear insight and understanding of the corporate mission and objectives, training, motivation and evaluation to achieve the desired objectives (mokaddem and asnani, 2019). previous research into im aimed at understanding the abstract concept of im in terms of its definition, synthesis and extension (ahmed and rafig, 2011), to relationship marketing and service quality (barnes, fox and morris, 2004), the impact of im on various service industries (keller et al., 2006; hwang and chi, 2005; papasolomon and vrontis, 2016), internal marketing orientation (lings and greenby, 2005), the link between internal marketing, organization culture and job satisfaction (shiu and yu, 2010) and how to use im to improve service quality (tsai and tang, 2008). although authors agree that there are links between job satisfaction and service quality (shiu and yu, 2010;udonde, akpan and awah, 2022) and that im has relationship with job satisfaction (yang and coarts, 2009; gounaris, 2006; chang, 2007) there are often overlapping im constructs and authors cannot agree as to what constitutes im. elements such as jobs as products (gounaris, 2006), place (papasolomou and vrontis 2016; barnes, 2004) promotion or internal communication (bumann and zeplin, 2005; ahmed and rafig, 2012;udonde, akpan and awah, 2022) people (papa solomon and vrontis, 2016; mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 50 | p a g e robert, lombard and steyn, 2007; gounaris, 2006; mokaddem and adnani; 2019), reward (blames, fox and morris,2004; ahmed and rafig, 2012; mokaddem and adnani, 2019, amangala and wali, 2013) and leadership (burmann and zeplin, 2005; ahmed, rafig and saad, 2003; gonuaris, 2006) have all been studied by various authors. these elements are seemingly indiscriminately change and adapted to suit individual studies and often broad im element are broken into numerous more specific construct until one is faced with a veritable minefield of possible im elements. elsamen and alishurideh (2012), assert that training employees for specific purposes like how to communicate with others will help in improving the internal service quality among the co-workers. this assertion is in support of kotler and armstrong (2013) who postulates that the organization should carry out internal marketing before external marketing. further as the task of successfully hiring, training and motivating able employees to serve the customers with the emphasis that it makes no sense for a business firm to promise excellent product or service before the firm’s staff is ready to provide it. udonde, aniefiok and awah (2022), advocate that the goal of internal marketing lies in motivating the employees and encourage them to offer superior service to customers which will improve the customer satisfaction of the company services. elisamen and alshrideh (2012) list the dimensions of internal marketing as employee motivation and reward, effective communication, employee development, employee selection, employee recruitment, support system and healthy work environment. from the review of numerous literature many construct have been identified by researchers on the dimensions or constructs of internal marketing, the first two constructs (employee motivation, rewards and effective communication) advocated by elsamen and alshurideh (2012) seem consistent hence, they were adopted in this current study. effective communication internal communications systems include relationship between and within departments. good internal communication acts as a binding ingredient in organization for the implementation of successful strategies (ahmad, igbal and sheerah, 2012). in most companies, communication provides an information channel; it links managers and employees in different departments within the same organization (ali, 2016). carrier and bourque (2019) revealed that management spend 75% or more of their work time engaging in some form of communication. lovelock and wright (2019) affirm that an effective internal communication is a very important instrument or tool for internal marketing. it helps the management to ensure effective service delivery at a high satisfactory level and helps build employee trust, respect and loyalty. organizations must give a serious consideration to improve the level of communication with employees to communicate its vision and mission as well as provide effective strategies to transfer mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 51 | p a g e knowledge and information, by using different methods such as team work, discussion session and internal newsletter (elsamen and alshurideh, 2012). employee motivation (reward) motivation is defined as the process that propels an individual’s intensity, direction and persistence of effort towards attaining a goal. according to udonde, akpan and awah (2022), among the factors that affect employee performance, motivation that comes with reward is of utmost importance. theorist such as maslow (1943), hezberg, mausner and snyderman (1959) and alderfer(1972) have sought to explain employee motivation by holding unto the assumption that all individuals possesses the same set of needs and therefore prescribe the characteristics that ought to be present in the jobs. maslow (1943) arranged human needs into a pyramid and combined them with motivation as a factor that encouraged people to satisfy their needs. herzberg, mausner and snyderman (1959) divided motivation into extrinsic and intrinsic factors, which influence employee’s motives and job satisfaction. in the early development phase, the majority of the studies on internal marketing focused on the issue of employee motivation and satisfaction. the major reason behind these was the fact that the roots of the internal marketing concept lie on efforts to improve service quality in organizations (pranowo, 2012) motivation therefore is about what a person wants and his emotional state which drives him in the direction of achieving what he wants (mullin, 2019). elsamen and alshurideh (2012) posit that companies that seek competitive advantage through employees must be able to manage the behavior and result of all employees. papasolomou and vrontis (2016) have indicated that there is no doubt that motivation is an important factor that improves the performance of the employee. udonde, anefiok and awah, 2022 sees it as an attribute that drives one to do or not to do something, strengthen employees to perform at their very best using diverse skills, tactics and processes. they see it as a powerful energy that drives, move and excite employees which usually end in their maximum productivity and contribution with a high level of employee’s performance. they encourage managers to create an atmosphere where their employees will work and contribute to the realization of the organizations goal. thus, many organizations set a systematic reward to motivate its employees in order to improve their service quality and delivery (papasolomou and vrontis, 2016). some of the ways that personnel could be motivated are through salary increment, fringe benefits, job security, physical surroundings and safety of the work. mokaddem and adnani (2019) asserts that financial incentives will get people to do more of what they are doing. thus, pantea et, al. (2020) adds that there is no doubt that motivation is the key to increase employee performance, but there is no clear cut answer to the question of how to motivate. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 52 | p a g e employee performance since employees are main source of competitive advantage in service-oriented organization. performance is the extent to which firm employees contributes to the achievement of the organizational goals (mokaddem and adnani, 2019), employee performance is the output of an employee. it involves task successfully completed by selected individual or individuals. many organizations in trying to decide on the abilities and output of their employees use the performance of their employees as a rating system. thus, employee performance is linked with the quality and quantity of output, efficiency and effectiveness of accomplished task, timeliness of output and job presence/attendance. (udonde, akpan and awah, 2022). one of the techniques/strategies for developing and initiating innovations in organizations is to have skilled human resources that aid in contributing to the self efficiency of employees. hence, perceived self-efficiency and critical skills is a critical success factor for performance. therefore, given the human resources potentials, employees can be an important element that aid organization’s success in moving towards innovations to a large extent (imani et, al., 2020).thus, good employee performance leads to positive customer perception of the service quality while poor employee performance is the result of increase customer complaint and brand switching (mokaddem and adnani, 2019). relationship between employee motivation (reward), effective communication and employee performance service organization focuses on consistently delivering high service quality but these services are offered by employees and employees are not always consistent. this brought to the fore the problem of how to ensure that service quality delivered by employees is of a consistently high quality. the solution to this was proposed as being employee motivation and satisfaction (ahmed and rafig, 2002). berry, wall and carbone (2006) support this assertion by putting forward the concept of employees as internal customers whose job products satisfy their needs. the premise of this in the development of internal marketing (im) was that in the marketing of service, much of what the customer buys is human acts of performance. therefore, in order for an organization to have satisfied client who receive consistently high service quality, an organization must have satisfied employees (ahmed and rafig, 2002). this then leads to the people aspect of im namely the recruiting, training, retention and motivation of the high-quality employees (burmann and zeplin, 2005; papasolomou and vrontis, 2016). the importance of motivation among the work force cannot be overstated. happy workers lead to happy customers and happy customers lead to successful businesses. on the opposite side, unhappy workers are likely to leave the company and when this happens, the company usually loses out (nickels, mchugh and mchugh, 2010). motivating the right people to join and remain with the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 53 | p a g e organization is a key function of managers because people are willing to work and work hard if they feel that their work makes a difference and is appreciated, people are motivated by a variety of things such as recognition, accomplishment and statues (nickels, mchugh and mchugh, 2010). employees are service organizations most importantasset, as the interaction between employee and customers is the focal point of the customer’s evaluation of the entire service process (gracia, cifre and grou, 2010). employees represent the organization to customers and are crucial to the success of their organization service offering as they interact directly with the organization's client (mishara, 2010). zeithaml and bitner (2009) refer to the role of employees as being that of a boundary spanner, meaning that they provide a link between the consumer and the internal operations of the organization and are not only vital in terms of providing the service, but in understanding and filttering information between the two. berry, wall and carbone (2006) state that while the technical quality of the delivery process can meet customer expectations. it is usually the human interactions between employees and customers that exceed expectations and lead to customer satisfaction and loyalty, the author emphasizes the importance of the interaction between staff and customers by stating that although these interactions are the likely cause of delight, they also have the capability of undermining great service process. if interaction with the employee is unpleasant regardless of the actual service delivery, a consumer will be dissatisfied with the service performance irrespective of the technical quality of the delivery. to exceed customer expectations the element of pleasant surprise is required and that the best opportunity available to service organization to surprise customers is during the interaction between clients and employees, referred to as "moment of truth" or critical incidents (berry, wall and carbone, 2006). moments of truth are instances of contact between customers and the employees of a service organization that provide customers with the opportunity to form opinions about the service and service organization. each interaction between staff and consumer presents the organization with an opportunity to prove its service quality and increase customers satisfaction and loyalty (zeithmal and bitner. 2009), each encounter add to the overall perception of service quality and if a mixture of positive and negative encounter is experience by a consumer, they will be left uncertain of the service quality. the interaction between employee and consumers during service delivery(moments of truth) are the single greatest opportunity service organizations have to customize their service offering in terms of customer requirement in order to delight (gracia, varela and delrio, 2010).the customization of service by employees operates in two dimensions, interpersonal adaptive behaviour and service offering adaption. interpersonal adaptive behaviour refers to actions that go beyond the mental or physical skill of the employee needed in service delivery by encompassing the interpersonal communication elements required during a client interaction (zeithaml and bitner, 2009). this refers, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 54 | p a g e for example to the employee mirroring the client gestures and facial expressions as well as adapting tone, voice and language to the customer's needs. the dimension of service offer adaption refers to the employee’s ability to tailor make or create a unique service offering per client (gracia, varela and delrio, 2010). this can, for example be as simple as a hair dresser offering an assortment of refreshments to a client, or as complex as a bank staff tailor making a financial service to a client's specific needs all translates to effective employee performance. theoretical frame work in this section, one major theory was considered relevant for this study and this is: the internal marketing theory propounded by leonard berry (1981). in his work "the employee as customers", he advocated treating employees as internal customers. berry (1981) state that internal customers must be sold on the service and be happy in their jobs before they can effectively serve the final customer. his model explained that treating employee as internal customer and the job presented to the employees as the products in conjunction with the application of marketing techniques within the company to reach employees satisfaction. berry's model is presented in figure 2.1 thus: fig 2.1 berry’s model of internal marketing source: berry’s model of internal marketing (berry, 1981) berry’s (1981) theory of internal marketing has been adopted in different studies over the years. gronroos (1994) was the first in 2007, he highlighted that internal marketing focus is on good internal relationships between people at all levels in the organization. he emphasized on adequate leadership, from the relationship perspective, he stated that the main focus of marketing is the value creating process. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 55 | p a g e another study who had adopted this theory is, ahmed and rafig (2003), who developed what was regarded as a hybrid approach in internal marketing taking the best from berry and gronroos, ahmed and rafig identified the main elements of internal marketing as:  employee motivation and satisfaction  customer orientation and customer satisfaction  inter-functional coordination and integration  marketing like approach to the above  implementation of specific corporation or functional strategies other studies that have adopted this theory are ballantyne (2003); lambert (2002); nanide, pesai and murphy (2003); bansal (2001). the internal marketing theory applies to the present study on employee performance as it adopts indices from related studies. the indices (effective communication, employee motivation and reward0 are used to enhance the performance of employees who are seen as the banks internal customer. thus, the success of the service product when driven to the external customers depends largely on how well the internal customers are treated. 3.0 research methodology the survey design was adopted by the researcher to aid in obtaining information from respondents. the population for this study consists of the employee of the selected commercial banks used in the study totaling 224. to determine the sample size since the population for the study was known, the tara yamene’s formula at 5% level of tolerable error was adopted. based on this formula, 143 staff formed the sample size for the study. primary data on the two independent variable and the dependent variable were collected from the 143 respondents who were banks employees within the uyo metropolis, akwa ibom state using the convenience sampling technique. the instrument used for data collection was a structures questionnaire while the hypotheses were tested using the simple regression at 0.5 level of significance. out of these 143 questionnaires distributed, 131 of them were returned representing approximately 92% return rate. 4.0 analysis of data variables number of questionnaire copies administered percentage (%) returned and useable 131 91.61 not returned and unuseable 12 8.39 total 143 100 as shown in the table above that out of the 143 copies of questionnaire that were administered to the respondents 131 representing 92% were returned in a useable form while the remaining 12 copies of 8% were either returned but not in useable form or not returned at all. test of hypothesis one mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 56 | p a g e ho1: employee motivation (reward) does not significantly affect employee performance of commercial banks. model summary of internal marketing and employee performance of commercial banks model r r square adjusted r square std. error of the estimate 1 .847a .718 .716 2.14541 a. predictors: (constant), employee motivation analysis of variance of internal marketing and employee performance of commercial banks a model sum of squares df mean square f sig. 1 regression 1689.225 1 1689.225 367.000 .000b residual 662.802 129 4.603 total 2352.027 130 a. dependent variable: employee performance b. predictors: (constant), employee motivation coefficientsa of internal marketing and employee performance of commercial banks model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 5.897 .725 8.129 .000 employee motivation .735 .038 .847 19.157 .000 a. dependent variable: employee performance mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 57 | p a g e the table above with r value of 0.847 indicates that there is a significant influence between the dependent and the independent variables. the r-square value of 0.718 implies that about 71.8% of the variation in employee performance was explained by employee motivation. the f-calculated value of 367.000 and p-value of 0.000 implies that the model was adequate. that is, the independent variable was able to explain the dependent variable very well. the constant value of 5.897 indicates that keeping independent variable (employee motivation) constant; employee performance will remain at 5.897. the coefficient of employee motivation was 0.735 which means that a unit change in employee motivation will lead to 0.735 unit change in employee performance. the p-value of 0.000 means that the effect of employee motivation on employee performance was statistically significant. test of hypothesis two h02: effective communication does not significantly influence employee performance of commercial banks in uyo, akwa ibom state.model summary of internal marketing and employee performance of commercial banks model r r square adjusted r square std. error of the estimate 1 .900a .810 .808 1.76312 a. predictors: (constant), effective communication analysis of variance a of internal marketing and employee performance of commercial banks model sum of squares df mean square f sig. 1 regression 1904.392 1 1904.392 612.625 .000b residual 447.635 129 3.109 total 2352.027 130 a. dependent variable: employee performance b. predictors: (constant), effective communication mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 58 | p a g e coefficientsa of internal marketing and employee performance of commercial banks model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 2.686 .690 3.894 .000 effective communic ation .853 .034 .900 24.751 .000 a. dependent variable: employee performance the table above with r value of 0.900 indicates that there is a significant effect between the dependent and the independent variables. the r-square value of 0.810 implies that about 81.0% of the variation in employee performance was explained by effective communication. the f-calculated value of 612.625 and p-value of 0.000 implies that the model was adequate. that is, the independent variable was able to explain the dependent variable very well. the constant value of 2.686 indicates that keeping independent variable (effective communication) constant; employee performance will remain at 2.686. the coefficient of effective communication was 0.853 which means that a unit change in effective communication will lead to 0.853 unit change in employee performance. the p-value of 0.000 means that the influence of effective communication on employee performance was statistically significant. conclusion and recommendations this study examined the influence of internal marketing strategies on employee performance of commercial banks in uyo metropolis, akwa ibom state. the study result revealed that internal marketing strategies have significant effect on employee performances of commercial banks. this means that every unit that internal marketing strategies such as (motivation/reward and effective communication) increases, employee performance of the banks will also increase. based on the findings and conclusion of the study, we proposed the following recommendations: 1. marketing managers of commercial banks should develop and implement structured rewards systems that recognize and incentivize high performance among employees. this could include bonuses, recognition programs and performance based promotions. they should enhance effective use of motivations (rewards) to increase employee performance 2. they should develop and implement training programs focused on enhancing communication skills for employees at all levels. these programs should cover verbal, non-verbal, written and digital communication techniques. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 59 | p a g e contribution to knowledge this study has provided practical recommendations for deposit money banks on how to design and implement effective internal marketing strategies to enhance employee performance. these include guidance on leadership practices, communication channels, performance management systems and employee recognition programs tailored to the banking industry context. the study findings has offered valuable insights into the role of internal marketing in driving employee performance within deposit money banks, contributing to both theoretical knowledge and practical implications for 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(2022). e-marketing strategies and savings mobilization drive of selected microfinance banks in uyo metropolis, akwa ibom state, international journal of business, marketing and management, 7(3), 1-6 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 62 | p a g e etuk, s.g., udo i.s. and awah a. (2022), customer relationship management and marketing technology, stra mark communication consult etuk, a., akpan, a. o., & awah,a.e. (2023).electronic banking and marketing performance of deposit money banks in uyo, akwa ibom state. american interdisciplinary journal of business and economics (aijbe), 10(3), 23-42. https;//doi.org/10.5281/zenodo.8346738 etuk, a., awah, a.e. and akpan, a.o. (2024).physical ambience and customer behavior in selected microfinance banks in uyo metropolis, akwa ibom state,top american journal of marketing.9(1), 1-24. etuk, a., awah, a.e. and akpan, a.o. (2024).assurance and customer patronage of microfinance banks in akwa ibom state, nigeria, american journal of information technology and management, 12(2),1-23. etuk, a., akpan, a. o., & awah,a.e. (2024). e-service reliability and customer loyalty in online shopping in nigeria: the moderating role of age and education, journal of current research in business and management sciences, 12(2), 2-16. etuk, a., awah, a.e. and akpan, a.o. (2024). empathy and customer patronage of microfinance banks in akwa ibom state, nigeria. international journal of marketing research and brand management,12(2),36-50. etuk, a., akpan, a. o., & awah,a.e. (2024). the role of age and education in moderating the relationship between e-service security and customer loyalty: the nigerian online shopping experience, michigan international journal of marketing. new media and communication,12(2), 50-64. etuk, a., awah, a.e. and akpan, a.o. (2024). tangibility and customer patronage of microfinance banks in akwa ibom state, nigeria. american journal of business and cooperative research,9(2), 1-19. etuk, a., awah, a.e. and akpan, a.o. (2024).eservice responsiveness and customer loyalty in online shopping in nigeria: the moderating role of age and education, european journal of marketing and management sciences, 7(2), 13-30. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 63 | p a g e gapp, r. and merrilees, i. (2016). important factors to consider when using internal branding as a management strategy. a healthcare case study. brand management, 14 (1/2): 162 176. garcia, e. cifre, e. and grou, r. (2010). service quality: the key role of service climate and behaviour of boundary employee units. group and organization management, 35.276-298. garcia, t., varela, j. and del rio, m. (2010). organizational service systems: antecedents and consequences: tourism and hospitality research, 11(1): 67-82. gronroos, c. and voima, p. (2013) internal marketing relationship perspective. london: international thompson business press. gronroos, g. (2008). service logic revisited: who creates value? and who-creates. european business review, 20(4): 298-314. herzberg, f. mausner, b., and snyderman, b. b. (1959). the motivation to work. new york: john wiley & sons. igbaekemem, g. o. (2014). monetary incentives motivatemployee's on organizational performance. global journal of arts. humanities social sciences. 2(7), 61-69. imani, s.; foroudi, p.; seyyedamiri, n. and niloofar, d. (2020).improving employees’ performance through internal marketing and organizational learning: mediating role of organizational innovation in an emerging market, cogent business and management journal 7(1), 1-23. keller, s. b., lynch, d. f., ellinger, a. e., ozment, j. and calantone, r. (2006). the impact of internal marketing efforts in distribution service operations. journal of business logistics, 27(1): 109139. kotler, p. (1991). marketing management analysis, planning. implementation and control. prentice hall. new jersey: englewood cliffs. kotler, p. and armstrong, g. (2013). principles of marketing india dorling kindersley. lings, 1. n. and greenley, g. e. (2005). measuring internal market orientation. journal of service research 7(3), 290-305. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 64 | p a g e lovelock, c. and wright, l. (1999). principles of marketing management. new york: prentice hall. mishra, s. (2010). internal marketing-a tool to harness employee power in service organizations in india. international journal of business and management, 5(1): 185-193. mullins, j. (2010). management and organizational behaviour. 10th ed. harlow: ft prentice hall. mokaddem, a. and adnani, k. (2019), the impact of internal marketing on employees’ performance in mobilis telecom, international journal o marketing and human resource management, 10(2), 23-33. nickels, w. mchugh, j. and mchugh, s. (2010). understanding business, india: prentice hall. oladipupo, a., agodi, j.e. and awah, a.e. (2016). value addition and profitability analysis, journal of economic research and entrepreneurship, 2(2), page, l. (2008). do not show me the money? the growing popularity of non-manetaryincentives in the workplace. available at: http:www.oppaper.comessay. workplaces/155356. non monetary incentives papasolomou, d. l. (2016). can internal marketing be implemented w within bureaucratic organizations? internal journal of bank marketing, 16(6), 141-149. papasolomou, i. and vrontis, d. (2016). using internal marketing to ignite the corporate brand: the case of the uk retail industry. brand management, 14(1/2): 177-195. pranowo, k. h. (2012). influence of internal marketing towards organizational performance with mediating role of organizational competence in not for profit organization aiesec indonesia. rafig. m and ahmed, p. k. (2000). advances in the internal marketing concept: definition, synthesis and extension journal of services marketing. 14(6/7): 449. roberts -lombard, m. and steyn, t. f. j. (2007). internal marketing in the travel agency industry in the western cape province, south african business reviews 11(3): 144. shiu, y. and yu, t. (2010). internal marketing, organizational culture, job satisfaction and organizational performance in non-life insurance. the service industries journal, 30(6): 793. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 65 | p a g e tsai, y. and tang, t. (2008). how to improve service quality: internal marketing as a determining factor. total quality management, 19(11): 11-17. udonde, u.e, akpan, a.o. and awah, a.e. (2022). internal marketing and employee performance in insurance industry in nigeria, british, international journal of business and marketing research, 5(1), 1-22. udonde, u.e., awah, a.e. and akpan, a.o. (2022). effect of communication and empowerment on sales-force performance in the nigerian insurance industry. advance journal of economic and marketing research, 7(11). yang, h. and coates, n. (2009). internal marketing: service quality in leisure services. marketing intelligence and planning, 28(6): 754. zeithaml, v. a. and bitner, m. j. (2009). service marketing: integrating customer focus across the firm. 5th ed. new york mcgraw-h ill. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 152 | p a g e work life balance and employee’s performance in telecommunication firms in enugu state. onyema chidozie nwabueze, prof. n. m. ile ph.d. and onyia charles nnandi department of business administration, enugu state university of science and technology, enugu state. doi: https://doi.org/10.5281/zenodo.15026202 abstract: the study evaluated the work life balance ad employee’s performance in telecommunication firms in enugu state. specifically, the objectives were to: examine the relationship between managing leisure time and employee punctuality and examine the relationship between stress management and employee efficiency of telecommunication firms in enugu state. the study used the descriptive survey design approach. the primary source of data was the administration of questionnaire. total populations of 281employees were used. two hundred and forty eight (248) returned the questionnaire and accurately filled. data was presented and analyzed using likert scale and the hypotheses using z test. the findings indicated that managing leisure time had significant positive relationship with employee punctuality z (95, n= 248), 7.176 < 9.462, p.<.05 stress management had significant positive relationship with employee efficiency of telecommunication firms, z(95,n= 248), 5.842 < 10.224, p.<.05. the study concluded that managing leisure time and stress management had significant positive relationship with employee punctuality and employee efficiency of telecommunication firms. the study recommended among others that the management of telecommunication firms should be engaging in leisure activities to enhance the opportunity to find balance in life and allow taking control of how employees spend their time and helping to regulate the challenging demands of what life can throw at employees. introduction 1.1 background of the study the actual term “work-life balance” first appears in the u.k. in the 80's as a plank in the women's liberation movement. the movement advocated for flexible schedules and maternity leave for women. the women's liberation movement of the 1980s brought work–life balance back to the forefront. work-life balance is one of the prevailing issues in many organizations. work-life balance aims at ensuring that the employees of an organization are able to divide their personal and professional life in a harmonious manner. the management of an organization needs to understand that developing and implementing policies under work-life balance, is a necessity in today’s scenario mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 153 | p a g e in order to increase productivity, enhancing educational standards as well as talent retention. inability of workers to balance work and family could lead to increased rates of absenteeism, stress, employee turnover, job dissatisfaction and poor work performance. it is therefore essential for employees to maintain stability between work and their private lives (akpa, egbuta, akinlabi & magaji, 2019). work-life balance studies the influence of work and family climate on the aspects of life, and it backs the efforts of the employees to divide their time and energy between work, family and the other aspects of their lives. in today’s world, most of the organizations have started introducing various policies in order to create a conducive working environment by means of flexible working hours and job sharing responsibilities (neelima and bhawani, 2019), which lead to self-management, employee effective communication, stress management, managing leisure time, and how to manage change in telecommunication firms in enugu state. the telecommunication firms are one of the most human resource severe sectors, and employees stay in the firms for longer hours doing routine work, which could be highly tasking on their mental health. with the current state of the working world, the role of human resource in organizational development has begun to be taken more seriously. it has been realized that human resources are beyond just productive tools at work, but their effectiveness stretches to how well the other areas of their lives are. with work life balance, organisations can ensure that their human resources are well taken care of beyond just work but in other areas as well. it takes a holistic approach to life. this realization is based on the understanding that without people, (human resource), the organisations may not achieve its objectives (siwale, chrine, crispin & mwiikisa, 2021). any imbalance between organizational commitment, personal commitments and inefficient management of life priorities can lead to serious consequences (shobitha and sudarsan, 2014). employees’ performance, though a multidimensional construct, refers to a task accomplishment degree that constitutes their job performance. similarly, rizwan, nazar, nadeem & abblas (2016) viewed employees’ performance in terms of their work quantity, quality and efficiency. it is also associated with productivity which implies output quantity, output quality, output timeliness, job presence, work morale, work efficiency and effectiveness. this is why boarman and motowidlo (2017) conceived employees’ performance as their effectiveness to perform their tasks that contributes to organizational core objectives through the conduciveness of their operating environment. as samson, et al. (2015) rightly noted the imperativeness of employees’ performance for organizational existence cannot be overemphasized. it was based on these that necessitated study the effect of worklife balance and employee performance of telecommunication firms in enugu, enugu state. 1.2 statement of problem a healthy balance is meeting the deadlines at work while still having time for friends and hobbies, having enough time to sleep properly and eat well, not worrying about work when you are at home.work life balance is a method which helps employees of an organization to balance their mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 154 | p a g e personal and professional lives. work life balance encourages employees to divide their time on the basis on priorities and maintain a balance by devoting time to family, health, vacations etc. along with making a career, business travel etc. it helps to motivate the employees and increases their loyalty towards the organisation. this helps to increase productivity at workplace as the employee is relaxed about his personal commitments. while poor work-life balance is often caused by poor resource management, this is not always the case. some businesses struggle with a culture that either rewards people for overworking or puts so much pressure on workers that they feel they must always be 'on. addressing a toxic work culture is no easy task. however, the organizations have been facing a lot of challenges as a result of poor worklife balance. instead of having time to recharge and rest, employees power through their to-do list. this leads to feelings of overwhelm and high stress levels, going on to contribute to mental health issues such as anxiety and depression over time as a result of poor managing leisure time and flexible work arrangement. the consequences of this if not tackled may lead to poor employee output and engagement in the organisation. unmanaged stress can lead to decreased work performance, increased relationship strains and burnout. based on this, the need to study work life balance and employee’s performance in telecommunication firms in enugu state. 1.3 objectives of the study the main objective of the study was to evaluate work life balance and employee’s performance in telecommunication firms in enugu state. specifically, the objectives were to: i. examine the relationship between managing leisure time and employee punctuality at work of telecommunication firms in enugu state. ii. examine the relationship between stress management and customer satisfaction of telecommunication firms in enugu state. 1.4 research questions the following research questions guided the study i. what is the relationship between managing leisure time and employee punctuality at work of telecommunication firms in enugu state? ii. what is the relationship between stress management and customer satisfaction of telecommunication firms in enugu state? 1.5 statement of the hypotheses the following hypotheses guided the study i. managing leisure time has no relationship with employee punctuality at work of telecommunication firms in enugu state. ii. stress management has relationship no with customer satisfaction firms in enugu state. review of related literature 2.1 conceptual review 2.1.1 work mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 155 | p a g e work is the study of how people interact with their work environment. it includes everything from scheduling and assigning tasks to equipping and training employees for their jobs. the structured design of work processes is referred to as work organization. work is the distribution and coordination of work tasks, skills and authority in an organization. work in organization is the way that tasks are distributed amongst the individuals in an organization and the ways in which these tasks are then coordinated to achieve the final product or service (berrell, 2021). work includes measures and solutions that create and maintain expedient, economic and social conditions for cooperation within the company, (leininger, 2023). the study maintains that work is using available resources and talent as efficiently as possible to achieve a result. 2.1.2 life life is defined as cells that self-replicate, metabolize, and are open for mutations, without which genetic information would remain unchangeable, and evolution would be impossible (witzany, 2020). the crucial difference between life and non-life (or non-living things) is that life uses energy for physical and conscious development. life is anything that grows and eventually dies, that is, ceases to proliferate and be cognizant. life exists at many levels. life is also a process through which energy and materials are transformed. the difference is that the process of life is intimately linked to story it contains, whereas non-life is indifferent to the story we impose upon it (tom and taylor, 2020). the study maintains that life is the aspect of existence that processes, acts, reacts, evaluates, and evolves through growth (reproduction and metabolism). 2.1.3 balance balance refers to an individual’s ability to maintain their line of gravity within their base of support. it can also be described as the ability to maintain equilibrium, where equilibrium can be defined as any condition in which all acting forces are cancelled by each other resulting in a stable balanced system (sullivan and leslie, 2014). 2.1.4 work-life balance work-life balance is the ability to set equilibrium between professional and personal life. it is essential for higher productivity, lower absenteeism, and better physical and mental health. to be able to create a healthy balance between career, family, and leisure activities take effort (shellye, 2022). work-life balance is a key part of self-care when juggling the responsibilities of your workday, home life, and relationships with your family members and other loved ones (wold, 2021). work-life balance is a term that makes intuitive sense to many of us but can be elusive to achieve. we all know the feeling when demands are piling up on one side of the work-life scale and dominating our days. work-life balance is often used to describe a trade-off. employee balance the time spent on work projects versus time spent with family, friends, and personal interests. it can also refer to the level of flexibility team members feel they have. work-life balance encompasses everything that goes into a well-lived life (wolf, 2021). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 156 | p a g e 2.1.5 components of work-life balance that formed part of the objectives of the study according to rangel,(2023), work life balance include employees wide range of options, including flexible hours arrangement, remote work, online work options, self management, managing change, leisure time, compressed workweeks. also, montenegro, (2016), posits that components of work life balance include: self-management, time management, stress management, managing change. managing technology and managing leisure time. 2.1.5.1 managing leisure time the link between a predominantly autonomous use of time and the enjoyment of leisure time, possibilities, capacities, habits, and attitudes (personal, social, cultural) regarding time management are of special importance (nuria and castillo, 2023). leisure activities refer to activities in which individuals participate in their free time outside of their mandatory time (such as work, class, and sleep). it is an action based on an open consciousness, free choice, and self-determination, and obtained from the improvement of the sense of implication and experience of the activities, such as reading, sports, climbing, social activities, chatting, or shopping (gkiotsalitis and stathopoulos, 2016). leisure has the potential to promote well-being and health more than other areas of human activity. in this sense, it is important to promote the visibility of the incidence of leisure in general, leisure experiences and leisure activities, practicing from physical activity to cultural consumption, hobbies, music, sports, and intergenerational activities in the physical and mental health of people (of any age, social condition, cultural capital, and changing sociocultural and personal contexts) (davidson, 2021). 2.1.5.2 stress management stress is a mental and physical condition, which affects an individual’s productivity, effectiveness, personal health and quality of work. the harmful and costly consequences of stress demonstrated the need for strategies to limit stressors within the organization. organizations that did not adopt strategies to manage and alleviate stress found their employees looking elsewhere for better opportunities (adim, ibekwe, and odunayo, 2018). stress is a universal and common challenge to organization and employee performance, it is the reality of modern day workplace. employees working in different sectors and organizations have to deal with stress. manufacturing firms’ workers are among the group of workers under a great deal of stress due to many antecedents of stress. stress contributes to decreased organizational performance, decreased employee overall performance, high error rate and poor quality of work, high staff turnover, and absenteeism due to health problems such as anxiety, emotional disorder; work life imbalance; depression and other forms of ailments such as frequent headache; obesity and cardiac arrests (ajayi, 2018). 2.1.6 employee mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 157 | p a g e an employee is an individual who was hired by an employer to do a specific job. the employee is hired by the employer after an application and interview process results in his or her selection as an employee. this selection occurs after the applicant is found by the employer to be the most qualified of their applicants to do the job for which they are hiring (heathfield, 2021). 2.1.7 performance performance is the completion of a task with the application of knowledge, skills, and abilities. in the workplace, performance or job performance means good ranking with the hypothesized conception of requirements of a task role, whereas citizenship performance implies a set of individual activity/contribution (prosocial organizational behavior) that supports the corporate culture. in the performing arts, a performance generally comprises an event in which a performer or group of performers present one or more works of art to an audience, (winston; charles; david, 2014). 2.1.8 employee performance employee performance is defined as how an employee fulfills their job duties and executes their required tasks. it refers to the effectiveness, quality, and efficiency of their output (ciner, 2019).performance also contributes to our assessment of how valuable an employee is to the organization. employee performance is the successful completion of tasks by a selected individual or individuals, as set and measured by a supervisor or organization, to predefined acceptable standards while efficiently and effectively utilizing available resource within a changing environment. in view of deadrick and gardner's (2017) points, employee performance could be defined as the record of outcomes achieved, for each job function, during a specified period of time, performance is represented as a distribution of outcomes achieved, and performance could be measured by using a variety of parameters which describe an employee's paten of performance over time. 2.1.9 components of employee performance that formed part of the objectives of the study the components of performance under the study includes; employee turnover output ; clientele satisfaction; and efficiency. the components of performance (sharlyn, 2017), were management involvement; goal setting; learning and development; feedback and coaching; and ongoing conversations (sharlyn, 2017). performance is the measure of standard or prescribed indicators of effectiveness, efficiency, and environmental responsibility such as cycle time, productivity, waste reduction, and regulatory compliance. (alderfer, 2013). 2.1.9.1 employee punctuality at work punctuality is the ability to be prompt, attend appointments on time and submit your assignments by the deadline. in a professional environment, being punctual involves planning ahead and making arrangements to ensure that you can fulfill your obligations on a strict schedule. punctuality at work informs many aspects of executive presence. being on time helps you establish a good reputation and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 158 | p a g e allow others to trust you. when you are punctual, your professional image appears polished and organized, rather than hurried and haphazard, (peshev, 2023) 2.1.9.2 customer satisfaction customer satisfaction (csat) is a measure of how well a company’s products, services, and overall customer experience meet customer expectations. it reflects your business’ health by showing how well your products or services resonate with buyers. customer satisfaction is a measure of how happy your customers are with your product or service. and for many businesses, it’s the difference between a success and a failure—no pressure, (alaina, 2023). customer satisfaction is a measurement of how happy customers are with a company's products and services. customer satisfaction includes a customer's perceived quality, value and expectations of a company and what it offers. companies use this data, which they can gather through methods like surveys and focus groups, to help them determine how they can improve their products or services to gain and keep more customers. this data also can reveal major insights into how customers relate to a brand and how they will interact with it in the future, (indeed, 2022). 2.1.10 conceptual model of the study fig: 2.1 conceptual model of the study ho1 ho2 source: researcher’s model, 2024 fig. 2.1 shows the linkages between the various components of work life balance and employee performance. the aim of the diagram is to show how improvements in these work life balance components and variables translate into improvements in the employee efficiency of the selected telecommunication firms. the diagram shows that managing leisure time has a high chance of improving the employee punctuality of the telecommunication firms, thereby increasing productivity ratios and stress management on fulfilling the needs within the organization will lead to greater employee efficiency of the telecommunication firms. the end product of these will culminate in the improved organizational productivity within the telecommunication firms. 2.2 theoretical framework independent variable: work life balance independent variable: employee performance managing leisure time employee punctuality at work stress management customer satisfaction mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 159 | p a g e the study was anchored on border theory by sue-campbell clark, (2000) because it explains how individuals manage and negotiate the work and family spheres and the borders between them in order to attain balance. central to this theory is the idea that work and family, constitute different domains which influence each other. 2.2.1 border theory border theory was developed by sue-campbell clark, in the year 2000. clark (2000) described the ways and manner in which workers manage and draw boundaries between their work and family affairs so as to sustain a balance. it was noted by this theory that an employee’s life comprises of several facets and that they are interrelated with each other to the extent that if one suffers, the other will surely be affected. this theory also explained that in order for the aspects of an employee’s life not to suffer, boundaries must be managed properly, most especially between the work life and the personal life. as such, an appropriate stability should be maintained between an employee’s work and family life connections (odita, 2023). border theory considers the degree to which individuals are seen as integral members of their workplace communities as a critical indicator of the options and support they are likely to have in their efforts to maintain balance between the work and non-work spheres. it is on this premise that this study is anchored on border theory by sue-campbell clark whose idea is based on the assumption that ‘work’ and ‘non-work’ are two separate domains but that they affect each other. 2.3 empirical review 2.3.1 managing leisure time and employee punctuality at work gholam, tehrani, nima, mona, azadeh & elaheh (2013) conducted a study on leisure time management: a new approach toward employees. the study was conducted at iran. the study sought to examine the effect of leisure time management on employees’ loyalty. the study employed structural equation model (sem). the total population of 248 employees was used. the finding showed that leisure time management has positive effects on employees’ work-role salience and their perception of management concern for employees, while these two later variables have positive effects on employees’ work-role salience. odunayo (2022) conducted a study on effect of employee turnover on organization performance in the telecommunication industry in nigeria. this study was carried at mtn nigeria across five states. the population of the study comprised of 235 staff of mtn nigeria operating in oyo state; kano state; enugu state; river’s state and ogun state. a total enumeration technique was used. a 6-point likert type scale format questionnaire was used to collect primary data. a total of 235 copies of questionnaire were distributed to the employees of ncbs, of which 216 were found flawless to yield a response rate of almost 94%. a pilot study was conducted to test the questionnaire. the questionnaire had a cronbach alpha coefficient range from0.751 to 0.873 suggesting that the instrument was mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 160 | p a g e reliable. regression tests were applied to determine the contribution of each independent variable in organisational performance. the results show that employee turnover measures have significant effects on organisational performance. besides this, all the independent variables have significant contributions in organisational performance. odia & onyeizugbe, (2023) conducted a study on the relationship between teleconferencing and performance of academic staff of universities in south-south region of nigeria. the multi-stage sampling technique was employed in selecting the samples. the universities were the primary units with a population size of eighteen (18) universities, while the academic staff of the universities consist the secondary units (mi) which vary from institution to institution, with a population of 12,158. the cochran’s sample size determination method was used to select a sample size m = 384. the 384 academic staff was then proportionally allocated to the 18 universities using bourley proportion allocation technique. the data for the study was collected via the quantitative method, using the questionnaire. the questionnaire was designed using google forms and distributed online (social media). the median and the spearman’s correlation technique as nonparametric methods were used since the data generated failed to meet the assumption of normality. results showed that there is a moderate positive relationship between teleconferencing and the innovative research output of academic staff of universities in south-south nigeria. madighi, goodluck & ugwu (2023) conducted a study on the relationship between organisational trust and employee affective work passion of telecommunication service distribution firms in port harcourt. the explanatory cross-sectional survey research design was adopted in this study. the population of this study consisted of 78 employees comprising 7 telecommunication service distribution firms in port harcourt, rivers state, nigeria. a sample size of 66 was adopted for the study using the krejcie and morgan sample size determination table of 1970. a structured questionnaire was used for data collection, distributed after validation and reliability check. however, 59 copies of the instrument were retrieved. hypotheses were tested using spearman rank order correlation with statistical package for social sciences (spss) version 25.0. the results showed a significant relationship between organisational trust and employee affective work passion (happiness, energy, and love) of telecommunication service distribution firms in port harcourt. felix, efebeh, itedjere, young, ayegbunam & chuks (2024) conducted a study on the relationship between change management process and organizational performance of selected telecommunication firms in nigeria. survey design was used and the sampling object comprised employees of mtn, glo and airtel; measures of change management process employed were prepare for change (pc), create a vision for change (cvc) and implement change (ic) (independent variables) on organizational performance (orgp) (dependent variable). questionnaire was obtained from respondents using five (5) likert scale. purposive sampling method was used to select a sample of seventy-five (75) employees out of which seventy-three (73) copies were returned and analyzed via descriptive and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 161 | p a g e inferential statistical tools. findings revealed that there is a significant positive relationship between pc and orgp (0.048<0.05); there is a significant positive relationship between cvc and orgp (0.000<0.05); and ic has a significant positive relationship with orgp which is evident with the pvalue (0.0038>0.05). the study concludes that change management has significant positive effect on organizational performance of selected telecommunication firms in nigeria. 2.3.2 stress management and customer satisfaction wafula & nyaboga, (2019), conducted a research on stress management and employee performance in kisii university, kenya. the purpose of the study is to investigate stress management and employee performance by use of psychotherapy as mitigation. survey research design was used for the study. purposive sampling, convenient sampling and census sampling was employed in this study. both descriptive statistics and inferential were used to analyse data. the results indicated that work related stress positively correlated to the employee’s performance r =.429, p < .01. stress coping strategies positively correlated to the employee’s performance r =.634, p < .01 level of significance. the study concluded that work related stress, causes of stress and stress coping strategies have effect on employee performance. the study recommended that there is need for university management to identify suitable stress coping strategies to help reduce stress employee work place stress. ehsan, & ali, (2019), conducted a research on impact of work stress on employee productivity: based in the banking sector of faisalabad, pakistan. the study investigated the impact of work stress on employee productivity. the target populations comprised all employees from the five to six bank of faisalabad city (bank al habib, faysal limited bank, mcb, meezan bank, j.s bank, bank al-falah). the stratified random sampling technique was used to select 50 participants for the study. questionnaire was the instrument used to elicit information from the respondents. the study found that there is significant relationship between work stress and employee’s productivity in banking sector. the study concluded that work stress is a real challenge for employees’ who are working in the banking sector. it is very important that working environment is being continuously monitored for stress related factors. harry, (2020), conducted a research on stress management and employee performance in nigeria. the purpose of the study was to examine the relationship between stress management and employee performance. the objective of the study was to investigate the influence of stress, management, workload, role ambiguity, role conflict, effectiveness, efficiency and commitment on employee performance. the study adopted the qualitative research approach where secondary data were used as the main source of data collection. the study found that stress is at the centre of several challenges bedeviling employee in the workplace, it cannot be eliminated hence the need to manage it to ensure efficiency and effectiveness of the workforce. the study concluded that stress management bears a positive and significant influence on employee performance. the study recommended that management should design task and jobs in ways that would make for effective, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 162 | p a g e efficiency and commitment and bring about improvement in the performance of their workforce and that flexible job schedules should be incorporated into human resource management strategies, policies and plan to enhance easy employee performance and commitment that will increase organizational survival. lagrosen, & lagrosen, (2020), conducted a research on workplace stress and health-the connection to quality management. the purpose of the paper is to examine associations between quality management values, workplace health and workplace stress. a questionnaire based on theory and previous research was constructed and delivered to a sample of swedish secondary school teachers. the questionnaire included previously developed constructs of quality management values and workplace health. in addition, constructs measuring stress, demand, control and bullying were included. correlation analyses and cluster analysis were carried out. the study found that quality management can increase the level of control that the employees have over their work situation, thereby alleviating some of the effects of workplace stress. furthermore, the results show an association between quality management and workplace bullying. moreover, control but not demand was found to be related to workplace health. four clusters of employees with different quality management, stress and health profiles were identified. soegoto, & narimawati, (2021), conducted a research on stress management and good employee performance towards the success of a company in bandung. the present study aimed to examine the contribution of personal stress management to an employee’s performance and how such influence may affect a company’s success. the study applied a descriptive survey method as the most appropriate means of the study. the participants were purposively selected comprising 34 employees. the study found that there are many stress factors employees endure though they do not significantly affect performance, but still influence most of their decisions to leave the company due to continuous dissatisfaction. the study concluded that stress among employees was associated with lack of commitment and passion for work, feelings of boredom and bad mood leading to decreased performance. 2.4 summary and gap of empirical review the studies done were carried outside work life balance ad employee’s performance in telecommunication firms in enugu state and did not focus to best of my knowledge on managing leisure time and employee punctuality and stress management and employee efficiency of telecommunication firms in enugu state. most of the studies reviewed analysed their data through descriptive statistics and appropriate inferential statistics, purposive sampling technique, pearson moment correlation coefficient, multiple sampling technique, partial least square structural equation modeling (pls-sem), multiple regression analysis (mra), simple linear regression and pearson correlation coefficient (r) while the present study made use of z test to test the hypotheses. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 163 | p a g e therefore, the study aimed at filling this research gap by evaluating the work life balance ad employee’s performance in telecommunication firms in enugu state. methodology 3.1 research design descriptive survey research approach was used for this investigation. the study used a survey research design since it included assessing phenomena without attempting to manipulate the study variables and is distinguished by the use of random samples from the public to gather empirical information of modern nature. 3.3 sources of data sources of data collection for the study were primary and secondary sources. 3.3.1 primary sources primary data refer to original data collected basically for the purpose of the study. questionnaire was used for collection of primary data. 3.2.2 secondary sources secondary data were obtained from facts already documented by others which are considered valid for the study. secondary source of data for this study includes textbooks, internet, journals, articles and unpublished works. 3.3 area of the study the study was carried out in enugu state. the area of the study was four (4) firms out of nine (9) listed telecommunication firms in enugu state (appendix a). they included: etisalat, 39 abakaliki road, gra; airtel, plot 6 ebeano estate otigba junction; global comm limited, 250 ogui, road (conoil mega station); mtn service centre,34, zik avenue, enugu, enugu state nigeria. these were chosen as a result of their experience and number of their staff, high standard of operations and trained individuals. 3.4 population of the study the population of the study was two hundred and eighty one (281) employees from various telecommunication firms understudy as shown in the table 3.1. table 3.1 population distribution selected smes branches staff 1 etisalat 1 71 2 airtel 1 54 3 global 1 74 4 mtn 3 82 total 281 source: administrative desk office, 2024 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 164 | p a g e 3.5 sample size determination the whole sample size was used for the study due to small number. 3.6. sampling technique the stratified random sampling with a random start was adopted so as to give every unit of the population under study equal opportunity of being selected into sample. 3.7 method of data collection the questionnaire was used for data collection. the secondary data were collected from firms, journals, publication, textbooks and the internet. ten questions (10) in the questionnaire were ranged. 3.8 validity of the instrument the instrument was given to two experts from the industry and academia to measure face and content validity. to make sure that the research instruments applied in the work are valid, the research ensured that the instrument measure the concept they are supposed to measure. 3.9 reliability of the instrument internal consistency test was used to test the reliability of the instrument. this was done by administering 20 copies of the prepared questionnaire to the sample of the study. cronbach’s alpha was used in determining the extent of consistency of the reliability. a cronbach’s alpha value (∞) of greater 0.850 indicated very strong reliability. scale: all variables case processing summary n % cases valid 10 100.0 excluded 0 .0 total 10 100.0 a. listwise deletion based on all variables in the procedure. reliability statistics cronbach’s alpha no. of items .85 10 scale reliabilities were calculated using cronbach’s alpha; the result obtained was 0.85. this shows that the internal consistency of the scale is good for the purpose of this study because it is greater than 0.85 which was good. 3.10 method of data analyses data from the questionnaire were analyzed with the aid of spss version 23 using simple, percentages. data from the questionnaire were analyzed using simple percentages, mean and standard deviation. pearson moment of correlation coefficient to test relationship (r ) to test the test of hypotheses. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 165 | p a g e data presentation analyses and interpretation 4.1 distribution and returned questionnaire table 4.1 depicts the distribution and returned questionnaire table 4.1 distribution and return of the questionnaire firms no distributed no returned percent returned no. not returned percent not returned 1 etisalat 71 63 22 8 3 2 airtel 54 53 19 1 1 3 global 74 62 22 12 4 4 mtn 82 70 25 12 4 total 281 248 88% 33 12% source: field study, 2024 two hundred and eighty one (281) copies of the questionnaire were distributed to the respondents and two hundred and forty eight(248) copies were returned representing eighty eighty(88%) percent, while thirty three (33) copies of the questionnaire were not returned representing twelve percent (12%). this shows a high rate of the respondents. 4.2 data relating to research questions 4.2.1 relationship between managing leisure time and employee punctuality of telecommunication firms table 4.2.1.1 depicts the relationship between managing leisure time and employee punctuality of telecommunication firms table 4.2.1.1: responses on the relationship between managing leisure time and employee punctuality of telecommunication firms 5 sa 4 a 3 n 2 da 1 sd ∑fx x sd decision 1 effective leisure time reduces stress promote productivity 570 114 46.0 130 26 10.5 159 53 21.4 44 22 8.9 33 33 13.3 939 248 100% 3.67 1.458 agree 2 physical and mental health are enhanced and hard work ensured through leisure time management 635 127 51.2 208 52 21.0 66 22 8.9 30 15 6.0 32 32 12.9 971 248 100% 3.92 1.416 agree 3 there is increase in the sense of empowerment with managing leisure time and selfvalue which enhances growth 745 149 60.1 172 43 17.3 33 11 4.4 38 19 7.7 26 26 10.5 1014 248 100% 4.09 1.377 agree 4 leisure time enable us to reenergize and improve individuals moods 560 112 45.2 252 63 25.4 66 11 4.4 72 36 14.5 26 26 10.5 976 248 100% 3.80 1.410 agree 5 the use of leisure time to pursue activities that will benefit longterm goals, and 605 121 48.8 292 73 29.4 66 11 4.4 4 2 .8 41 41 16.5 1008 248 100% 3.93 1.434 agree mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 166 | p a g e enhance physical expansion total grand mean and standard deviation 3.88 2 1.419 source: field survey, 2024 table 4.2.1.1., shows 140 respondents out of 248 representing 56.5 percent agreed that effective leisure time reduces stress promote productivity with mean score 3.67 and standard deviation of 1.458. physical and mental health are enhanced and hard work ensured through leisure time 179 respondents representing 72.2 percent agreed with mean score of 3.92 and standard deviation of 1.416. there is increase in the sense of empowerment with managing leisure time and self-value which enhances growth192 respondents representing 77.4 percent agreed with mean score of 4.09 and standard deviation of 1.377. leisure time enable us to re-energize and improve individuals moods 175 respondents representing 70.6 percent agreed with mean score of 3.80 and 1.410. the use of leisure time to pursue activities that will benefit longterm goals, and enhance physical expansion 194 respondents representing 78.2 percent agreed with a mean score of 3.93 and standard deviation 1.434. 4.2.2 relationship between stress management and employee efficiency of telecommunication firms table 4.2.2.1 depicts the relationship between stress management and employee efficiency of telecommunication firms table 4.2.2.1: responses on the relationship between stress management and employee efficiency of telecommunication firms 5 sa 4 a 3 n 2 da 1 sd ∑fx x sd decisio n 1 there is reduced symptoms of poor mental and physical health 805 161 64.9 212 53 21.4 33 11 4.4 12 6 2.4 17 17 6.9 1079 248 100% 4.35 1.136 agree 2 absenteeism is reduced with stress management and it improves efficiency rates 680 136 54.8 256 64 25.8 33 11 4.4 36 18 7.3 19 19 7.7 1024 248 100% 4.13 1.250 agree 3 stress management decreases fewer injuries, less illness and lost time 400 80 32.3 368 92 37.1 33 11 4.4 70 35 14.1 30 30 12.1 901 248 100% 3.63 1.376 agree 4 the stress management helps improve sleep, cognition and libido 460 92 37.1 104 26 10.5 210 70 28.2 76 38 15.3 22 22 8.9 872 248 100% 3.52 1.356 agree 5 the stress management increases efficiency and employee satisfaction and gives opportunities for remote working 705 141 56.9 104 26 10.5 84 28 11.3 66 33 13.3 20 20 8.1 979 248 100% 3.95 1.394 agree mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 167 | p a g e total grand mean and standard deviation 3.916 1.302 source: field survey, 2024 table 4.2.2.1, depicts that 214 respondents out of 248 representing 86.3 percent agreed that there is reduced symptoms of poor mental and physical health with mean score 3.35 and standard deviation of 1.133. absenteeism is reduced with stress management and it improves efficiency rates 200 respondents representing 80.6 percent agreed with mean score of 4.13 and standard deviation of 1.250. stress management decreases fewer injuries, less illness and lost time 172 respondents representing 69.4 percent agreed with mean score of 3.63 and standard deviation of 1.376. the stress management helps improve sleep, cognition and libido 118 respondents representing 47.6 percent agreed with mean score of 3.52 and 1.356. the stress management increases efficiency and employee satisfaction and gives opportunities for remote working 167 respondents representing 67.4 percent agreed with a mean score of 3.95 and standard deviation 1.394. 4.3 test of hypotheses 4.3.1 hypothesis one: managing leisure time has relationship with employee punctuality of telecommunication firms. table 4.3.1.1 shows the kolmogorov-smirnov z on managing leisure time has relationship with employee punctuality of telecommunication firms. table 4.3.1.1 shows the kolmogorov-smirnov z on managing leisure time has relationship with employee punctuality of telecommunication firms one-sample kolmogorov-smirnov test effective leisure time reduces stress promote productivity physical and mental health are enhanced and hard work ensured through leisure time management lack of support from the executive level reduces necessary reinforcement to implement the vision there is increase in the sense of empowerment with managing leisure time and self value which enhances growth key stakeholders leisure time enable us to reenergize and improve individuals moods the use of leisure time to pursue activities that will benefit longterm goals, and enhance physical expansion n 248 248 248 248 248 uniform parametersa,b minimum 1 1 1 1 1 maximum 5 5 5 5 5 most extreme differences absolute .460 .512 .601 .456 .532 positive .133 .129 .105 .105 .165 negative -.460 -.512 -.601 -.456 -.532 kolmogorov-smirnov z 7.239 8.065 9.462 7.176 8.382 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 168 | p a g e asymp. sig. (2-tailed) .000 .000 .000 .000 .000 a. test distribution is uniform. b. calculated from data. decision rule if the calculated z-value is greater than the critical z-value (i.e zcal > zcritical), reject the null hypothesis and accept the alternative hypothesis accordingly. result with kolmogorov-smirnon z – value of 7.176 < 9.462 and on asymp. significance of .000, the responses from the respondents as display in the table is normally distributed. this affirms that the managing leisure time had significant positive relationship with employee punctuality of telecommunication firms. decision furthermore, comparing the calculated zvalue of 7.176 < 9.462 against the critical zvalue of .000 (2-tailed test at 95% level of confidence) the null hypothesis were rejected. thus the alternative hypothesis was accepted which states that managing leisure time had significant positive relationship with employee punctuality of telecommunication firms. 4.3.2 hypothesis two: stress management has relationship with employee efficiency firms in enugu state. table 4.3.2.1 shows the kolmogorov-smirnov z on stress management has relationship with employee efficiency firms in enugu state. table 4.3.2.1 shows the kolmogorov-smirnov z on the relationship between stress management and employee efficiency of telecommunication firms one-sample kolmogorov-smirnov test there is reduced symptoms of poor mental and physical health absenteeism is reduced with stress management and it improves efficiency rates stress management decreases fewer injuries, less illness and lost time the stress management helps improve sleep, cognition and libido the stress management increases efficiency and employee satisfaction and gives opportunities for remote working n 248 248 248 248 248 uniform parametersa,b minimum 1 1 1 1 1 maximum 5 5 5 5 5 most extreme differences absolute .649 .556 .444 .371 .569 positive .069 .077 .121 .089 .081 negative -.649 -.556 -.444 -.371 -.569 kolmogorov-smirnov z 10.224 8.763 6.985 5.842 8.954 asymp. sig. (2-tailed) .000 .000 .000 .000 .000 a. test distribution is uniform. b. calculated from data. decision rule if the calculated z-value is greater than the critical z-value (i.e zcal > zcritical), reject the null hypothesis and accept the alternative hypothesis accordingly. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 169 | p a g e result with kolmogorov-smirnon z – value of 5.842 < 10.224 and on asymp. significance of .000, the responses from the respondents as display in the table is normally distributed. this affirms that the stress management had significant positive relationship with employee efficiency of telecommunication firms decision furthermore, comparing the calculated zvalue of 5.842 < 10.224 against the critical zvalue of .000 (2-tailed test at 95% level of confidence) the null hypothesis were rejected. thus the alternative hypothesis was accepted which states that stress management had significant positive relationship with employee efficiency of telecommunication firms 4.4 discussion of findings 4.4.1 managing leisure time had relationship with employee output from the result of hypothesis one, the calculated zvalue of 7.176 < 9.462 against the critical zvalue of .000, which implies that managing leisure time had significant positive relationship with employee output of telecommunication firms. in the support of the result in the literature review, gholam, tehrani, nima, mona, azadeh & elaheh (2013) conducted a study on leisure time management: a new approach toward employees. the finding showed that leisure time management has positive effects on employees’ work-role salience and their perception of management concern for employees, while these two later variables have positive effects on employees’ work-role salience. felix, efebeh, itedjere, young, ayegbunam & chuks (2024) conducted a study on the relationship between change management process and organizational performance of selected telecommunication firms in nigeria. findings revealed that there is a significant positive relationship between pc and orgp (0.048<0.05); there is a significant positive relationship between cvc and orgp (0.000<0.05); and ic has a significant positive relationship with orgp which is evident with the p-value (0.0038>0.05). the study concludes that change management has significant positive effect on organizational performance of selected telecommunication firms in nigeria. 4.4.2 stress management had relationship employee engagement from the result of hypothesis two, the calculated zvalue of 5.842 < 10.224 against the critical z value of .000 which implies that stress management had significant positive relationship with employee engagement of telecommunication firms. in the support of the result in the literature review, umukoro, egwakhe and akpa (2020) conducted a study on flexible work design and employee commitment: when socio-demographic characteristics are introduced? the result from hierarchical multiple regression analysis revealed that sociodemographic characteristics had positive significant moderating effect on the relationship between flexible work design and employee mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 170 | p a g e commitment. adebayo & ibrahim (2023) conducted a study on flexible working arrangements and employees' job satisfaction in hospitality industry. the qualitative findings however showed that effective implementation of part time will have a significant impact on employees’ job satisfaction. the study concluded that work life balance is indeed drivers of business as it decreases absenteeism and increases employee turnover. summary of findings, conclusion and recommendations 5.1 summary of findings i. managing leisure time had significant positive relationship with employee punctuality of telecommunication firms, z (95, n= 248), 7.176 < 9.462, p.<.05 ii stress management had significant positive relationship with employee efficiency of telecommunication firms, z (95, n= 248), 5.842 < 10.224, p.<.05 5.2 conclusions the study concluded that managing leisure time and stress management had significant positive relationship with employee punctuality and employee efficiency of telecommunication firms. worklife balance is about the interaction between paid work and other activities, including unpaid work in families and community, leisure and personal development. it is the extent to which an employee of an organization is equally self-engaged and equally satisfied with his or her work role and family role. the telecommunication sector is one of the most human resource intensive sectors. telecommunication employees stay in the firms for longer hours doing routine work, which could be highly tasking on their mental health. 5.3 recommendations based on the findings, the following recommendations were proffered i. the management of telecommunication firms should be engaging in leisure activities to enhance the opportunity to find balance in life and allow taking control of how employees spend their time and helping to regulate the challenging demands of what life can throw at employees. ii. the telecommunication firms should foster stress management not only provide employees with job satisfaction, better health, increased work-life balance, and less stress, but they also benefit the organizations by boost employee productivity and motivation 5.5 contribution to knowledge the studies done were carried outside work life balance ad employee’s performance in telecommunication firms in enugu state and did not focus to best of my knowledge on managing leisure time and employee punctuality; and stress management and employee efficiency of telecommunication firms in enugu state. most of the studies reviewed analysed their data through a purposeful sampling technique, descriptive statistics and appropriate inferential statistics, purposive sampling technique, pearson moment correlation coefficient, multiple sampling technique, partial least square structural equation modeling (pls-sem), multiple regression analysis (mra) method, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 171 | p a g e simple linear regression and pearson correlation coefficient (r) while the present study made use of z test to test the hypotheses. therefore, the study aimed at filling this research gap by evaluating the work life balance ad employee’s performance in telecommunication firms in enugu state. references adebayo, a. a., & ibrahim, w. (2023). flexible working arrangements and employees' job satisfaction in the hospitality industry. african journal of management and business research, 11(1). https://orcid.org/0009-0002-3055-1279 adim, c. v., ibekwe, w., & odunayo, o. a. (2018). stress management and employee performance of deposit money banks in port harcourt, nigeria. american journal of humanities and social sciences research (ajhssr), 2(12), 41-49. ajayi, s. (2018). effect of stress on employee performance and job satisfaction: a case study of nigerian banking industry. ssrn electronic journal. https://doi.org/10.2139/ssrn.3160620 alderfer, c. (2013). letter from the editor. journal of applied behavioural science, 3(9), 357-359. akpa, v. o., egbuta, o. u., akinlabi, b. h., & magaji, n. (2019). work-life balance and employee performance: a study of selected deposit money banks in lagos state, nigeria. the journal of social sciences research, 5(12), 1787-1795. alaina, f. 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(2020). role of flexible working hours’ arrangement on employee job performance and retention in manufacturing industries in agbara, nigeria. economic insights – trends and challenges, ix(lxxii), 23-37. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 173 | p a g e jacobse, e. (2023). efficient work organization: boost productivity anywhere. shiftbase blog. https://www.shiftbase.com/glossary/work-organization jill, h. 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(2023). types of flexible working arrangements. retrieved from mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 174 | p a g e https://co.linkedin.com/in/valentina-rangel?trk=article-ssr-frontend-pulse_publisher-authorca rizwan, m., nazar, k., nadeem, b., & abblas, q. (2016). the impact of workforce diversity towards employee performance. american journal of marketing research, 2(2), 53-60. sentric, h. (2023). 3 ways to improve employee efficiency. retrieved from https://sentrichr.com/3ways-to-improve-employee-efficiency/ sharlyn, l. 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(2014). physical rehabilitation (6th ed.). fa davis. tutorialspoint. (2022). what is performance? retrieved from https://www.tutorialspoint.com/performance_management/performance_management_und erstanding.htm umukoro, j. e., egwakhe, j. a., & akpa, v. o. (2020). flexible work design and employee commitment: when socio-demographic characteristics are introduced? international journal of finance, insurance and risk management, x (3), 3-17. wafula, m., & nyaboga, e. (2019). stress management and employee performance: use of psychotherapy as mitigation in selected schools (school of business and economics and health sciences) in kisii university, kenya. merit research journal of business and management, 7(3), 019-027. wolf, j. (2021). what is work-life balance? retrieved from https://www.betcom/blog/work-lifebalance mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 64 | p a g e a historical perspective on volatility in the mexican stock market index maría rodríguez gonzález cristóbal colón universityveracruz, mexico, third year student of doctoral program in management science abstract: the predictability of stock price movements has long been a subject of debate in academia and the finance sector. this study delves into the age-old question: how can historical stock price data be leveraged to forecast future behavior? this question has spurred two competing theories: the chartist theory and the theory of random walks. chartists, who primarily follow dow theory and technical analysis, share a common belief that historical asset price data holds valuable information for predicting future behavior. they posit that patterns observed in past prices tend to recur in the future, suggesting that history repeats itself. consequently, analysts following this approach use historical patterns to forecast future price movements, aiming to boost their expected profits (murphy, 2000). in stark contrast, the theory of random walks contends that stock prices follow a random walk, making it impossible to predict future prices based on historical data (fama, 1965). this theory asserts that price changes are random variables that are independent and identically distributed (johnston & dinardo, 1997). in essence, past prices do not offer any information that can be used to anticipate future prices. fama (1970) introduced three levels of market efficiency, with the weak form suggesting that the history of stock prices does not contain information capable of generating yields beyond what a random portfolio would yield. keywords: stock prices, chartist theory, random walks, market efficiency, historical data, forecasting. 1. introduction for many years, in the academia and finance sector the following question has been subject of discussion and controversy: how to extent, the historical data of stock prices to predict their behavior? the answers to this question have been addressed firstly by the chartist theory and the theory of random walks. the focus of chartists’ theories (primarily dow theory and technical analysis) based on the same assumptions; assume that the historical data of asset price have much information that can be used to predict their behavior. the pattern of past prices tends to recur in the future, that is, history repeats itself. thus, an analysis based on this approach to identify patterns can be used to predict future behavior of prices and thus increase expected profits (murphy, 2000). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 65 | p a g e in contrast, theory of random walks says that stock prices are determined in a random walk, its mean, cannot predict future prices from past prices (fama, 1965). in statistical terms, theory says that the price changes are random variables, independent and identically distributed (johnston & dinardo, 1997). that is, past prices do not provide such information that can be used to predict future prices. fame (1970) proposed three levels of market efficiency with respect to the information reflected in prices. the weak form holds that the history of stock prices does not contain information that can be used to obtain yields above which gives a random portfolio. therefore, in an efficient market in its weak form, prices follow a random walk. in semi-strong market efficiency prices even reflect public available information. with strong market efficiency prices add private information. fame (1970) proposes three levels of markets efficiency in relation to the information of prices. the weak form sustains that the track record of stock prices does not contain information that could be used to obtain higher yields than those obtained by a portfolio of stocks, even taken at random. hence it is written that in an efficient market in its weak form, prices follow a random walk. a market have semistrong efficiency, whether in addition the above, the prices reflect the publicly available information. an efficient market is strong, whether in addition the above, the prices reflect private information. in order to verify these assertions (despite the difficulty to test the semi-strong and strong efficiency) some statistical tests were developed to determine whether stock prices follow a random walk, example of this is: serial correlation analysis, unit root test and the variance ratio. the majority of the researches for developed countries and latin american markets (worthington and higgs, 2006; lópez, 1998, 2004; ramírez, 2002) have found the presence of autocorrelation of stock returns, so random walk hypothesis it is rejected. in the last twenty years, several time series models have been proposed to represent the information of generation process on the basis of characteristics of the series of interest, the empirical evidence about behavioral and financial time series modeling show a more outstanding characteristic (fama, 1965; lamoureux & lastrapes, 1990; hassan, islam & abul, 2000; geng, 2006; balaban, bayar & faff, 2003; ebeid & bedeir, 2004), following it describes. i) variance of series is not constant along the time, which violates the assumption of homoscedasticity from traditional models. ii) substantial changes and conditioned volatility clusters in which the volatility is followed by high volatility and low volatility is followed by low volatility. this behavior suggests that the volatility of financial series is determined by an autoregressive process (serial correlation) and non-constant variance (heteroscedasticity). iii) the distribution of gains although centered in zero show lightweights bias and the kurtosis value is greater relative to standard normal (excess kurtosis), implying biased results when assuming normality. iv) volatility effect on stock prices. bad news and good news affect the volatility in different ways: the first ones have greater effect than the seconds’ ones, therefore, if the volatility incremented, prices fall and vice versa, which allows observing a negative correlation. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 66 | p a g e the above results show the importance of modeling the financial series incorporating volatility (risk). from engle (1982) famous work: autoregressive conditional heteroscedasticity with estimates of the variance of united kingdom inflation, a family of models of autoregressive conditional heteroscedasticity (arch) have been developed, mostly used to explain the volatility of financial yields. with regard to empirical evidence, there are a large number of studies that used arch models to analyze the behavior of volatility. in particular, we identify models that are more predictive for ex-post forecasts. geng (2006) applies arch family models to analyze the characteristics of the volatility of the chinese stock market. compares several models by using standard criteria and concludes that the model egarch (1,1) and egarch-m model (1.1) have the same efficiency to forecast series. ebeid & bedeir (2004) evaluates the capacity of arch models to forecast stock market yields from egypt and concludes that the garch (1,1) model is more appropriate for modeling the volatility of the market price index. ludlow and mota (2006) analyzes the financial markets volatility based on three indexes (ipc, nasdaq, s & p500) using a multivariate model garch (1,1) and conclude that shocks derived from bad news have an impact with more force on market deeper. the work of lopez (2004) evaluates the contribution of three models of the family arch (garch (1,1), tarch (1,1), egarch (1,1)), for modeling the behavior of the mexican stock market based in the ipc.the criterion used for the evaluation was; verify if the forecasted values of the ipc, once modeled the volatility, is capable of reproducing the first four moments of the distribution of the ipc. concludes that the egarch (1,1) has better qualities to predict. the purpose of this work is to analyze the features of the volatility of the stock market in mexico and identify the model with the best predictive ability. to this end, we apply the arch family models using daily returns of the mexican stock market index. to identify the model with the highest predictive ability, it follows closely the work of lopez (2004). the preparation of this exercise was justified by the great attention given the volatility term, not only by academics but also by investors in the stock market in mexico which requires a measure of risk when making transactions. the investment portfolio design, the fixing of prices, calculation of value at risk, and financial strategies, justify the importance of modeling and forecasting the conditional volatility of returns. the main conclusion of this paper presents empirical evidence for egarch models for forecasting effects of ex-post. the work is organized as follows: second section presents the theoretical conceptualization of arch and garch models of engle (1982), bollerslev (1986), zakoian (1990) and nelson (1991). third section presents the results of the estimation, statistical tests and forecasts. fourth section presents the main conclusions. 2. models to capture volatility characteristics, robert engle (1982) propose to model the conditional volatility through a conditional heteroscedasticity autoregressive process (arch) in which the process mean is zero and variance dependent on conditional the random errors passed. however, empirical evidence shows that it requires a large amount of remnants to capture the dynamics of the conditional variance. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 67 | p a g e bollerslev (1986) developed a special technique using an arma process to the conditional variance of errors called garch (p, q) which has an autoregressive component and moving average on heteroscedastic variance. the advantage of garch about the arch model is that the garch model could to have more parsimony and representation that it is easier identify and estimate. the garch model is denoted as follows: y t x t t (1) t vt t 2 (2) where: v2 1 , (3) and to model garch (1,1) t2 0 1 t2 1 1 t2 1 (4) v t like in the arch model , is white noise process which is independent t i from the past achievements of . the conditions over the parameters that guarantee 0 0, 1 1 1 the stability of the model are: . 0 the conditional variance depends upon three terms: the mean , information on the volatility of the previous period measured by the lag of the squared residuals (arch term) obtained from equation 1); and the last period forecast variance (garch term). garch model (p, q) is: v 2 t t t (5) q p t2 0 i t2 i j t2 j i 1 i 1 (6) the conditions on parameters are: 0 0, i 0, j 0 1 2 q 1 2 p 1 , (7) despite the fact that garch model is used to forecast volatility and determine the behavior of prices, there are situations that garch model cannot explain. the biggest problem is that standard garch models assume that the error terms positive and negative have the same symmetrical effects on mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 68 | p a g e volatility. that is, good news and bad news have the same effect on volatility in this model. the exponential garch (egarch) and threshold arch model (tarch) describe asymmetric market response under positive and negative impacts. egarch model of nelson (1991) is denoted as q p ln( t ) 0 i g(vt i ) j ln( t j ) i 1 i 1 (8) g(vt ) ivt (9) 0 0 when , the effects of information are asymmetric. when there is presence of effect “leverage”. there are not restrictions on parameters, which is an advantage of egarch model compared with the garch model. tarch model proposed by zakoian (1990) have the follow expression: q p t 0 i t2 i t2 1dt 1 j t j i 1 i 1 (10) where d is a latent variable 1 t 0 d 0 t 0 (11) t 0) and bad news t 0 have different effects in this model, good news ( on conditional variance. good news has an impact of while bad news has an 0 0 impact . if there is leverage effect. if the impact of news is asymmetric. 3. estimation and testing 3.1 data to carry out the estimation of the arch model, index of the mexican stock market (bmv) are used. the daily yields are calculated as: rt ln(ipct / ipct 1). t t t t e mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 69 | p a g e time series of ipc as representing the "price" of the stock market is used due to ipc is the main indicator of yields offered by investment in shares traded on the bmv and it consists of a sample of stocks with higher trading volume weighted on the basis of the proportion they have on market capitalization. data used were daily closing of the ipq, including all days of operations of the bmv for the period january 3th, 2000 to july 11th, 2008. we didn´t considere successive values in order to avoid stock return volatilities due to the impact of the recent global financial crises called the first largest crisis after the recession of 1930s (ali and afzal, 2012). in total 2136 observations, published in http://mx.finance.yahoo.com/. for data processing excel spreadsheet was used and to estimate the e-views 3 package was used. to identify the model which allows us to explain with more accuracy the historical performance of the ipc, and to obtain forecasts, the following methodology is used: a) 2127 sample observations are used to adjust the models. b) volatility is modeled and the best model based on standard evaluation criteria (akaike criterion, schwarz criterion and value of the maximum likelihood function) is selected. c) with the resulting models, nine periods forward (july 1st to july 11th, 2008) are forecast and the results with real data from the same period, are compared. d) accuracy measures are calculated (mean square error, mean absolute error, theil inequality coefficient and decomposition of the mean square error). this, because they allow evaluating the forecasts, and the model in which the difference between the forecasted values and real values is minimal, is chosen. 3.2) description of the information this work begins obtaining a graph of the ipc in order to consider appropriate initial transformations. in graph 1 it can be observed an increasing tendency of the ipc over time, starting from an intercept. the graph is very similar as a random walk with trend. graph 1: historical ipc mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 70 | p a g e daily yield of the ipc over the sample period are presented in graph 2 and it is possible to observe that series consistently fluctuates around zero, it´s variance is not constant through time and shows an autocorrelation behavior. graph 2: yields of ipc the estimated distribution of the yields (kernel epanechnikov, with silverman bandwidth value h = 0.0022) is shown in graph 4, in which is again observed the excess kurtosis. the jarque bera test rejects the normal distribution in yields of the ipq (jarque bera = 682.4052). graph 4: estimated distributions of the ipq yields kernel density (normal, h = 0.0022) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 71 | p a g e ripc statistically, the risk or volatility is the dispersion of the yields. daily performance (average profitability) for the period under review is 0.000670 and the risk (standard deviation) per day is 0.014114, which reflects the high volatility of the mexican stock index. table 1 summarizes the descriptive statistics in yields of the ipc. table 1: descriptive statistics in yields of the ipc statistics value mean 0.000670 median 0.001179 standard deviation 0.014114 bias -0.105974 kurtosis 5.767421 source: own 3.3 unitary root test in order to detect if the ipc yields series covariance is stationary, unit root test is carried out with the statistical dickey-fuller. results are shown in table 2. table 2. unitary root test augmented dickey – fuller unit root test on ripc adf test statistic -21.56508 1% critical value* -3.4364 5% critical value -2.8634 10% critical value -2.5678 *mackinnon critical values for rejection of hypothesis of a unit root. source: own it was confirmed that the series ripq has not unit root, therefore, we can apply the conventional methodology of analysis for time series stationary in covariance. 3.4 models for adjusting the model series ripq, the ar and ma terms defining the process are identified, using 2127 observations. 0 10 20 30 40 -0.08 -0.06 -0.04 -0.02 0.00 0.02 0.04 0.06 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 72 | p a g e different estimates were carried out by ordinary least squares and based on the akaike, schwarz and log likelihood criteria, the following arma (5,1) was chosen. the results are summarized in table 3. ripqt 0 1ripqt 1 5ripqt 5 1 t 1 t (12) rescuing the residual of the model, is verified through the arch-lm test (lagrange multipliers) in order to get the residual of model, we may identify trough test arch-lm (lagrange multiplications), if the squared errors (conditional variance are correlated with its past. test result shows that errors are correlated with their immediate past, which indicates that we have arch effects (1) in the arma model. the ripq series is volatile. these results suggest modeling the effect of the autoregressive conditional volatility, therefore, a garch (1,1) model is proposed, thus we obtain the following equation: ripqt 0 1ripqt 1 5ripqt 5 1 t 1 t (13) 2 2 2 0 1 t 1 1 t 1 (14) when estimating jointly the equations 1) and 2) by the method of maximum likelihood, it is observed that the parameters of the terms ar (1), ar (5), ma (1), arch (1) and garch (1) is significant according to statistical z. as shown, the value of the sum of the coefficients of arch and garch term (0.081392 + 0.89368 = 0.975072) is very close to 1, which shows the existence of high volatility. this suggests that given the possibility of a shock expected market the fluctuations do not stop in the near term. this is a signal of high risk. similarly, considering that the sum of both parameters is less than unity, the proposed garch (1,1) model is a stationary process. in order to verify this, the wald test was performed. the test arch-lm shows that are not taken problems of heteroscedasticity in the model. for describing the asymmetric market response under positive and negative shock, we proceed to estimate the egarch (1,1) model and tarch (1,1) model. the first results show that skewness coefficient is statistically different from zero (z = -6.104619) and negative (-0.117746) which gives evidence of leverage effect on the mexican stock market for the sample period. this is, volatility caused by negative shocks is greater than those caused by positive shock. results of the second model show that the asymmetry coefficient is statistically different from zero (z = 5.776392) and positive (0.163874), which also shows evidence of leverage effect. this is consistent with the bulk of the research. table 3: parameter estimates and diagnostics of the models models terms arma ar(1), ar(5), ma(1) ar(1), ar(5), ma(1) ar(1), ar(5), ma(1) ar(1), ar(5), ma(1) parameters arma(5,1) garch(1,1) egarch(1,1) tarch(1,1) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 73 | p a g e 0 1 5 1 arch(1) garch(1) 1 standard error of regression log likelihood akaike criterion schwarz criterion f-statistic arch-lm test observations 0.000660 (0.000312) 2.114489 -0.378290 (0.131065) -2.886274 -0.055764 (0.020027) -2.784496 0.481759 (0.124842) 3.858934 0.013906 6060.702 -5.711176 -5.700502 12.03360 f= 38.89053 2127 0.00128 (0.000253) 5.071421 -0.315002 (0.120769) -2.608306 -0.059082 (0.021191) -2.788073 0.404675 (0.116990) 3.459058 0.081392 (0.013212) 6.160275 0.899368 (0.016351) 55.00287 0.013932 6242.034 -5.879334 -5.860656 5.137749 f= 0.403016 2127 0.000786 (0.000260) 3.019394 -0.300079 (0.121641) -2.466918 -0.048604 (0.020582) -2.361544 0.392119 (0.118283) 3.315092 0.128319 (0.020068) 6.394098 0.965980 (0.008411) 114.8426 -0.117746 (0.019288) -6.104619 0.013923 6286.126 -5.919968 -5.898621 4.951903 f=0.20484 2127 0.000877 (0.000260) 3.376556 -0.343568 (0.123114) -2.790641 -0.050880 (0.021108) -2.410490 0.436423 (0.119088) 3.664721 0.006874 (0.012468) 0.551294 0.877360 (0.016949) 51.76405 0.163874 (0.028370) 5.776392 0.013922 6279.839 -5.914039 -5.892692 4.995343 f=0.360630 2127 note: the values in each box are the coefficients of each term, their standard errors and the value of zstatistic, respectively. source: own it is observed in table 4, when comparing the values of the mean square error and the mean absolute error associated with the prediction of each of the models, that egarch model (1.1) has the minimum value, which suggests that the best model to forecast the ipc. similarly, the coefficient value of inequality of theil associated to egarch (1,1) is minimum, indicating that is the best fit model. however, the decomposition of the mean square error given by the bias ratio variance and covariance shows that garch (1,1) overcomes the other models. according to the value of the errors of each of the models, the forecast errors mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 74 | p a g e (proportion of bias and proportion of variance) are very large, up from 0.1 for the case of bias, which means the presence of a systematic bias (pindyck, 2001). table 4: assessment of predictive ability of the models indicator garch(1,1) egarch(1,1) tarch(1,1) root mean square error 1345.00 1260.474 1274.684 mean absolute error 1234.881 1158.502 1171.084 theil inequality coefficient 0.023207 0.021778 0.022018 proportion of bias 0.842957 0.844744 0.844056 proportion of variance 0.064700 0.091298 0.085941 proportion of covariance 0.092344 0.063958 0.070004 source: own 4. conclusions to determine which is the model that explain more precisely the behavior of the mexican stock market index for the period january 3th, 2000 to july 11th, 2008 has been used an arma model (5.1) in which the arch effects are identified, so the process is modeled through the models from the arch / garch family. the findings of this research provide evidence on the existence of highly persistent volatility of returns of the ipc. the significance of the asymmetry parameters about tarch and egarch models suggest the existence of the leverage effect. the volatility of returns of the ipc caused by the bad news is greater than those caused by the good news. the above evidence is consistent with the bulk of research on the volatility of returns of stock prices and stock indices. garch (1,1), egarch (1,1) and tarch (1,1) models, allow us suitably adjust the ipc series. however, the egarch (1,1) model shows to be the best model for estimating according to the standard evaluation criteria. the forecasting results by using the three models, give evidence that the egarch (1,1) model has the best predictive capability. finally we can say that the forecasts obtained from these results, show the rapidity with they tend to their unconditional mean, which indicates, that the forecast horizon of these models is very short, provides immediate predictions (2 -3 days) before stabilizing . references ali rafaqet and muhammad afzal (2012). impact of global financial crisis on stock markets: evidence from pakistan and india. journal of business management and economics vol. 3(7). pp. 275282, june. balaban, ercan; bayar, asli and faff, robert w., (2003). forecasting stock market volatility: evidence from fourteen countries. u of edinburgh, center for financial markets research working paper no. 02.04; efma helsinki meetings. retrieved from ssrn: http://ssrn.com/abstract=339520 or doi: 10.2139/ssrn.339520 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 75 | p a g e bollerslev, chou and kroner (1992).arch modeling in finance: a review of the theory and empirical evidence. journal of econometrics, volume 52, issues 1-2, pages 5-59. ebeid, said t. and bedeir, gamal b. a (2004). volatility modeling and forecasting of the egyptian stock market index using arch models. retrieved from ssrn: http://ssrn.com/abstract=631887 engle, robert f. (1982). autoregresive coditional heteroscedasticity with estimates of the variance of united kingdominflation”, econometrica 55, julio, pp. 987-1007. fama, eugene (1965). the behavior of stock-market prices. the journal of business, vol. 38, no. 1. pp. 34-105. fama, eugene (1970). efficient capital markets: a review of theory and empirical work. the journal of finance, vol. 25, no. 2. pp. 383-417. geng, jia (2006). volatility analysis for chinese stock market using garch model. retrieved from ssrn: http://ssrn.com/abstract=1020363 hassan m. kabir, islam anisul m. and abul basher syed (2000). market efficiency, timevarying volatility and equity returns in bangladesh stock market. economics working paper archive econwpa, from http://ideas.repec.org/p/wpa/wuwpfi/0310015.html johnston, jack and dinardo john (1997). econometric methods, ed. mc graw hill, usa, 2ª ed. lamoureux, christopher g. and lastrapes william d (1990). heteroskedasticity in stock return data: volume versus garch effects. the journal of finance, vol. 45, no. 1. pp. 221-229. lópez, herrera francisco (2004). modelado de la volatilidad y pronóstico del índice de precios y cotizaciones de la bolsa mexicana de valores. contaduría y administración no. 213, mayo 2004. retrieved from http://www.ejournal.unam.mx/rca/213/rca21302.pdf lópez, herrera francisco (1998). análisis de la eficiencia del mercado accionario mexicano. contaduría y administración no. 191. retrieved from http://www.ejournal.unam.mx/rca/191/rca19106.pdf ludlow, jorge y mota, beatriz (2006). volatilidad del ipc, nasdaq y s&p500: un modelo garch multivariado. análisis económico. num. 48, vol. xxi. retrieved from http://www.analisiseconomico.com.mx/pdf/4811.pdf mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 76 | p a g e murphy, john j (2000). análisis técnico de los mercados financieros. barcelona, españa: gestión 2000. 540 pp. pindick robert s. & rubinfeld daniel l. (2001). econometría, modelos y pronósticos. ed. mc graw hill. méxico. ramírez, josé carlos y sandoval-saavedra, rogelio (2002). ¿existen componentespronosticables en las series de los rendimientos de las acciones? revista mexicana de economía y finanzas. volumen 1, número 1. pp. 39-58 worthington, andrew and higgs, helen (2004) random walks and market efficiency in european equity markets. global journal of finance and economics 1(1):pp. 59-78. retrieved from: http://eprints.qut.edu.au/2319/1/2319.pdf worthington, a. c., & higgs, h. (2006). evaluating financial development in emerging capital markets with efficiency benchmarks. journal of economic development, vol.31, no.1, pp.1-27. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 43 | p a g e environmental, social and governance disclosure on corporate performance: a study of agricultural firms and health care firms in nigeria nwachukwu raphael (phd) and azodo chinyere department of accountancy, tansian university, umunya, nigeria e-mail: chikwute@yahoo.com doi:https://doi.org/10.5281/zenodo.15639229 abstract: this study determined the environmental, social and governance disclosure on corporate performance of two selected firms in nigeria (agricultural firms and health care firms). the study employed environmental disclosure, social disclosure and corporate governance disclosure as the independent variables and return on assets as the dependent variable. ex post facto research design. data were analyzed with descriptive statistics, and the hypotheses were tested inferential statistics. multiple regressions were employed to test the hypotheses. the study regression result of the model showed that the environmental disclosure had a positive coefficient of 0.0032 and a pvalue of 0.040 which was significant at 5% level. the hypothesis result showed that the variable of social practice disclosure had a positive coefficient of 0.000390 and a p-value of 0.087 which was significant at 5% level. another finding showed that the regression result of model showed that the variable of governance practices disclosure had a negative coefficient of -0.000558 and a p-value of 0.355 which was significant at 5% level. based on the outcome of the study, the study suggested among others that since environmental, sustainability disclosures positively affects financial performance, the companies need to develop and publicize detailed environmental policies and practices. this includes reporting on emissions reductions, waste management, and resource conservation efforts. keywords: environmental disclosure, social disclosure, governance disclosure and return on assets. introduction environmental, social and governance (esg) credentials have become a global trend nowadays and are increasingly important for companies due to spreading awareness of their responsibility for sustainable growth and their multi-dimensional impact on society (kaakeh & gokmenoglu, 2022). sustainable development in all fields of activity is ever more demanded to become a compulsory requirement at the global level (chien, 2023) and companies are increasingly using sustainability strategies and this has led to notable shifts in business models and management practices (chang & mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:chikwute@yahoo.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 44 | p a g e lee, 2022). firms are implementing optimal strategies focused on maximizing stakeholder value while also achieving the company’s financial goals (al amosh, khatib & ananzeh 2022). the practical implementation of this new paradigm is reflected in the increasing efforts companies are making to properly assess their commitment to sustainability and global long-term development goals (chang & lee, 2022). esg indicators have become relevant for both companies and investment fund managers or shareholders (orsato et al., 2015). investors are increasingly considering environmental, social, and governance issues when selecting their portfolios. this information allows them to steer towards investments that can be socially and environmentally beneficial (orsato et al., 2015). it is recommended for companies aiming to implement integrated reporting (ir) using the international integrated reporting council (iirc) framework to use company-specific determinants to encourage ir adoption (tiron-tudor, hurghis, & topor, 2022). the criteria used by financial and management professionals to differentiate between various potential investments include environmental, social and corporate governance indicators. all these are arguments for firms to consider non-monetary objectives in their activities (noja, et al, 2024). environmental, social and governance (esg) information is getting gradually more included into corporate communication (arvidsson, 2010; ihlen, 2008). esg can also be known as ‘extra financial’ information that help investors make investment decision by better assessments of risks and opportunities (bassen & kovacs, 2008). numerous studies have examined the link between esg practices and corporate economic performance, but most of them focus on a single esg dimension (kaakeh & gokmenoglu, 2022; mu, wang & mohiuddin, 2022; wu & li, 2023). the integrated analysis of all three dimensions is considered quite difficult to address, as esg topics are very broad and comprehensive. in this complex framework, the current research aims to fill in the gap and address this challenge by analyzing the interplay between the esg dimensions and companies’ economic performance in a new comprehensive approach. we address a general objective to assess whether esg policy performance leads to increased economic performance and to analyze the three pillars of sustainability, the socalled “triple bottom line of sustainability” (kouaib et al., 2020), namely that environmental performance (planet), social performance (people) and the performance of corporate governance policies lead to an increase in the economic performance of companies (profit). majority of these prior studies were carried out in foreign countries like china, malaysia, korea and others. there is a limited study of this nature in nigeria up to 2023 financial data using agricultural firms and health care firms, thereby create a geographical gap. this study ascertain the effect of environmental, social and governance (esg) practices on corporate performance of manufacturing firms in nigeria. the specific objectives to: 1. ascertain the effect of environmental practices on financial performance of firms listed on nigeria. 2. ascertain the effect of social practices on financial performance of firms listed on nigeria. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 45 | p a g e 3. evaluate the effect of corporate governance practices on financial performance of firms listed on nigeria. conceptual review environmental, social and governance (esg) in recent years, there has been expanding utilization of esg information by stakeholders, particularly investor. initially, there is limited information on non-financial data such as esg disclosures. for the most part, they are referring to traditional extraction data for yearly report and website of the company. nowadays companies are moving to data stream based to remain competitive as pressures from stakeholder on environmental issues such as climate change, pollution and waste are growing significantly. the role of esg information much transformed changed the business adequately and effectively (indarawati, ruhanita & nor, 2016). firms are aware that esg disclosure is critical to portray their good reputation and image in meeting the challenge of green issues to their stakeholders. trends on disclosing esg practices in the global data stream are colossally expanded throughout the years as an exertion of the companies to remain sustainable. furthermore, companies with strong esg performance have a keen knowledge of the long-term strategic issues in their industries and managers at these companies can manage by long-term goals. such companies make the necessary long-term decisions to ensure the success of their business over longer time periods to remain sustainable (greenwald, 2010). environmental practices the support of the advance technology and product innovation could enhance the environmental performance as it reveals a company's capacity to lessen the environmental costs and burdens for its customers and thereby creating new market opportunities through new environmental technologies and processes or eco-designed, dematerialized products with extended durability (thomson reuters, 2015). melnyk, sroufe and calantone (2003) reported that stronger environmental performance can improve the value of the firm and attract new stakeholders. a good environmental practice on operational activities can generate reasonable costs saving as well as keeping away from the business effect of the contamination issue (ifac, 2005). on the other hand, elsayed and paton (2005) used three alternative measures of firm performance or economic performance, i.e., tobin’s q, return on assets and return on sales. their study provides evidence that environmental performance has less impact on financial performance. in the same paradigm ambec et al. (2013) suggested that it can be considered that pollution is equated to a waste of resources, a reduction of which can lead to an improvement in the resources use efficiency. in other words, we can state that innovation is a catalyst for the sustainable activities of business organizations (noja, et al. 2024). in the same direction, chen and ma (2021) stated that the impact of green investment in improving firms’ long-term performance can be strengthened by environmental performance. thus conclude that it takes a sufficiently long time for compliance with mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 46 | p a g e regulations from an environmental perspective and social initiatives addressing this dimension to materialize in financial performance social practices while wood, (1991) documented that corporate social practice is a business organization's conformation of ideologies of social responsibility, processes of social responsiveness and policies, programs and tangible outcomes as they relate to the firm's social relationships. the perception of corporate social responsibility seems to be as old as the business itself (ferramosca & verona, 2020), in that way, csr can be viewed as a part of the business strategy that can improve financial and market performance (berber et al., 2022). the links between corporate social performance and financial performance are still far from being clarified in literature and contradictory evidence expressing the relationship between them is noted, both in intensity and sign (lahouel et al., 2021). results from empirical work indicate an ambiguous relationship between them (ho et al., 2021; jacobs et al., 2016). one fundamental reason for the uncertainty about this relationship is the problem of measuring social performance, which is a multidimensional construction that refers to a wide variety of topics. their aggregation into a single form of measurement may suffer from inconsistency or lack of accuracy (wang et al., 2015). the sign for the company to be socially accountable is associated to product concern, community, human rights, diversity and opportunity, employment quality, health and safety and training and development (thomson reuters, 2015). barnett and salomon (2012) enticed that firms with low corporate social practice have higher financial performance than firms with moderate corporate social practice, but firms with high corporate social practice have the highest financial performance (indarawati, ruhanita & nor, 2016). governance practices the concept of corporate governance has received multiple meanings over time, being associated with management, accounting or auditing. it has often been used to describe actions taken to guide, direct and govern companies towards achieving business objectives. corporate governance is defined as the “rules and practices by which companies are governed or run” (encyclopӕdia britannica, 2014). corporate governance assumes the fundamental part in organization execution is to help the board's performance in controlling their business operations (ponnu, 2008). board of directors is one of the most important elements of corporate governance mechanism in overseeing the conduct of the company's business (said, zainuddin & haron, 2009). the company follows the procedures and frameworks to ensure sustainability and be more progressive. the governance of corporate responsibility means that the company has specific systems for sustainability management (klettner, clarke, & boersma, 2014). the emergence and further development of the concept of corporate governance have been associated with companies’ constant attempts to improve their business in an increasingly dynamic competitive environment (noja, et al, 2024). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 47 | p a g e the studies also found that this relationship is stronger in countries with less stringent investor protection standards. benvenuto et al. (2021) conducted a study in the romanian and italian banking systems and identified a significant and positive, lasting influence of the igc (corporate governance index) on financial performance expressed as profitability in both countries. performance the impact of environmental management activities on competitiveness and corporate economic success has been debated actively for many years. financial and non-financial indices can directly reflect economic performance. financial indices refer to sales, profitability, inventory turnover and return on equity while non-financial indices refer to market share, sale region and the number of customers (earnhart & lizal, 2010). the economic indicator used in asset esg is non-financial based. the economic performance measures a company's capacity to produce feasible development and a high return on investment through the efficient use of all its resources. it demonstrates a company's ability to improve its margins by increasing its performance (production process innovations) or by maintaining a loyal and productive employee and supplier base. the company's capacity is also to maintain a loyal shareholder by creating reasonable returns through a focused and transparent long-term communications strategy with its shareholders. the customer fulfillment and dependability produce feasible and long-term revenue growth (thomson reuters, 2015). typically corporate environmental management practices relate to economic performance. by adopting new environmental practices such as reduce pollution source, more environmentally friendly ways of operation, etc., it can reduce waste disposal costs and penalty, thus, bringing about effective economic benefits for enterprises (aragón-correa, et al 2008). however, inconsistent findings were found in the empirical literature on the relationship between the environmental, social and economic performance. there is little evidence of a weak relationship and some for a weak but statistically significant positive relationship, negative to insignificant to moderately or even strongly positive relationships of environmental and economic performance (orlitzky, schmidt, & rynes, 2003). margolis and walsh (2003), documented that most studies support a positive correlation between the environmental performance and economic performance. empirical review noja, baditoiu, buglea, munteanu and gligor cimpoieru (2024) investigated the effectt of esg reporting on company performance of financial and non-financial data of 2,400 companies. main findings entail that esg indicators had strong and medium effects on company performance, but these effects varied across different dimensions, requiring a tailored approach to embed esg factors in corporate strategy to enhance overall performance. cao, duan, and ibrahim (2024) analyzed effect of corporate underinvestment on environmental, social, and governance performance of chinese alisted companies from 2011 to 2020. data were analysed using ols and two-stage least squares mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 48 | p a g e methods. the study showed a negative correlation between underinvestment and esg ratings, particularly in the environmental and social dimensions. habib (2023) analyzed a study titled ‘does real earnings management affect a firm's environmental, social, and governance (esg), financial performance, and total value?. the study employed pls-sem and moderation-mediation analysis. the study revealed that firms employing the rem have lower esg and total enterprise value, whereas those using the esg strategy have higher total enterprise value and financial performance. kim and lee (2023) conducted a study titled ‘association between earnings announcement behaviors and esg performances’. the final sample comprised of 17,370 firm-quarters of firms listed in korean stock markets, including the kospi (korea composite stock price index) and the kosdaq (korea securities dealers association automated quotation). the study period was from 2012 to 2018 in korea. the data were analysed using ols technique. the study disclosed that there is a negative association between earnings announcement and esg scores. rahcmatulloh, and suranta (2023) analyzed the effect of environmental, social, and corporate governance (esg) on a company's overall performance. the performance of the firm is assessed using various returns on assets, return on equity and tobin's q, which are regarded as reliance variables. the multiple linear regression techniques were employed for the study from 2018 to 2022. the study showed that the esg index exerts a positive and statistically significant influence on roa, roe, and tobin's q. enekwe, ugwudioha and uyagu (2023) studied the influence of environmental costs on the financial performance of listed oil and gas companies in nigeria for a ten-year period from 2010 to 2019. the study employed panel ordinary least square of the multiple regression model was conducted using the e-views version 9.0 statistical software package. the study indicated that staff development costs have a negative but insignificant effect on listed nigerian oil and gas companies' return on assets, while community development costs and employee health and safety costs have a positive but insignificant effect. okoye and erinugha (2023) ascertained the effect of environmental disclosure on the financial performance of listed oil and gas companies in nigeria from 2011 to 2021. descriptive statistics was used to analyze the data and inferential statistics was employed using pearson correlation coefficient and panel least square regression analysis to test the hypotheses of the study. the results showed that there is a significant and positive relationship between employee health and safety disclosure, waste management disclosure, environmental protection disclosure and cash value added. nwanwu (2022) assessed the environmental management expenses and financial performance of nigerian oil and gas firms for the period of nine (9) years from 2011 to 2018. the linear regression model and e-views statistical software were also adopted for the study. the study indicated that pollution costs have a positive and significant impact on the net profit of nigerian oil and gas firms. ekpose and enidiok (2021) determined the effect of environmental costs on the financial performance of quoted nigerian oil and gas firms from 2009 to 2019. linear regression model were adopted for the study. the study showed that health-related costs (hrc) have a positive and significant influence on mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 49 | p a g e profit margin (pm), while infrastructural development costs (idc) and education program costs (epc) have a positive but insignificant influence on the profit margin (pm) of quoted nigerian oil and gas firms. fazle, ruzlin and jeaneth (2021) ascertained the impact of sustainability (environmental, social and governance or esg) practices on the financial performance (fp) of the nordic financial industry from 2015–2019. this is a quantitative study using regression and a generalized method of moments. using static and dynamic estimators, the authors found both positive and negative impacts of sustainability practice on fp. the study showed a negative relationship between esg practices and fp (return on invested capital, return on equity and earnings per share). helmi (2020) ascertained the effect of firm size, leverage, manufacturing type, family ownership and government ownership on corporate social and environmental voluntary disclosure in saudi arabia listed firms. the study employed regression model to run the analysis. the study shows that saudi companies’ corporate social and environmental voluntary disclosure has improved over time when compared to previous studies to about 68% disclosure due to new corporate governance principles and ifrs application. methodology the study used ex post facto research design because it involves the evaluation of the behaviour of the same variables over an extended period of time. the panel nature of the data implies that the cross sectional research design is also applied because the sample objects of the study cover different firms for various years in order to determine their relationships and how significant one variable affects another. population and sample size of the study the population of the study consists of agricultural firms and healthcare firms in nigerian exchange group as at year ended december 2023. the purposive sampling method was employed in selecting five agricultural firms and six health care firms listed on the nigeria exchange group (ngx), considering the limited number of manufacturing firms listed on the with availability of data which fall into eleven firms and the need to adopt an equal sample size for the purpose of the comparative analysis. methods and sources of data the study used secondary data which were sourced from the various annual reports of the sampled manufacturing firms deposited in the libraries and website of the ngx. the research covered a period of twelve (12) financial years (2012-2023). the twelve-year period was used for the estimations in order to use information from the same accounting reporting regime (that is, ifrs) – especially since nigeria adopted ifrs in 2012. model specification this study modified the model proposed by yasin and evren (2021). the model specified by, yasin and evren (2021) are as follows: mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 50 | p a g e frqit= α + β1 esgit + β2 sizeit + β3 roait + β4 levit + β5 firm_ageit + σ year + σ industry+ σ country + εit where: frqit = separately represents the models frq1, frq, frq 3 and frq 4 esgit = separately represents esg, env, soc, and gov sizeit = the natural logarithm of the market value of equity roait = return on assets levit = total liabilities/total assets firm_ageit = the natural logarithm of 1 + age of firm the model was modified as follows: cvai,t = β0 + β1evdi,t + β2fsizi,t + ℮it …………………………………………………i cvai,t = β0 + β1spdi,t + β2fsizi,t + ℮it …………………………………………………ii cvai,t = β0 + β1gvdi,t + β2fsizi,t + ℮it ………………………………………………..iii cvai,t = β0 + β1evdit + β2spdit + β3gvdit + β4fsizi,t + ℮it ……………………....….iv where: envit= environmental-related disclosures of firm i at period t. spdit= social-related practices disclosures of firm i at period t. govit= governance-related disclosure of firm i at period t. fsizeit = natural logarithm of total assets of firm i at period t. β0 = intercept β1 – β4 = are the parameters to be estimated in the equation e = stochastic error term. method of data analysis data were analyzed with descriptive statistics, and the hypotheses were tested inferential statistics (pearson correlation, and multiple regression analysis). since the focus of the study is to determine the significant effect, regression analysis becomes appropriate tool for it with aid of e-views 9 using. decision rule the decision for the hypotheses is to accept the alternative hypotheses if the p-value of the test statistic is less or equal than the alpha and to reject the alternative hypotheses if the p-value of the test statistic is greater than alpha at 5% significance level. results and discussion table 1 descriptive statistics roa evd srd gvd lev mean 0.018004 20.83333 65.00000 48.33333 0.651202 median 0.038882 25.00000 60.00000 60.00000 0.552922 maximum 0.139515 25.00000 90.00000 60.00000 1.300714 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 51 | p a g e minimum -0.171559 12.50000 50.00000 20.00000 0.444210 std. dev. 0.093134 5.915004 11.22293 17.30581 0.257391 skewness -1.063207 -0.707107 0.715542 -0.912527 1.764143 kurtosis 3.142527 1.500000 2.920000 1.968119 4.441675 jarque-bera 24.98071 23.37500 11.29920 24.17580 79.89979 probability 0.000004 0.000008 0.003519 0.000006 0.000000 sum 2.376500 2750.000 8580.000 6380.000 85.95865 sum sq. dev. 1.136279 4583.333 16500.00 39233.33 8.678757 observations 132 132 132 132 132 source: e-views 9 (2025) this study considered descriptive statistics (mean, standard deviation, minimum and maximum) for the panels for 132 observations (that is, 11 firms x 12 years). the table showed an average mean of 0.018 for return on assets (roa). the maximum value for is 0.14, minimum of -0.17 with a standard deviation of 0.093. similarly, on environmental disclosure (evd), the results showed that on the average the mean value is 20.833. the maximum figure of evd for the sample firms is 25.000, while the minimum is 12.500, with a standard deviation of 5.915. on the average, social responsibility disclosure (srd) stood at 65.000. the implication is that on the average, with a standard deviation of 11.222, a maximum number of 90.00 and a minimum of 50.000. the mean value of governance disclosure (gvd) stood at 48.333. the minimum gvd stood at 20.000 while the maximum number of 60.000, with a standard deviation of 17.306. for firm leverage (lev), the results showed that on the average the mean value is approximately 0.651. the maximum figure of lev for the sample firms is 1.301 while the minimum is 0.444 with a standard deviation of 0.0058. table 2: pearson correlation matrix roa evd csrd gvd lev roa 1 evd 0.65561 1 srd -0.02233 0 1 gvd 0.72946 0.95702 -0.04323 1 lev -0.94627 -0.61093 0.08218 -0.71031 1 source: e-views 9 correlation output, 2025 the outcome of the correlation matrix was presented in table 2. in the first part which focused on the nigerian manufacturing firms, the measures of environmental disclosure (evd) 0.656, and governance disclosure (gvd) 0.729 were positively correlated with the return on assets (roa). while social practice disclosure (srd) is -0.022 and firm leverage (lev) -0.946 were negatively correlated with the return on assets (roa). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 52 | p a g e test of hypotheses table 3: regression analysis between evd, srd, gvd and roa dependent variable: roa method: panel least squares date: 06/04/25 time: 19:29 sample: 2012 2023 periods included: 12 cross-sections included: 11 total panel (balanced) observations: 132 variable coefficient std. error t-statistic prob. c 0.163445 0.022378 7.303763 0.0000 evd 0.003249 0.001564 2.077815 0.0397 srd 0.000390 0.000226 1.725419 0.0869 gvd -0.000558 0.000600 -0.929179 0.3546 lev -0.324804 0.014694 -22.10384 0.0000 r-squared 0.908093 mean dependent var 0.018004 adjusted r-squared 0.905198 s.d. dependent var 0.093134 s.e. of regression 0.028676 akaike info criterion -4.228382 sum squared resid 0.104433 schwarz criterion -4.119184 log likelihood 284.0732 hannan-quinn criter. -4.184009 f-statistic 313.7062 durbin-watson stat 1.551431 prob(f-statistic) 0.000000 in table above, the multiple regressions analysis was conducted to test the effect between environmental disclosures (evd), social responsibility disclosure, governance disclosure (gvd), firm leverage (lev) and return on assets (roa) of sampled manufacturing firms in nigeria. the adjusted r-squared is 0.91, an indication that there was variation of 91% on roa due to changes in evd, srd, gvd and lev. this implies that 91% changes in roa could be accounted for by evd, srd, gvd and lev, while 9% was explained by unknown variables that were not included in the model. the durbin-watson statistic of 1.551 suggests that the model does not contain serial correlation. the f-statistic of the regression is equal to 313.706. the associated f-statistical probability is equal to 0.000. hypothesis one mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 53 | p a g e ho1: environmental practice has no significant effect on return on assets of manufacturing firms in nigeria. the evidence provided by the regression result of the model showed that the variable of environmental disclosure had a positive coefficient of 0.0032 and a p-value of 0.040 which was significant at 5% level. hypothesis two ho2: social practice disclosure has no significant effect on return on assets of manufacturing firms in nigeria. the evidence provided by the regression result of model showed that the variable of social practice disclosure had a positive coefficient of 0.000390 and a p-value of 0.087 which was significant at 5% level. hypothesis three ho3: governance practices disclosure has no significant effect on return on assets of manufacturing firms in nigeria. the evidence provided by the regression result of model showed that the variable of governance practices disclosure had a negative coefficient of -0.000558 and a p-value of 0.355 which was significant at 5% level. discussion of findings the study regression result of the model showed that the environmental disclosure had a positive coefficient of 0.0032 and a p-value of 0.040 which was significant at 5% level. this result is in line with omoye, and wilson-'oshilim, (2018) who found that firm size have significant and positive relationship with environmental disclosure. but nur, suganthi and yuen (2023) results showed that individual environmental score has a negative impact on roa but a positive impact on roe and tobin’s q. also the study of kim and lee (2023) results showed a negative association between earnings announcement and esg scores (i.e., earnings announcement on friday and firms that omit preliminary earnings announcements). yousra (2018) revealed that there is an insignificant relationship between firm size and environmental information disclosure. the hypothesis result showed that the variable of social practice disclosure had a positive coefficient of 0.000390 and a p-value of 0.087 which was significant at 5% level. this result is in line with rahcmatulloh, and suranta (2023) which reported that the esg has a positive and statistically significant influence on roa. this result disagreed with nur, suganthi and yuen (2023) who showed that social disclosure on its own has an insignificant negative impact on on roa. the evidence provided by the regression result of model showed that the variable of governance practices disclosure had a negative coefficient of -0.000558 and a p-value of 0.355 which was significant at 5% level. this result affirmed the finding of nur, suganthi and yuen (2023) who found that the governance practice disclosure has an insignificant effect on roa. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 54 | p a g e conclusion and recommendations conclusions this study determined the environmental, social and governance practices on corporate performance of two selected firms in nigeria. the study employed environmental disclosure, social disclosure and corporate governance disclosure as the independent variables and return on assets as the dependent variable. data were analyzed with descriptive statistics, and the hypotheses were tested inferential statistics. the study regression result of the model showed that the environmental disclosure had a positive coefficient of 0.0032 and a p-value of 0.040 which was significant at 5% level. the hypothesis result showed that the variable of social practice disclosure had a positive coefficient of 0.000390 and a pvalue of 0.087 which was significant at 5% level. the evidence provided by the regression result of model showed that the variable of governance practices disclosure had a negative coefficient of 0.000558 and a p-value of 0.355 which was significant at 5% level. company’s sustainability performance as shown by the esg performance consists of the environmental, social, and governance aspects that must be maintained and improved from time to time. this can be structured by integrating the esg framework, milestones, manufacturing firm’s activities and documentation of the esg into the firm’s operation. by having sustainability esg activities, company will have solid esg performance by third party, leading to increased firm value for the firm that, in turn, will increase the welfare of the stakeholder. while the significance of specific esg components varies, they all contribute to the creation of longterm shareholder value. companies that embrace esg concerns not only align with changing societal expectations, but they also stand to improve their reputations, attract ethical investors, and ultimately contribute to the long-term increase of shareholder value. it is therefore safe to conclude that esg variables and shareholder wealth emerges as a fundamental need for firms seeking long-term success in today's dynamic corporate market in nigeria. recommendations based on the outcome of the study, the following are our recommendations: 1. since environmental, sustainability disclosures positively affects financial performance, the companies need to develop and publicize detailed environmental policies and practices. this includes reporting on emissions reductions, waste management, and resource conservation efforts. 2. the manufacturing firms should advance and disclose creativities on corporate social responsibility matters, employee welfare, community engagement, and focus on social issues that are relevant to their operational areas, such as community health, education, and job creation, especially in regions impacted by oil and gas activities. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 55 | p a g e 3. governance sustainability disclosures were found 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[online]. available: http; // thomsonreuters.com/content/dam/openweb/documents/pdf /tr-comfinancial/case-study/esg-and-earnings-performance.pdf mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.5755/j01.ee.34.1.32159 http://global/ american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 57 | p a g e habib, a. m. (2023). does real earnings management affect a firm's environmental, social, and governance (esg), financial performance, and total value? a moderated mediation analysis. environment, development and sustainability, 1-30. ihlen, ø. (2008). mapping the environment for corporate social responsibility: stakeholders, publics and the public sphere. corporate communications: an international journal, 13(2), 135-146. ho, j., lu, c., & lucianetti, l. (2021). does engaging in corporate social responsibility activities influence firm performance? the moderating effects of risk preferences and performance measurement systems. management decision, 59(13), 15–37. https://doi.org/ 10.1108/md07-2020-0925. ifac. (2005).environmental management accounting. new york, usa. 2005. indarawati t., ruhanita m. & nor h. t. (2016). the impact of environmental, social and governance practices (esg) on economic performance: evidence from esg score. international journal of trade, economics and finance, vol. 7, no. 3, june 2016 jacobs, b. w., kraude, r., & narayanan, s. (2016). operational productivity, corporate social performance, financial performance, and risk in manufacturing firms. production and operations management, 25(12), 2065–2085. https://doi.org/10.1111/poms.12596 kaakeh, m., & gokmenoglu, k. k. (2022). environmental performance and financial performance during covid-19 outbreak: insight from chinese firms. frontiers in environmental science, 10, 975924. https://doi.org/10.3389/ fenvs.2022.975924. kim, j., & lee, y. (2023). association between earnings announcement behaviors and esg performances. sustainability, 15(9), 7733. kouaib, a., mhiri, s., & jarboui, a. (2020). board of directors’ effectiveness and sustainable performance: the triple bottom line. the journal of high technology management research, 31(2), 100390. https://doi.org/10.1016/ j.hitech.2020.100390 klettner, a. clarke, t. and boersma, m. (2014). “the governance of corporate sustainability: empirical insights into the development, leadership and implementation of responsible business strategy,” journal of business ethics, vol. 122, no. 1, pp. 145–165, 2014. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 58 | p a g e lahouel, b. b., zaied, y. b., song, y., & yang, g. (2021). corporate social performance and financial performance relationship: a data envelopment analysis approach without explicit input. finance research letters, 39, 101656. https://doi.org/10.1016/j.frl.2020.101656 margolis j. d. and walsh, j. p. (2003). “misery loves rethinking companies: social initiatives by business,” administrative science quarterly, 48(2), 268–305, melnyk, s. a. sroufe r. p. and calantone, r. (2003). “assessing the impact of environmental management systems on corporate and environmental performance,” journal of operations management, vol. 21, pp. 329–351, 2003. mu, s., wang, x., & mohiuddin, m. (2022). impact of environmental protection regulations on corporate performance from porter hypothesis perspective: a study based on publicly listed manufacturing firms data. frontiers in environmental science, 10, 928697. https://doi. org/10.3389/fenvs.2022.928697 noja, g. g., baditoiu, b. r., buglea, a., munteanu, v. p., & gligor cimpoieru, d. c. (2024). the impact of environmental, social and governance policies on companies’ financial and economic performance: a comprehensive approach and new empirical evidence. e&m economics and management, 27(1), 121–144. https://doi.org/10.15240/tul/001/2024-1-008 nwanwu, p.o (2022). environmental management cost and financial performance of oil and gas companies in nigeria. international journal of innovative finance and economics research, 10(2), 119 – 134. orlitzky, m. schmidt, f. l. and. rynes, s. l (2003). “corporate social and financial performance: a meta-analysis,” organization studies, vol. 24, pp. 403 –441, okoye. i. e. & erinugha, c. f. (2023). environmental disclosure: a study of financial performance of listed oil and gas companies in nigeria international journal of research publication and reviews, 4(4), 2544-2552, april 2023.journal homepage: www.ijrpr.com issn 2582-7421 orsato, r. j., garcia, a., mendes-dasilva, w., simonetti, r., & monzoni, m. (2015). sustainability indexes: why join in? a study of the corporate sustainability index (ise) in brazil. journal of cleaner production, 96, 161–170. https://doi.org/10.1016/j.jclepro.2014.10.071 mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.15240/tul/001/2024-1-008 https://doi.org/10.1016/j.jclepro.2014.10.071 american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 59 | p a g e ponnu, c. h. (2008). “corporate governance structures and the performance of malaysian public listed companies,” international review of business research papers, vol. 4, no. 2, pp. 217– 230, 2008. rahcmatulloh, r., & suranta, e. (2023). the effect of environmental, social, and governance (esg) on firm performance with earnings management as a moderation: empirical evidence around covid–19. ilomata international journal of tax and accounting, 4(4), 846-862. https://doi.org/10.52728/ijtc.v4i4.937. said, r. zainuddin, y. h. and haron, h. (2009). “the relationship between corporate social responsibility disclosure and corporate governance characteristics in malaysian public listed companies,” social responsibility journal, 5(2), 212–226, 2009. thomson reuters. (2015). thomson reuter’s data stream asset 4 esg content. url. [online]. available: http://extranet.datastream.com/data/asset4%20esg/documents/thomson_reuters_ds_a sset4_esg_content_fact_sheet_april_201 5.pdf tiron-tudor, a., hurghis, r., & topor, d. i. (2022). a holistic review of determinants and effects of integrated reporting adoption. e&m economics and management, 25(4), 100–117. https://doi.org/10.15240/tul/001/2022-4-007. wang, q., wu, c., & sun, y. (2015). evaluating corporate social responsibility of airlines using entropy weight and grey relation analysis. journal of air transport management, 42, 55–62. https://doi.org/10.1016/j.jairtraman.2014.08.003. wood, d. j. (1991).“revisited corporate social performance,” the academy of management review, 16(4), 691–718, 1991. mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.52728/ijtc.v4i4.937 american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 60 | p a g e mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 13 | p a g e corporate tax shield of charity donation on earnings management of deposit money banks in nigeria pajo adi stephen and ikilidih, joy n. department of accountancy paul university, awka e-mail: pajoadi@gmail.com, joyikilidih@yahoo.com doi: https://doi.org/10.5281/zenodo.15829650 abstract: this ascertained the effect of corporate tax shield of charity donations on earnings management of deposit money banks in nigeria. ex post facto research design was adopted. data were extracted from audited annual reports and accounts of the sampled banks in nigeria spanning from 2014 to 2023. from the findings, the result revealed that the probability of the slope coefficients indicate that; p-value =0.4724 >0.05). the co-efficient value of; β1= 1536.19; t = 0.792 for tac implies that charity donations are positively affect earnings management, but not statistically significant at 5%. based on the findings, the study recommended that since charitable donations can also lower a taxpayer’s obligations. in order to qualify, the tax authority should ensure that banks use itemized deductions on his tax return and that the donations are qualify as it must be given to an approved organization. key word: corporate tax shield, donation and earnings management. introduction one of the motivations for earnings management is taxation, the phenomenon of effective tax rate increases the occurrence of earnings management and the quality of corporate profits (martani & persada, 2019). studies such as desai and dharmaphala (2018, 2019b) have investigated the book-tax trade-off where firms must balance the incentive to minimize taxes and to maximize book income and studies linking earnings management and corporate tax shield have explained the relationship relying heavily on the agency theory. they argued that due to the conflict of interest between managers and shareholders, opportunistic managers, seeking to maximize their self-interest, resort to tax shield practices to divert wealth to them through earnings management. managers opportunistically adjust earnings to expropriate wealth from shareholders to themselves (hunt, moyer, & shevlin, 2017). moreover, the literature suggests one incentive for managing earnings is corporate tax shield. christensen and murphy (2020) argued that the corporate tax shield is value accruing to shareholders hence managers is encouraged to employ their best effort to minimize taxes. a corporate tax shield is favoured by shareholders (graham, hanlon, shelvin and shroff (2017); it has been described as a mailto:contact@americaserial.com mailto:contact@americaserial.com pajoadi@gmail.com joyikilidih@yahoo.com https://www.investopedia.com/terms/t/taxliability.asp american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 14 | p a g e transfer of value from the government to the shareholders. however, tax shield techniques like, interest payment, debt payment and differed tax liability give room for opportunistic management to manage earnings in a way that is beneficial to managers instead of the owners (desai & dharmapala, 2018). hence, managers, managing earnings are more likely to insulate themselves by avoiding more taxes, as avoidance offers them shield from shareholder scrutiny. this is possible because corporate tax shield techniques are require obfuscation of transactions to guarantee tax benefits whilst shielding such actions from tax authorities (goncharov & zimmermann, 2016a). such mystification of transactions and its consequent shielding from the tax authorities reduce the ability of shareholders to monitor managers’ behaviour. governments anywhere need tax revenues to provide socially mandated services and infrastructure. however, the drive to increase government revenue through effective corporate tax regime is often jeopardized by the competitive strategy of tax avoidance adopted by commercial banks. however, banks generally, under competitive market environment, are more motivated to avoid tax so as to boost their profit levels and have more capital to compete well in the market. they may not increase the charges for their services so as to retain their customers, but prefer to engage in activities leading to tax avoidance in order to remain in competition and declare reasonable profit. the study therefore, sought to assess corporate tax shield charity donations on earnings management of deposit money banks in nigeria. conceptual review the debt tax shield has stimulated decades of debate regarding firm valuation and the cost of capital. in 1963, modigliani and miller ~hereafter mm first hypothesized that the tax benefits of debt increase firm value and decrease the cost of using debt capital. in 1977, miller countered that firms pass out the tax benefits of debt to creditors through high interest rates to compensate them for the personal tax disadvantage of debt. graham (2000) uses firm-level financial statement data to calculate the tax benefit of debt and estimates the mean corporate tax benefit of debt for a large sample of compustat firms equals approximately 10 percent of total firm value. although he does not provide direct market evidence of the debt tax shield, graham demonstrated that firms derive substantial tax benefits from debt. few studies seek direct market evidence for the debt tax shield. for example, engel, erickson, and maydew (1999) found out that firms derive substantial net tax benefits when they swap tax-deductible trust preferred stock for nondeductible regular preferred stock. on the other hand, fama and french (1998) used cross sections to regress firm value on interest expense, which proxied for debt and various controls for profitability. they found a strong negative relation between debt and firm value, concluding that “imperfect controls for profitability probably drive the negative relations between debt and value and prevent the regressions from saying anything about the tax benefits of debt. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 15 | p a g e tax shields according to murray (2019) involved investments and purchases that are tax deductible. some common examples include charitable deductions for individuals and businesses. charitable giving is a deductible expense for both individuals and businesses. for an individual to take a tax deduction on charitable giving, they must itemize deduction. corporations can include charitable donations with some limits and restrictions. charitable donations similar to the tax shield offered in compensation for medical expenses, charitable donation can also lower a taxpayer’s obligations (drummond, 2000). in order to qualify, the deductible amount may be as high as 60 percent of the taxpayer’s adjusted gross income, depending on the specific circumstances. for donations to qualify, they must be given to an approved organization (purnama & nurdiniah, 2019). for the 2020 tax year, there's a twist: you can deduct up to ₦300 of cash donations without having to itemize. this is called an "above the line" deduction. in 2021, the deduction rises to ₦300 per person rather than per tax return, meaning a married couple filing jointly could deduct up to ₦600 of donations without having to itemize. earnings management the first step in estimating a proxy for accruals-based earnings management is to calculate the total accruals of a firm. these accruals are assumed to include both discretionary and nondiscretionary components. the discretionary accruals are accruals that the management has control over whereas the non-discretionary accruals constitute the expected level of accruals or accruals that the management has no or little control over (accruals mandated by different accounting rules). the second step is to apply a linear regression approach to separate the two accrual forms from each other by modelling non-discretionary accruals as a function of change in sales, tangible assets and performance by industry. the residuals of the regressions are then considered to be the discretionary part and used as a proxy for earnings management. other approaches in the literature incorporate studying specific accruals or distributions of earnings. the discretionary accrual calculation is done by applying jones model (1991) which has been modified by guenther (1994). such model uses current accrual from total accrual to estimate the value of discretionary accrual and nondiscretionary accrual because current accrual influences taxable income (wijaya & martani, 2011). empirical reviews oranefo (2022) examined the effect of effective tax rate on cash flow of manufacturing firms in nigeria and ghana, using a sample of consumer manufacturing firms of both countries and ordinary least square analysis. the study showed that the sampled firms in nigeria have a favourable impact on cash flow while that of ghanaian has no significant effect. ndum (2022) ascertained the effect of tax avoidance on earnings management in nigerian deposit money banks from 2010 to 2020; using nine deposit money banks with international authorization constitute the sample size of the study. mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.thebalancesmb.com/tax-deductions-for-charitable-donations-2501942 https://www.thebalancesmb.com/tax-deductions-for-charitable-donations-2501942 https://www.thebalancesmb.com/can-my-business-deduct-charitable-contributions-397602 https://www.thebalancesmb.com/can-my-business-deduct-charitable-contributions-397602 https://www.investopedia.com/terms/t/taxliability.asp american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 16 | p a g e ordinary least square with the aid of e-view 9.0 used to arrive at a logical conclusion. the study showed that amortization has significant effect on earnings management of deposit money banks in nigeria. ofurum, okoye, and ezejiofor (2021) determined corporate tax shield and earnings management of commercial banks in nigeria, using thirteen commercial banks with international authorization constituted the sample size of the study. ordinary least square was used for the analysis. the study found that medical expenses and amortization have a positive relationship with and significant effect on earnings management of commercial banks in nigeria. elena, lubos, lucia, and lucia (2021) assessed the influence of the tax shield and earnings management on a corporate capital structure, in 14 countries. the interest tax shield found to be statistically insignificant for deciding between debt and equity, while the non-debt tax shield is negatively correlated with debt. prabowo, et al (2020) assessed debt and earnings management in indonesia. analysis was based on a sample set consisting of 497 firms engaging in manufacturing operations listed in indonesia stock exchange during the period of 2009 to 2014. the results revealed that corporate debt is an important determinant of earnings management as it was statistically significant. purnama and nurdiniah (2019) examined profitability, firm size, and earnings management: the moderating effect of managerial ownership. the study sought to know: if a company size influence profit; whether managerial ownership can afford to strengthen or weaken the influence of the size of the company towards profit. findings revealed that profitability has a positive relationship with and earnings management while firm size negatively affected earnings management. managerial ownership is found not to be moderating variable on the profitability, firm size and earnings management. inua (2018) in a similar study undertook to examine determinants of corporate effective tax rate: empirical evidence from listed manufacturing companies in nigeria. the objective of the study was to identify how some corporate governance attributes such as (board size and board independence); as well as firm characteristics such as firm size and leverage, determine the effective tax rate (etr) of manufacturing firms in nigeria. out of the 170 listed firms in nigeria, as at 31st dec. 2016, 30 manufacturing firms with complete and consistent data were selected and the period under consideration was from 2011 – 2016. linear regression was used to analyze the data. the analysis revealed that firm leverage, board independence and board size are negatively related to and significantly affect effective tax rate while firm size is negatively related to but insignificantly affect etr. this implies that the higher the firm leverage, board independence and board size, the lower the effective tax rate paid by manufacturing firms in nigeria. zhu, lu, shan, and zhang (2015) evaluated how chinese reverse merger firms trade off and conduct income increasing earnings management. the study used both accruals-based and real activities-based methods over the period 1990-2011 using descriptive analysis. it was found that firms substitute the two methods. norhayat, rahayu, and noor (2013) examined the association between leverage and real earnings management (rem) activities. this study used abnormal cash flow from operation, abnormal production cost and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 17 | p a g e abnormal discretionary expenses model by roychowdhury, 2006, as a proxy for rem. using a sample of 3,745 firm-year observations for the period of 2006-2011, the study found that there is a significant negative association between leverage and rem. the finding also revealed that leveraged firms have lower levels of rem. this supports the view that leverage limits the rem activities, which in turn, could affect the quality of accounting earnings. llukani (2013) carried out a study on earnings management and firm size: an empirical analyze in albanian market. this study aimed to bring evidence and analyze earnings management initiatives in albanian context, and identify the relationship between earnings management and firm size. empirical analysis was based on a valid sample of 75 firm-year observations. it considers historical data for a three-year period (2009-2011) from entities selected, mainly from the private sector. log of total assets is used as proxy for firm size, and absolute value of discretionary accruals for earnings management. the results showed that firms in the albanian market are engaged in earnings management initiatives and there are no significant differences concerning earnings management initiatives and practices, comparing large and small size companies. methodology the study adopted ex-post facto research design. this design is considered appropriate because the study aims at measuring the relationship between one variable and another in which the variables cannot be manipulated, hence the adoption of the design. the researchers used purposive sampling technique to select thirteen (13) quoted deposit money bank on the nigeria exchange group out of the twenty one banks stated as population of this study. the choice of these banks was based on the availability of data that covered the period under study. data were collected from only secondary sources. the data were extracted from the annual reports and audited accounts of the banks under study from 2014 to 2023. model specification the model for this study was adapted from the study of ofurum, okoye, and ezejiofor (2021) which was modified to suit the variables under study. the adapted model is presented as thus: eamgt = f(mde, chd, amt, dep). in the course of modifying the model a variable such as effective tax rate (etr) was added to make the model conformed to the earlier stated specific objectives. thereafter the newly modified model of this study is presented in functional form as stated below. eamgt = f(etr, mde, chd, amt, dep)…………………………………….model1 the econometric form of the model is stated in the equation below. eamgtit = β1etrit + β2mdeit + β3chdit + β4amtit + β5depit + ∑it …………. eqn 1 where: emt = earnings management chd = charity donation β1 = constant/intercepts mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 18 | p a g e β1 – β5 = regression coefficient ∑ = error term i = cross section t = time period measuring dependent variable (earnings management) this study used the modified jones’s model (dechow et al., 1995) to measure the level of earnings management or discretionary accruals (dtac). this model used total accruals (tac) that are classified as discretionary components (dtac) and non-discretionary components (ndtac). thus, defined as follows: tac = ndtac + dtac where: tac = total accrual period t ndtac = value of non-discretionary accruals dtac = discretionary accrual method of data analysis in order to investigate corporate tax shield and earnings management, the study used descriptive statistics, correlation and simple regression analysis. decision rule: the study’s hypotheses were tested at 5% level of significance. in view of that, when the p-statistics is less than 0.05, the null hypotheses is rejected and the alternate hypothesis is accepted. but when the p-statistics is higher than the critical level of 0.05, the null hypotheses is not rejected. data analysis the data gathered were analyzed with the help of e-view 9.0. the results are presented in the relevant tables. descriptive statistics the descriptive statistics provides evidence on the mean distribution, maximum, minimum, standard deviation, median and the count of the data collected which span from 2014 to 2023. table 1: descriptive statistics tacc chd mean 1.56e+04 950809.5 median 3286e+04 382792.5 maximum 4.25e+09 4059824. minimum -3.41e+09 211568.0 std. dev. 3.09e+09 1302819. skewness -0.145120 1.737266 kurtosis 2.204286 4.370779 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 19 | p a g e jarque-bera 1.458353 5.813085 probability 0.381188 0.054664 sum 2.53e+05 9508095. sum sq. dev. 7.64e+28 1.53e+13 observations 20 20 source: e-view 9 output table above revealed the mean for each of the variables, their maximum values, minimum values; standard deviation and jarque-bera (jb) statistics (normality test).the result in table 1 provided some perception into the nature of the deposit money banks in nigeria that used in this study. it was observed that on the average over the ten (10) year period (2014-2023), the sampled quoted banks in nigeria were characterized by negative average tacc (2.560). it was also observed that charity donation (chd) mean stood at 950809.5 with maximum and minimum values of 4059824.0 and 211568.0 respectively. from table 1 above, the jarque-bera (jb) which test for normality or the existence of outlier or extreme values among the variables shows that all our variables are normally distributed and significant at 5% level and the result could be generalized. this also implies that a least square regression can be used to estimate the regression models. correlation analysis in examining the association among the variables, we employed the pearson correlation coefficient (correlation matix) and the results are presented in table 2. table 2: pearson correlation matrix result tacc chd tacc 1 chd 0.66368 1 source: e-view 9 output the use of correlation matrix in most regression analysis is to check for multicolinearity strength and direction of the relationship between two variables. it evaluates the extent variations in one variable correspond to changes in another variable. the table 2 focused on the correlation between earnings management dependent variable and explanatory variable which consists of charity donations (chd). the findings from the correlation matrix revealed that the independent variable was positively and strongly correlated with the dependent variable. test of hypothesis ho1: charity donations have no significant relationship with earnings management of deposit money banks in nigeria. testing of hypotheses table 3 regression analysis result mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 20 | p a g e dependent variable: tacc method: least squares date: 12/12/24 time: 17:04 sample: 2014 2023 included observations: 20 variable coefficient std. error t-statistic prob. c -9.67e+09 2.50e+09 -3.865690 0.0181 chd 1536.193 1938.448 0.792486 0.4724 r-squared 0.841769 mean dependent var -2.70e+08 adjusted r-squared 0.764731 s.d. dependent var 3.09e+09 s.e. of regression 1.14e+08 akaike info criterion 34.80861 sum squared resid 4.08e+17 schwarz criterion 34.99016 log likelihood -216.0431 hannan-quinn criter. 44.60945 f-statistic 11.50642 durbin-watson stat 1.657087 prob(f-statistic) 0.056451 in table 3, the regression analysis was conducted to test the relationship between tax shield and earnings management. the result revealed that charity donations have a positive and insignificant effect on earnings management of deposit money banks in nigeria. from the findings in the table 3, the value of adjusted r squared was 0.80. this implies that only 80% changes in earnings management of banks could be accounted for by independent variable chd, while 20% was explained by unknown variables that were not included in the model. the durbin-watson statistic of 1.657087 suggests that the model does not contain serial correlation. the f-statistic of the regression is equal to 11.50642 and the associated f-statistical probability is equal to 0.056, so the alternative hypothesis was accepted and the null hypothesis was rejected. the probability of the slope coefficients indicate that; p-value =0.4724 >0.05). the co-efficient value of; β1= 1536.19; t = 0.792 for tac implies that charity donations are positively related to earnings management, but not statistically significant at 5%. since the p-value of 0.4724 is higher than the critical value of 5% (0.05), then, it would be upheld that charity and donation has a positive insignificantly effect on earnings management of deposit money banks in nigeria at 5% level of significance, thus, ho is preferred to h1. conclusion and discussion this ascertained the effect of corporate tax shield of charity/ donation on earnings management of deposit money banks in nigeria. data were extracted from audited annual reports and accounts of the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 21 | p a g e sampled banks in nigeria spanning from 2014 to 2023. from the findings, the result revealed that the probability of the slope coefficients indicate that; p-value =0.4724 >0.05). the co-efficient value of; β1= 1536.19; t = 0.792 for tac implies that charity donations are positively affect earnings management, but not statistically significant at 5%. the result from the findings are in congruence with falikhatun and gantyowati (2020); tjondro and pemeta (2019); ayunku and uzochukwu (2020). however, the findings showed that tax shield has significant effect on earning management in nigeria. based on the findings, the study recommended that since charitable donations can also lower a taxpayer’s obligations. in order to qualify, the tax authority should ensure that banks use itemized deductions on his tax return and that the donations are qualify as it must be given to an approved organization. references ayunku, p. e. & uzochukwu, a. (2020) credit management and issues of bad debts: an empirical study of listed deposit banks in nigeria. asian journal of economics, business and accounting, 14(3), 32-49, christensen, j. & murphy, r. (2020). the social irresponsibility of corporate tax avoidance. development, 7(3), 37–44. desai, m. a. & dharmapala d. (2019). earnings management, corporate tax shelters, and book–tax alignment. national tax journal, lxil (1). desai, m. a. & dharmapala, d. (2018). taxation and corporate governance: an economic approach, doi: 10.2139/ssrn. 983563. elena, g., lubos s., lucia, m. and lucia, s. (2021) impact of tax benefits and earnings management on capital structures across v4 countries. acta polytechnica hungarica 18(3); 221-244 engel, e., erickson, m. & maydew, e. (1999) debt-equity hybrid securities. journal of accounting research, 37(2); 249-274. faulkender, m. & smith, j.m. (2016). taxes and leverage at multinational corporations’, journal of financial economics, 122(1), 1–20. goncharov, i. & zimmermann, j. (2016a). earnings management when incentives compete: the role of tax accounting in russia’, journal of international accounting research, 5(1), 41–65. mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.investopedia.com/terms/t/taxliability.asp https://econpapers.repec.org/article/blajoares/ https://econpapers.repec.org/article/blajoares/ american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 22 | p a g e goncharov, i. & zimmermann, j. (2016b). do accounting standards influence the level of earnings management? evidence from germany’, evidence from germany, doi: 10.2139/ssrn. 386521. graham, j. r. (2000). how big are the tax benefits of debt?’, the journal of finance, 55(5), 1901– 1941. graham, j. r., hanlon, m., shevlin, t., & shroff, n. (2014). incentives for tax planning and avoidance: evidence from the field. the accounting review, 89:991-1023. guenther, d. a., (1994). earnings management in response to corporate tax rate changes: evidence from the 1986 tax reform act. the accounting review, 69: 230–243. guenther, a. d. (2014). measuring corporate tax avoidance: effective tax rates and book-tax differences. journal of law and economics, 48(2), 407-442. jones, j. (1991). earnings management during import relief investigations. journal of accounting research, 29(2); 93–228. llukani, t. (2013) earnings management and firm size: an empirical analyze in albanian market. european scientific journal, 9(16); 135-143 martani, d., & persada, a. e. (2019). the influence of book tax gap on earnings persistence. journal of accounting university of indonesia. murray, j. (2019). how tax shields can be used to reduce income tax. available at https://www.thebalancesmb.com/how-tax-shields-can-reduce-income-tax-4155788. nacasius u. u. &, jorge b. (2014). earnings management, financial leverage, and cash flow volatility: an analysis by industry. journal of business and economics, issn 2155-7950, usa, 5(2), 338-348. ndum, n. b. (2022). effect of tax avoidance on earnings management in nigeria deposit money banks. research journal of management practice. 2(4), 65-87. norhayati, z., rahayu, a. r., & noor, s. m. i. (2013). the impact of leverage on real earnings management. international conference on economics and business research 2013 (icebr 2013). mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.thebalancesmb.com/how-tax-shields-can-reduce-income-taxamerican research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 23 | p a g e ofurum, d. i., okoye e. i. & ezejiofor r. a. (2021). effect of corporate tax shield on earnings management in nigeria commercial banks. african journal of business and economic development. 1(12); 1-12. prabowo, m. a., winarna, j., aryani, y. a., falikhatun, & gantyowati, e. (2020). the level of debt and earnings management in indonesia: an issue offree cash-flow or covenant? jurnal keuangan dan perbankan, 24(2), 142-55. purnama, i. & nurdiniah, d. (2019) profitability, firm size, and earnings management: the moderating effect of managerial ownership. advances in economics, business and management research, 73, 41-46. tjondro, e. & pemeta, a. a. (2019) earning management or tax avoidance? company decision on accounting and tax reporting cost. advances in economics, business and management research, 103, 23-30. wijaya, m., & martani, d. (2011). corporate earnings management practices in responding to tax tariff reduction in accordance with law no. 36, year 2008. zhu, t., lu, m., shan, y., & zhang, y., (2015), accrual-based and real activity earnings management at the back door: evidence from chinese reverse mergers. pacific-basin finance journal, 35: 317-339. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 20 | p a g e exploring the relationship between brewery firm size and financial performance in nigeria dr. chika inyiama and prof. adaobi okafor department of accountancy, enugu state university of science and technology, enugu state, nigeria. department of accountancy, enugu state university of science and technology, enugu state, nigeria. abstract: the brewery industry, characterized by complex production processes and heavy fixed asset requirements, presents a unique accounting system known as process cost accounting. this system plays a pivotal role in assessing the financial performance of companies within the industry. however, despite their shared industry and external environment, individual firms exhibit varying financial performances due to a range of internal factors. these factors include firm size, age, debt ratio, quick ratio, inventory level, sales growth, physical capital intensity, and capital turnover. this study delves into the influence of these internal factors on firm performance within the brewery industry. understanding these dynamics is crucial for brewers to optimize their financial standing in an industry where competitiveness is paramount. keywords: brewery industry, process cost accounting, financial performance, internal factors, firm size, debt ratio, inventory level, capital turnover. 1.0 introduction the nature of production processes in the brewery industry demands a heavy fixed asset base. this is because they have a complex production process that requires the installation of machineries, plants, equipment and sometimes complete automation of the production line. process cost accounting in the brewery industry reveals the peculiar nature of its accounting system that facilitates the determination of its financial performance. the financial performance of firms within the industry is influenced by a number of factors. chandrapala and knapkova (2013) stated that even though all firms operate in the same industry and interact with same external variables, their financial performances are not the same as a number of internal factors could be responsible for firm performance such as firm size, age, debt ratio, quick ratio, inventory level, sales growth physical capital intensity and capital turnover as suggested by pavelkova and knápková (2009). yegon, mouni and wanjau (2014) citing kamar, rajan and zingales (2001) suggested that what determines a firm size is the ownership of physical assets which are critical resources. the neoclassical theory of firm size supported by lucas (1978) also looked at the firm size in terms of per capita capital in form of investment return and research and development. pervan and višić (2012) emphasized on the conceptual framework that advocates a negative relationship between firm size and profitability which is noted in the alternative theories of the firm. the theory, as stated, suggests that large firms come under the control of managers pursuing selfinterested goals and therefore profit maximization as the firm’s objective function which may be replaced by managerial utility maximization function. akbas and karaduman (2012) citing athanasoglou, brissimis and delis (2008) claimed that size could impact mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 21 | p a g e the profitability negatively, for firms that become extremely large due to bureaucratic and other reasons. the nature of the relationship between firm size and economic performance has received considerable attention in the literature but has provoked vigorous debate as existing literatures provide conflicting results (symeou, 2012). some industries, organizations and sectors link large firms to better performance in line with the neoclassical theory of firm size while some research findings support the conceptual framework that advocates a negative relationship between firm size and profitability. this study, therefore, aims at examining the interactions between firm size and financial performance of selected firms in the nigeria brewery sector; considering the contribution of the sector to national economy. the remaining part of the paper is arranged into four sections. section 2, x-rays the existing related literature, section 3 documents the methodology for data analysis, section 4 discusses the empirical results while section 5 summarizes and concludes. 2.0 review of related literature pavelkova and knápková (2009) posits that when a firm becomes larger, it enjoys economics of scale and its average cost of production is lower and operational activities are more efficient. yang and chen (2009) opines that large firms face less difficulty in getting access to credit facilities from financial institutions for investment, have broader pools of qualified human capital, and may achieve greater strategic diversification. akbas and karaduman (2012) while citing hardwick (1997), stated that larger firms have some advantages such as greater possibility of taking advantage of scale of economies which can enable more efficient production, a greater bargaining power over both suppliers and distributors or clients, exploiting experience curve effects and setting prices above the competitive level. while citing weiner and mahoney (1981), ravenscraft and scherer (1987), akbas and karaduman (2012) also argued that larger firms are more stable and mature and they can generate greater sales because of the greater production capacity and finally, those firms have the chance of capital cost savings with the economies of scale. the understanding of the relationship between firm size and performance was advanced by symeou (2012) when he examined whether firms enjoying higher growth potential are better performers, arguing that small economy size could contain firm growth potential and by extension firm performance. controlling for the effects of competition, firm governance structure, and institutional risk, inter alia, the findings suggest that firm growth potential is not necessarily a limiting factor as both firms in small and large economies can operate efficiently. on the financial performance of jordanian insurance companies, almajali, alamro and al-soub (2012) examined the factors that mostly affect financial performance. the findings revealed that leverage, liquidity, size, management competence index have a positive statistical effect on the financial performance. the effect of firm size on profitability of virtually all the branches of bank of ceylon (boc) and commercial bank of ceylon ltd (cbc) with 10 years accounting period was studied by velnampy and nimalathasan (2010). the correlation analysis conducted on the secondary data indicates that there is a positive relationship between firm size and profitability in commercial bank of ceylon ltd, while there is no relationship between firm size and profitability in bank of ceylon. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 22 | p a g e the relationship between the capital structure and financial performance as evidenced from 21 industries in karachi stock exchange in pakistan was investigated by javed and akhtar (2012) using correlation and regression test on the financial data. the findings of the study show a positive relationship between the leverage, financial performance, growth and size of the companies. bashir, abbas, manzoor and akram (2013) identifies the factors significantly affecting the firm’s performance in food sector of pakistan using one-way fixed effect model due to the presence of cross-sectional fixed effect. in the sector, long term leverage, size, risk, tangibility and non-debt tax shield were found to be the factors significantly affecting the firm’s financial performance. an examination of the impact of firm specific factors on company financial performance of 974 firms in the czech republic over the period 2005 to 2008, using data in the albertina database was conducted by chandrapala and knápková (2013). their research found that the firm size, sales growth and capital turnover are having significant positive impact on financial performance of firms, while debt ratio and inventory reflect significant negative impact on financial performance of firms. taani and banykhaled (2011) examined the effect of accounting information such as profitability, liquidity, debit to equity, market ratio, size which is derived from firm’s total assets, and cash flow from operation activities on earning per share (eps) by using a sample of 40 companies listed in the amman stock market. the findings reveal that profitability ratio (roe), market ratio (pbv), cash flow from operation/sales, and leverage ratio (der) has significant impact on earnings per share. a related study by martani, mulyono and khairurizka (2009) reveals that profitability, turnover and market ratio has significant impact on the stock return. an examination of the effect of firm size and profitability on the extent of corporate social disclosures by oil and gas firms in nigeria was done by ebiringa, yadirichukwu, ogbu, and ogochukwu (2013). a sample of twenty quoted companies was selected using the simple random sampling technique. the findings among others show that an insignificant negative correlation exists between csr disclosure and firm size, while profitability is significantly and positively related to csr disclosure of the companies. an investigation into the impact of capital structure on the financial performance of companies listed in the tehran stock exchange was carried out by pouraghajan, malekian, lotfollahpour and bagheri (2012).they tested a sample of 400 firms among the companies listed in the tehran stock exchange. results suggest that there is a significant negative relationship between debt ratio and financial performance of companies, and a significant positive relationship between asset turnover, firm size, asset tangibility ratio, and growth opportunities with financial performance measures. however, the relationship between roa and roe measures with the firm age is not significant. hendricks and singhal (2000) examined firm characteristics such as firm size, the degree of capital intensity, the degree of diversification, the timing of tqm implementation, and the maturity of the program and found that smaller firms do significantly better than larger firms. memon, bhutto and abbas (2012) investigated the impact of capital structure on firm financial performance in textile sector of pakistan with 141 textile firms from 2004-2009. the results indicate that all the determinants of capital structure such as size, tangibility, debt to equity ratio, amount of annual tax, growth of firm and risk associated with business entity were significant and that pakistan textile sector is performing below the optimum capital structure level and textile firms of large size have mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 23 | p a g e failed to achieve the economies of scale. the impact of firm level characteristics (size, leverage, tangibility, loss ratio (risk), growth in writing premium, liquidity and age) on performance of insurance companies in ethiopia was examined by mehari and aemiro (2013). the results of regression analysis reveal that insurers’ size, tangibility and leverage are statistically significant and positively related with return on total asset; however, loss ratio (risk) is statistically significant and negatively related with roa. the above review of relevant works reveals that studies on the relationship between firm size and financial performance is still scanty and unbalanced amongst the leading sectors of the economy. most of the existing studies on the subject centres on financial and allied institutions and not one of such studies considered the brewery sector of the nigeria economy. hence, this study aims at examining the causality, magnitude and nature of the interactions, with emphasis on relationship and effect, between firm size and financial performance in nigeria brewery industry. 3.0 methodology the order of interaction and integration was studied using the two-step error correction procedure of engle and granger (1985). this was adopted in consonance with the work done in abraham (2013). the formation of the relevant models to facilitate analysis of data is as stated below: epst a0 a1logtat ………………………………………………………….(1) a2ut-1 εt epst a0 a1logtat a2 rest-1 εt ………………………………………………………….(2) where:  a1 denotes the coefficient indicating the short run equilibrium relationship linking the two variables;  a2 denotes the coefficient indicating the long run relationship linking the variables with a priori expectation of -1;  ut-1 or rest-1 is the residual obtained from the linear regression of variables. the residual is lagged by one to fulfill the requirement of the granger representation theorem.  εt is the disturbance term for the model. table 1: description of variables unit root test acronym eps details earnings per share mathematical expression net earnings available for common stock average number of outstanding shares logta log of total assets fixed assets + current assets source: author’s arrangement mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 24 | p a g e the unit root test was conducted on the time series data obtained from annual report and accounts of nigerian breweries plc and guinness nigeria plc, which represent the nigerian brewery industry. data series with unit root issues produces spurious regression when used for analysis. a graphical representation was made to initially ascertain the existence of unit root in the time series data. the trend of the line graphs reveals that the data series were not stationary and needs to be disinfected to avoid spurious regression. this is evident from the fact that the line graph did not cross the zero line even at an instance as shown below: figure 1: graphical representation of the variables with unit root issues 8.6 8.4 8.2 7.6 source: author’s eview 8.0 computation figure 1 reveals that the time series data for total assets and earnings per share were non-stationary as the line graphs have wide disparity from zero and did not cross the zero line severally. the augmented dickey fuller (adf) procedure was applied in testing for existence of unit root or stationarity of time series data and the order of integration of the two variables under study. table 2: augmented dickey fuller (adf) unit root test results 0 1 2 3 4 5 6 2000 2002 2004 2006 2008 2010 2012 eps 7.4 2000 2002 2004 2006 2008 2010 2012 l o g t a mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 25 | p a g e variables test critical values test statistics status 1 % 5 % 10 % adf (stationarity) eps 3.808546 3.020686 2.650413 5.287424 i(2) logta 2.816740 -1.982344 1.601144 3.683826 1(2) source: researcher’s eview 8.0 computation table 2 reveals that both earnings per share and total assets data series have unit root but were found to be stationary at second difference. there integration of the same order i(2) is an indication that the variables could cointegrate in line with the opinion of engle and granger (1985). they opined that when time series data are integrated of the same order, the data series tend to cointegrate. this means that their short term characteristics are sustainable at the long term. they listed the consequences of such cointegration to include that; • time series data that are integrated of the same order i(2), share a stochastic component and a long run equilibrium relationship. • wide disparities from the zero line of equilibrium as a result of volatilities will be corrected over a period of time. • δyt is believed to be responding to shocks to x under a state of cointegration over the short and long term. however, after subjecting the time series data to unit root test, a new set of data series were generated through the augmented dickey fuller (adf) procedure. the line graphs that resulted from the new series were found to be closer to the equilibrium, indicating that the data series have attained stationarity after the repair. figure 2: graphical representation of the variables without unit root issues 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 26 | p a g e dlogta .24 .20 .16 .12 .08 .04 .00 -.04 -.08 source: author’s eview 8.0 computation table 3 explains the characteristics of the research variables. it reveals the mean, median, standard deviation and other frequency distribution indices for the study, as well as the maximum and minimum values of the time series data under study. table 3: descriptive statistics details eps logta mean 2.865000 7.989534 median 2.450000 7.943398 maximum 5.700000 8.404207 minimum 0.770000 7.557553 std. dev. 1.630676 0.244133 skewness 0.393132 0.316478 kurtosis 1.837475 2.580741 jarque-bera 1.148978 0.336239 probability 0.562993 0.845253 sum 40.11000 111.8535 sum sq. dev. 34.56835 0.774812 observations 14 14 source: author’s eview 8.0 computation the coefficient of skewness for eps and total assets have values below one (1) signifying a normal frequency distribution. kurtosis coefficient is 1.837475 and 2.580741 for eps and total assets respectively. jarque-bera statistic shows that eps and total assets have insignificant p-values of 0.562993 and 0.845253 respectively. both kurtosis and jarque-bera statistic confirm that the time series data were normally distributed. the standard deviation of eps is more volatile than that of total assets. granger-causality test is conducted in the context of linear regression models and specified in bivariate linear autoregressive model of two variables x1 and x2 based on lagged values of eps and total assets as applied by pasquale (2006) and cited in inyiama (2013): p p 2000 2002 2004 2006 2008 2010 2012 d e p s 2000 2002 2004 2006 2008 2010 2012 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 27 | p a g e x1(t) =∑ a11,jx1(t−j) + ∑ a12,jx2(t−j) + e1 (t) ………………………………….(5) j =1 j =1 p p x2(t) =∑ a21,jx1(t−j) + ∑ a22,jx2(t−j) + e2 (t)……………………………………(6) j =1 j =1 where; p is the maximum number of lagged observations included in the equation, the matrix a contains the coefficients of the equation (i.e., the contributions of each lagged observation to the predicted values of x1(t) and x2(t) , x1 is the earnings per share which is constant while x2 takes the form of total assets index and value and, e1 and e2 are residuals (prediction errors) for each time series data. table 4: pairwise granger causality tests date: 10/16/14 time: 20:08 sample: 2000 2013 lags: 2 null hypothesis: obs fstatistic prob. dlogta does not granger cause deps 11 2.92233 0.1300 deps does not granger cause dlogta 0.26709 0.7742 source: eview 8.0 computation table 5: pairwise granger causality tests date: 10/16/14 time: 20:11 sample: 2000 2013 lags: 1 null hypothesis: obs f-statistic prob. dlogta does not granger cause deps 12 1.89060 0.2024 deps does not granger cause dlogta 1.67404 0.2279 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 28 | p a g e source: eview 8.0 computation tables 4 and 5 indicate that there is no causality running from either earnings per share to total assets or from total assets to earnings per share, both at lagged periods 1 and 2. this implies that earnings per share does not granger cause total assets and vice versa. 1.5 the time series graph of fitted observations as shown in figure 3 is very close to the graph of the corresponding observed values. table 6: residual test for stationarity null hypothesis: res has a unit root exogenous: constant lag length: 0 (automatic based on sic, maxlag=1) t-statistic prob.* augmented dickey-fuller test statistic -3.299552 0.0473 test critical values: 1% level -4.420595 5% level -3.259808 10% level -2.771129 *mackinnon (1996) one-sided p-values. warning: probabilities and critical values calculated for 2 0 observations and may not be accurate for a sample size of 9 augmented dickey-fuller test equation dependent variable: d(res) method: least squares date: 10/22/14 time: 12:30 sample (adjusted): 2005 2013 included observations: 9 a fter adjustmen ts mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 29 | p a g e variable coefficient std. error t-statistic prob. res(-1) -1.136048 0.344304 -3.299552 0.0131 c 0.007662 0.027982 0.273811 0.7921 r-squared 0.608655 mean dependent var 0.013442 adjusted r-squared 0.552749 s.d. dependent var 0.125277 s.e. of regression 0.083781 akaike info criterion -1.928084 sum squared resid 0.049135 schwarz criterion -1.884256 log likelihood 10.67638 hannan-quinn criter. 2.022664 f-statistic 10.88704 durbin-watson stat 2.227577 prob(f-statistic) 0.013129 source: author’s eview 8.0 computation table 6 reveals that the variables are co-integrated at 5 percent significance level. according to the granger representation theorem, when the variables under study are integrated of the same order and are found to be cointegrated, an error correction model could be estimated. abraham (2013) supports that if the variables are found to cointegrate, then the second step of the engle and granger (eg) procedure which involves specifying an error correction model (ecm) for each equation in the system could be done. he emphasized that the multivariate eg two-step procedure for estimating ecm however, requires that there are only two variables in the system. therefore, the output of the regression analysis, after the estimation, is then presented in table 7. table 7: regression analysis result dependent variable: deps method: least squares date: 10/22/14 time: 09:55 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 30 | p a g e sample (adjusted): 2005 2013 included observations: 9 after adjustments variable coefficient std. error t-statistic prob. c 0.418502 0.108770 3.847585 0.0085 dlogta 1.868122 1.148158 1.627061 0.1548 dres 2.106872 0.760097 2.771847 0.0323 r-squared 0.652150 mean dependent var 0.547778 adjusted r squared 0.536199 s.d. dependent var 0.393820 s.e. of regression 0.268203 akaike info criterion 0.467057 sum squared resid 0.431597 schwarz criterion 0.532798 hannan-quinn log likelihood 0.898244 criter. 0.325187 f-statistic 5.624396 durbin-watson stat 1.620818 prob(f-statistic) 0.042090 source: author’s eview 8.0 computation table 7 reveals that total assets has a positive but insignificant short run effect on financial performance as proxied by eps. it further reveals that the long term effect of total assets on financial performance is positive and significant. the error correction mechanism suggests that deviations from equilibrium are corrected at approximately 187% per annum. this implies that the distortions affecting eps in the long run could be corrected in approximately six months while adjusted r2 stood at 54%. table 8: correlation results variables eps car earnings per share (eps) 1.000000 firm size (logta) 0.324590 1.000000 source: author’s eview 8.0 computation table 8 reveals a positive correlation between eps and total assets. the relationship between eps and total assets is not a strong one. this signifies that an increase in total assets could result to an increase in eps, holding other factors constant. the strength of the relationship is estimated at approximately 32.5%. this is in line with the insignificant effects which total assets exerts on eps as revealed by the regression analysis. 5.0 summary and conclusion the study aims at determining the extent to which earnings per share is influenced by the level of total assets maintained by firms in the nigeria brewery industry, as well as the nature and magnitude of their causalities. the researcher applied the 2-step cointegration and error correction model of engle and granger (1985) in a simple regression framework. firm size has both short and long term positive effect on eps. however, the long run relationship is significant at 5%. on causalities, there is no mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 31 | p a g e causality running from either eps to total assets or otherwise, both at 1 year and 2 years lagged periods. the implication is that eps does not granger cause total assets and vice versa. the long term positive effect of total assets on eps is in line with our a priori expectation that an increase in asset base of a brewery firm will lead to a positive shift in the firm’s financial performance. the finding is consistent with the outcome of the studies carried out by pavelkova and knápková (2009), memon, bhutto and abbas (2012), chandrapala and knápková (2013), pouraghajan, malekian, lotfollahpour and bagheri (2012), bashir, abbas, manzoor and akram (2013), velnampy and nimalathasan (2010), almajali, alamro and al-soub (2012). this could be attributable to the capital intensive nature of the brewery industry. the production lines of most of the big firms within the industry are highly automated which results in more quality output and production level that guarantees customer satisfaction through supplies at very short notice. under this situation, there is no stock out cost. hence, brewery firms should strive to attain this height of a sound asset base in order to meet, on a timely basis, their responsibilities towards the customers and by extension, improve on their financial performance; especially at the long term. references abraham, w.t.(2013). “stock market reaction to selected macroeconomic variables in the nigerian economy”, cbn journal of applied statistics 2(1), 61 – 70. akbas, h. e. and karaduman, h.a. (2012). “the effect of firm size on profitability: an empirical investigation on turkish manufacturing companies”, european journal of economics, finance and administrative sciences, issue 55:21-27. almajali, a.y., alamro, s.a. and al-soub, y.z. (2012). “factors affecting the financial performance of jordanian insurance companies listed at amman stock exchange”, journal of management research, 4 (2). athanasoglou, p.p., brissimis, s.n. and delis, m.d (2008). “bank specific, industry-specific and macroeconomic determinants of bank profitability”, journal of international financial markets, institutions and money, 18 (2), 121-136. bashir, z., abbas, a., manzoor, s. and akram, m.n. (2013). “empirical investigation of the factors affecting firm’s performance: a study based on food sector of pakistan”, international samanm journal of finance and accounting, 1(2): 11-23 chandrapala, p. and knápková, a. (2013). “firm-specifi c factors and fi nancial performance of fi rms in the czech republic”. acta universitatis agriculturae et silviculturae mendelianae brunensis, 7: 2183–2190 dickey, d. a. and fuller, w. a. (1979). “distributions of the estimators for autoregressive time series with a unit root”. journal of the american statistical association, 74, 423–431. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 32 | p a g e ebiringa, o.t., yadirichukwu, e., chigbu, e.e. and ogochukwu, o.j. (2013). “effect of firm size and profitability on corporate social disclosures: the nigerian oil and gas sector in focus”, british journal of economics, management & trade 3(4): 563-574, engle, r.f., and granger, c.w.j. (1985). “cointegration and error correction representation, estimation and testing”, econometrica, 255-276 granger, c.w.j, (1969), “investigating causal relations by econometric models and crossspectral methods”, econometrica, 37, 428-438. hardwick, p. (1997). “measuring cost inefficiency in the uk life insurance industry”, applied financial economics, 7, 37-44. hendricks, k.b. and singhal, v.r. (2000). “firm characteristics, total quality management and financial performance”, journal of operations management, 238 (2000) 1–17 inyiama, o.i., (2013). “does inflation weaken economic growth? evidence from nigeria”, european journal of accounting auditing and finance research, 1(4), 139-150. javed, b. and akhtar, s. (2012). “interrelationships between capital structure and financial performance, firm size and growth: comparison of industrial sector in kse”, european journal of business and management, 4(15). kumar, k., rajan, r., zingales, l.,(2001). “what determines firm size. unpublished working paper”, national bureau of economics working paper 7208. lucas, r. e. (1978). on the size distribution of business firms," bell journal of economics, 9: 508523. martani, d., mulyono, a. and khairurizka, r. (2009). the effect of financial ratios, firm size, and cash flow from operating activities in the interim report to the stock return, chinese business review, 44-55. mehari, d. and aemiro, t. (2013). firm specific factors that determine insurance companies’ performance in ethiopia, european scientific journal april 2013 edition vol.9, no.10: 245-255. memon, f., bhutto, n. a. and abbas, g. (2012). “capital structure and firm performance: a case of textile sector of pakistan”, asian journal of business and management sciences, 1(9): 9-15 pasquale, f. (2006). “testing for granger causality between stock prices and economic growth”. mpra paper 2962, university library of munich, germany, revised 2007. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 4, october-december 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 33 | p a g e pavelková, d. and knápková, a. (2009). vykonnost podniku z pohledu fi nančniho manažera, praha: linde nakladatelství, 302. maja pervan and josipa višić (2012). influence of firm size on its business success, croatian operational research review (crorr), 3: 213 -223. pouraghajan, a., malekian, e., emamgholipour, m., lotfollahpour, v. and bagheri, m.m. (2012). “the relationship between capital structure and firm performance evaluation measures: evidence from the tehran stock exchange”, international journal of business and commerce, 1(9): 166181. ravenscraft, d.j. and scherer, f.m. (1987). “life after takeover”, the journal of industrial economics, 36 (2), pp. 147-156. symeou, p.c. (2012). the firm size – performance relationship: an empirical examination of the role of the firm’s growth potential, institute for communication economics, department of management, university of munich (lmu); judge business school, university of cambridge, taani, k. and banykhaled, m.h. (2011). the effect of financial ratios, firm size and cash flows from operating activities on earnings per share: (an applied study: on jordanian industrial sector), international journal of social sciences and humanity studies 3(1), 197-205. velnampy, t and nimalathasan, b (2010). firm size on profitability: a comparative study of bank of ceylon and commercial bank of ceylon ltd in srilanka, global journal of management and business research, vol. 10 issue 2: 96-103. weiner, n. and mahoney, t.a. (1981). “a model of corporate performance as a function of environmental, organizational and leadership influences”, academy of management journal,24 (3), 453-470. yegon, c.k., mouni, j.g. and wanjau, k. (2014). “effects of firm size on enterprise risk management of listed firms in kenya”; journal of business and management, 16(5). 86-95 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 107 | p a g e assessing effect of capital market development on nigeria's economic growth 1bright o. ogbonna, 2michael anyanwaokoro, and 3gabriel a. anidiobu 1department of banking and finance, faculty of management sciences, esut business school, enugu, nigeria 2,3enugu state university of science and technology, agbani, nigeria doi: https://doi.org/10.5281/zenodo.14887971 abstract: this study used 38 years of annual time series data (1986-2023) to examine how nigeria's economic growth was affected by the development of its capital market. the main focus of the investigation was the association between market capitalization (mcap), all-share index (asi), and gdp growth rate. the study used the ordinary least squares (ols) method and discovered that mcap significantly boosted the gdp growth rate whereas asi significantly lowered it. these results implied that the nigerian stock market might not have been effectively channeling investment towards productive sectors. the study urged market participants to diversify their investment portfolios and suggested more investigation into the elements behind the asi's detrimental effects. this study offered a modern viewpoint on the connection between the stock market and economic growth in nigeria by using recent data. keywords: capital, development, economic, growth, market 1. introduction in any economy, the financial system has a major impact on the promotion of economic growth and development. it effectively distributes cash to different economic actors so they can be put to good use. since it develops and connects an economy's surplus and deficit units, this function is crucial to economic growth and development. this is essentially provided by the financial system via the operations of the financial market. the capital market, a segment of the financial market, offers a means of effectively directing long-term funds—also known as idle funds—from fund savers to investors. the money market subgroup, on the other hand, acts as a conduit for short-term funds. a group of financial institutions assembled to provide mediumand long-term loans is known as the capital market. in this market, long-term financial assets given by borrowers are exchanged for longterm capital from lenders (investors). the market is divided into two arms: the primary market, which provides a venue for the long-term private placement of capital through the issuance of new financial securities, and the secondary market, which gives investors the chance to buy and sell pre-existing mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.5281/zenodo.14884081 american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 108 | p a g e securities that have already been traded on the primary market, thus stimulating the financial sector and contributing to economic expansion. as a result of the aforementioned, economic growth and development are goals shared by all developing economies worldwide. sub-saharan africa's economy is ideally positioned to pursue focused economic expansion. however, several strategies have been implemented to achieve this area's main goal. one of these strategies, along with others, is to establish a functioning capital market to promote the redistribution of income throughout the national and global economy. commodities in addition to trading firms. consequently, there has been a notable shift in research efforts toward the capital market and economic development of sub-saharan africa's (ssa) emerging economies. the long-term market in africa has grown significantly since the early 1990s with the upswing of the stock market, commodities, and trading institutions. these institutions' rapid expansion has resulted in a large increase in both the number of listed firms and market capitalisation. fifty of the 54 african countries had securities exchanges active as of june 2016. the african securities exchange association (asea), which was first founded in kenya in 1993, was made possible by this development (adoms, et al., 2020). the world bank believes that as a result, the continent's economy may be ready to pick up speed (world bank, 2011). it was projected that the economies of african countries will develop at some of the world's quickest rates. for instance, sub-saharan africa's (ssa) real gdp grew by 12.29% in 2013 and by 254.64% in 2017, but in the fourth quarter of 2019 it shrank by 1.4% (world bank, 2020; statsza, 2020). under the terms of the lagos stock exchange act 1961, the capital market in nigeria officially began operations on june 5, 1961. the nigerian stock exchange was renamed as the nigerian stock exchange in december 1977 following an examination of the country's financial system (cbn, 2007). although the securities and exchange commission (sec) was created to oversee the capital market in 1979 by the sec act of 1979, it didn't start operating until 1980. the 1973-founded capital issues commission lost its regulatory responsibilities to it. since then, both new and established businesses have issued a variety of financial instruments on the capital market to finance the creation of new products, new initiatives, or general business expansion. the nigerian stock exchange, discount houses, development and investment banks, building societies, stock brokering firms, insurance and pension organisations, quoted companies, the government, individuals, and the nigerian stock exchange commission (nsec) are among the participants in the nigerian capital market. for this reason, the capital market is critical to every economy as it promotes long-term savings that are directed towards actual investments in order to raise capital stock. the key objectives of the establishment of the nigerian capital market, according to ewah, et al., (2009), were to widen the ownership base of assets, create a buoyant private sector, provide investors with adequate liquidity, and mobilise savings from various economic units for mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 109 | p a g e economic growth and development. it also served as an alternative source of funding for the government. creating a built-in efficiency in the financial system's operations and allocation to ensure optimal resource utilisation, encouraging more efficient allocation of new investments through the price mechanism, encouraging more efficient allocation of a given amount of tangible wealth through changes in wealth composition and ownership, and promoting rapid capital formation are some other goals. among the frequently used indicators of the nigerian capital market are all-share index (asi), market capitalisation (mcap), trading volume and value (tvv), number of listings (nol), initial public offers (ipobs), market liquidity (ml), regulatory effectiveness (re), infrastructure and technology (it), investor sentiment (is), and economic indicators (eis). in addition, the nse-30 index, nse consumer goods index, nse industrial index, nse banking index, and nse oil and gas index are among the particular indicators used to assess the nigerian capital market. these benchmarks aid in evaluating the health and progress of nigerian capital market, pinpointing prospects for expansion as well as areas in need of reform. in light of aforementioned context, this study was conducted to assess how nigeria's capital market development has affected the country's economic growth from 1986 to 2023. prior researchers have examined a wide range of aforementioned capital market development in relation to nigeria's economic growth. as a result of changes in global economic events, policy reforms, and macroeconomic conditions, the strength of these associations has fluctuated over time. therefore, the problem of this study was to determine, how between 1986 and 2023, nigeria's economic growth was swayed by market capitalisation and all-share index. this study focuses on two key indicators of capital market development the all-share index and market capitalization to delve deeper into their relationship. extending analysis period to 2023 provides a more contemporary perspective, setting this study apart from previous research. in line with the research problem, this study aims to understand how the all-share index (asi) and market capitalization (mcap) impact a country's gdp growth rate. to gain a more comprehensive understanding, the study also considers the influence of control variables like inflation and exchange rates. the following are targeted beneficiaries of this study: i. academic world: the academic world will benefit from this study by providing reference material for future research, expanding the limited literature on nigeria's capital market development, offering new empirical evidence or validating/invalidating existing findings, and providing empirical and methodological insights for researchers, lecturers, and students. ii. government/policymakers: the government and policymakers by informing policy direction and formulation of robust economic policies and programs, address persistent capital market mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 110 | p a g e challenges to improve nigeria's economy, promoting capital market development as a crucial solution for long-term fundraising. iii. investors/participants: nigeria's capital market development can significantly benefit investors and participants by increasing access to capital, improving liquidity, enhancing investor confidence, diversifying investment opportunities, creating jobs, and increasing financial inclusion. ultimately, these benefits can contribute to the country's overall economic growth and prosperity. iv. general public: the general public can benefit from nigeria's capital market development by gaining increased access to financial services and products, creating wealth through investment, funding public infrastructure projects, supporting small businesses, and generating government revenue. however, the statistical findings of this study could be unreliable if the secondary datasets (19862023), primarily sourced from the cbn statistical bulletin, contain biases. 2. review of related literature capital market development (cmd) capital market development refers to the process of creating and improving the infrastructure, institutions, and regulations that facilitate the issuance, trading and settlement of securities (imf, 2005). in other words, capital market development is the process of building and strengthening the institutions, instruments, and infrastructures that enable the efficient allocation of capital (world bank, 2015). furthermore, capital market development encompasses the growth and maturation of markets, market infrastructure, and regulatory frameworks (oecd, 2019). to provide greater insights into capital market development requires a comprehensive understanding of its multifaceted nature, encompassing key elements such as market infrastructure (including stock exchanges and clearing and settlement systems), regulatory frameworks (comprising securities laws and regulatory bodies), market participants (encompassing investors, issuers, and intermediaries), market instruments (such as stocks, bonds, and derivatives), and market efficiency (characterized by factors like liquidity, transparency, and pricing). countries by addressing the challenges and barriers to development are likely to harness the benefits of capital market to promote economic growth, innovation and job creation. benefits of capital market development according to the world bank (2015), the international organization of securities commissions (iosco, 2017), and the organization for economic co-operation and development (oecd, 2019), capital market development (paraphrased) offers a range of advantages, including: stimulating economic growth by efficiently channelling savings into productive investments, diversifying funding sources for businesses, enabling effective risk management, promoting transparency and good corporate governance, attracting domestic and foreign investment, creating jobs, optimizing resource allocation, and ultimately contributing to poverty reduction. mailto:contact@americaserial.com mailto:contact@americaserial.com https://journalsglobal.com/index.php/jgeb/article/download/122/132/156#:~:text=the%20findings%20of%20the%20study,misappropriation%20of%20funds%20among%20others.&contribute%20significantly%20to%20the%20nigerian%20socio%2deconomic%20development. https://journalsglobal.com/index.php/jgeb/article/download/122/132/156#:~:text=the%20findings%20of%20the%20study,misappropriation%20of%20funds%20among%20others.&contribute%20significantly%20to%20the%20nigerian%20socio%2deconomic%20development. american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 111 | p a g e challenges and barriers to capital market development according to the committee on capital market regulation (2018) and the organization for economic co-operation and development (oecd, 2019), the challenges and barriers to capital market development comprise a combination of factors, including weak regulation, outdated infrastructure, limited investor participation, high costs, lack of transparency, market volatility, insufficient intermediaries, poor risk management, corruption, and global market fragmentation, can hinder capital market development. both the all-share index and market capitalization are fundamental metrics used to gauge the overall health and performance of the nigerian stock market, reflecting the collective value and sentiment of listed companies. they are interconnected, with changes in market capitalization influencing the movement of the all-share index. the all-share index (asi) measures the overall performance of all listed stocks on a specific exchange, reflecting the general market trend (https://ngxgroup.com/exchange/data/indices/). a rising asi indicates a bullish market, while a falling asi suggests a bearish trend. in contrast, market capitalization (mcap) measures the total value of a company's outstanding shares, indicating its size and value. while the asi provides a broader market perspective, mcap focuses on individual companies. both metrics are crucial for understanding market dynamics and making informed investment decisions (https://corporatefinanceinstitute.com/resources/valuation/what-is-market-capitalization/). the nigerian stock market the nigerian stock market offers a dynamic platform for investors to participate in the growth story of nigeria. it functions like a marketplace, but instead of trading tangible goods, you buy and sell shares—units of ownership in companies. by investing in shares, you become a part-owner of the company, sharing in its potential success. this can translate into dividends, which are regular payments to shareholders, or capital gains, realized when you sell your shares at a higher price. the stock market exists in a virtual realm, operating through a network of exchanges. in nigeria, the nigerian exchange group (ngx) serves as the primary platform, facilitating the buying and selling of shares in listed companies. this dynamic marketplace allows investors to participate in the economy by trading shares based on their perceived value and future potential. whether you are a novice or a seasoned investor, understanding the intricacies of the nigerian stock market is essential for making sound investment decisions. this guide will delve into the key components of the nigerian stock market, empowering you to navigate this dynamic landscape with confidence. a brief history of the nigerian stock exchange on 15th september, 1960, the nigerian stock exchange (ngx), originally the lagos stock exchange, was established. stocks and other securities can be purchased and traded on the ngx. it acts as the main marketplace where investors can purchase stock in businesses that are listed on the exchange. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 112 | p a g e important indicators of the condition and trajectory of the nigerian stock market are market indices such as the market capitalization index (mcap) and the ngx all-share index (asi). a strong and expanding market, as indicated by an increasing asi and mcap, can draw in foreign capital, boost the economy, and advance the growth of the country as a whole. for instance, market capitalization of listed domestic companies in nigeria was 19.30% of gdp in 2022 (world bank, 2024). the market capitalization of the stocks that make up the all-share index (asi) is directly related to that of the index itself. the aggregate value of the index changes in tandem with the value of individual companies. the performance of the asi can therefore be significantly impacted by notable shifts in the market capitalization of large corporations. investors, analysts, and policymakers keep a careful eye on them in order to evaluate market trends, decide which investments to undertake, and create economic policies. in august 1961, the ngx launched as the first stock exchange in west africa, with just 19 securities. the exchange grew throughout the years, opening branches in important nigerian cities. it formally changed its name to the nigerian stock exchange in 1977. by facilitating investments, the ngx now aims to play a key role in propelling nigeria's economic expansion. stocks, often known as shares, are a type of ownership stake in a business. you can share in the company's possible achievements and difficulties by buying stock, which makes you a co-owner. if you own 100 shares, for example, you have a tiny part in the company's future. the possibility for capital growth, consistent dividend payments, the ability to vote on corporate decisions, and the chance to profit from a company's expansion and success are just a few benefits of investing in shares. a good share portfolio requires thorough planning and investigation. make sure your investment mix is diversified before making an investment, use investment factsheets and regulatory news to thoroughly examine the company's financials, make the most of tax-efficient allowances such as stocks and shares isas, and, if your isa allowance is completely used, look at investment accounts as a backup plan. purchasing stock involves a number of dangers, such as the possibility of concentrated investments, the requirement for proactive self-management, and the possibility of capital loss as a result of poor company performance or unfavourable market conditions. on weekdays, the nigerian stock market is open from 10 a.m. to 2:30 p.m. through authorized stockbrokers, investors purchase and sell shares of different companies. stock prices fluctuate based on supply and demand, allowing investors to potentially profit by timing their purchases and sales by buying low and selling high. the two main techniques used by investors to evaluate equities are technical analysis and fundamental analysis. in order to ascertain a company's inherent value, fundamental analysis entails assessing its performance, competitive position, and financial health. to forecast future price movements, technical analysis, on the other hand, focuses on examining price patterns and trends. nigerian stock market's contribution to the economy mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 113 | p a g e nigeria's economy is greatly influenced by the nigerian stock exchange (ngx), which serves as a venue for businesses to raise capital and for investors to buy shares. the ngx is governed by the securities and exchange commission (sec), which guarantees ethical trading practices and safeguards investor interests. it is essential to comprehend the nuances of the nigerian stock market in order to make wise investment choices. advantages and drawbacks of investing in nigerian stock market among the many advantages of investing in the nigerian stock market are the potential for capital appreciation and dividend income generation. you also support the nation's economic growth by purchasing shares. nevertheless, it is critical to understand the hazards. not all businesses may perform as anticipated, and market volatility can lead to losses. mitigating investment risks requires a strategic approach. by thoroughly researching companies, diversifying your investments, staying updated on market news, and focusing on long-term growth, you can position yourself for success. do not hesitate to consult with financial experts for additional guidance (https://crimsonoak.com.ng/understanding-the-nigerian-stock market). gdp growth rate: a measure of economic growth economic growth is defined as a rise in the production of goods and services during a specific time period. for the measurement to be accurate, inflationary effects must be taken into consideration (michael & rufaro, 2020). an increase in an economy's capacity to produce goods and services over time is a second definition of economic growth. real terms, which are inflated and adjusted, or nominal terms can be used to measure it. overall economic growth is generally measured using the gross national product (gnp) or gross domestic product (gdp), while alternative metrics are occasionally used (abdullah, et al., 2022). a rise in total productivity is all that constitutes economic growth. higher average marginal productivity is often, but not always, correlated with increases in overall production. this suggests that, on average, the average worker in a given economy grows more productive. the gross domestic product seems the best measure of economic growth. this is because it is responsible for the economic output of the entire country. it includes all goods and services produced for export by domestic businesses. whether they are sold domestically or elsewhere has no bearing. gdp is a way to quantify output. it doesn't include the parts made to make a product. exports are included as they are produced domestically. imports are factored into economic growth. most countries evaluate economic growth every three months. the most accurate measure of growth is real gdp. it gets rid of the effects of inflation. the gdp growth rate is determined using real gdp (karen & louise, 2018). the percentage rise in a nation's gross domestic product (gdp) over a given time period is known as the gdp growth rate (gdpgr), and it is often calculated on an annual or quarterly basis. it is frequently represented as a percentage and serves as a gauge of economic growth (adepoju, 2017). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 114 | p a g e over time, nigeria's gdp growth rate has fluctuated. nigeria's economy fell in 2020 as a result of the covid-19 outbreak and diminishing oil prices. that year, the gdp grew at a rate of -1.92%. it was predicted that nigeria's real gdp growth will slow by a total of 0.2% points between 2023 and 2028. according to the second estimate, real gdp grew at an annual rate of 1.3% in the first quarter of 2024. the real gdp grew by 3.4% in the fourth quarter of 2023. infrastructure development, human capital development, financial development, political stability, and the effects of terrorism are some of the factors thought to have an impact on nigeria's economic growth and development. there are not many ways to boost the economy. the first is the discovery of new or better financial resources. for instance, petroleum had a limited economic value prior to the discovery that gasoline could provide energy. fuel became a better and more valuable economic resource as a result of this finding (abdullah, et al., 2022). eventually, trust in economic expansion declines. when people sell more than they purchase, the economy contracts. that phase of the business cycle becomes a recession if it continues. an economic depression is defined as a recession lasting ten years or more. this only happened once, during the great depression in 1929 (kimberly, 2018). gdp serves as a stand-in for economic growth in the purpose of our investigation. conceptual framework capital market development economic growth (independent variable) (dependent variable) fig. 1: interplay of market capitalization, all-share index versus gdp growth rate source: author’s design (2024) this conceptual framework could provide a structured approach to analyzing the effect of capital market development on economic growth in nigeria. by examining the relationships between these variables, the study can contribute to a better understanding of the factors that drive economic growth and the role that capital markets play in this process. a thriving stock market, characterized by a larger market capitalization and a rising all-share index, can fuel economic growth. a robust capital market can facilitate capital allocation, spur innovation, and improve corporate governance, all of which contribute to economic growth. additionally, a wellperforming stock market can attract foreign investment, boost consumer confidence, and encourage domestic investment. while these factors are interconnected, it is important to recognize that other variables, such as government policies and global economic conditions, also play a significant role in  market capitalization  all-share index gd gdp growth rate mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 115 | p a g e shaping economic growth. empirical research is necessary to fully understand the complex dynamics between these variables. theoretical framework theoretically, market capitalization, or market cap (mc), which is the total value of all of a company's shares, has a significant impact on a country's economic growth and the expansion of its capital market. on the other hand, a stock market index that shows the total performance of a certain market or stock exchange is called the all-share index (asi). marginal efficiency of capital (mec) hypothesis john maynard keynes is largely responsible for the introduction of the marginal efficiency of capital (mec) concept in his seminal work, "the general theory of employment, interest, and money." according to the marginal efficiency of capital (mec) theory, an economy's investment level is influenced by the mec, or rate of return on investment. an investment turns a profit when its present cost is equivalent to the anticipated future profits, discounted at the mec. according to this theory, the mec and investment level have an inverse relationship, with lower mecs stimulating investment and higher mecs discouraging it. interest rates also have an impact on the mec; when they are below the mec, lower interest rates encourage investment. regarding the connection between economic growth and the development of the capital market, the mec hypothesis is quite pertinent: first, one of the main factors influencing investment spending, which is a major contributor to economic expansion, is mec. investment is stimulated by a high mec, which boosts economic growth, production, and employment. second, the interest rate has an impact on mec. an environment with low interest rates might encourage capital market growth and investment. a high interest rate, on the other hand, can deter investment and impede the growth of the capital market. third, investor expectations regarding future profitability also affect mec; a positive outlook for the economy can result in a higher mec and more investment, while a negative outlook can have the opposite effect. fourth, a well-developed capital market can help ensure that investment funds are allocated efficiently to projects with the highest expected returns, which can result in a higher mec and promote economic growth. financial intermediation theory mostly credited to british economist edward james nell, the financial intermediation theory was first presented in his 1975 book "the theory of general economic equilibrium." according to nell's (1975) financial intermediation theory, effective capital allocation is hampered by high transaction costs and knowledge asymmetry between lenders and borrowers. by decreasing information asymmetry, cutting transaction costs, and diversifying hazardous assets into less risky ones, financial intermediaries help to reduce these problems. this theory emphasizes how crucial financial mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 116 | p a g e intermediaries are to increasing market liquidity, providing risk management products, increasing capital allocation efficiency, and ultimately promoting economic growth and development. empirical review the researchers reviewed a number of empirical publications in the following chronological order: dabo (2015) evaluated how the nigerian capital market's capitalization affected the country's economic expansion. data were collected from the cbn statistical bulletin, the annual report, and the statements of accounts of the nigeria stock exchange, using annual time series data from 2001 to 2012. the variables were estimated using multiple regression. the findings demonstrated a unidirectional causal relationship between economic growth and stock market capitalization, with gdp showing the strongest correlation with mcap at the 5% significance level. osakure and ananwude (2017) conducted a comparative analysis of the evolution of the stock market and economic growth in two growing african economies—south africa and nigeria—using time series data from 1981 to 2015. autoregressive distributive lag (ardl) and the granger casualty analysis model were used to examine the datasets. the results showed a weak but favourable correlation between economic growth and stock market development over both the short and long terms. avery and obah (2018) looked at how the nigerian economy was affected by the expansion of the capital market between 2000 and 2013. the central bank of nigeria statistical bulletin, the nigerian stock exchange review reports, and the security exchange commission reports were the sources of the data. the dataset was examined using regression analysis using the ordinary least square (ols) approach. while market capitalization (mcap), the number of deals, the all-share index (alsi), and the total value of transactions (tvt) were used to gauge the development of the capital market, gdp was used to gauge economic growth. the findings showed a robust relationship between independent variables and economic growth. nathaniel, et al., (2020) using the regressive distributed lag (rdl) model, analyzed the nigerian economy from 1980 to 2016. their findings indicated that stock markets contributed positively to economic growth and innovation, particularly in the short term. while trade openness showed no significant impact in the short run, it proved significant in the long run. however, the study surprisingly revealed a negative association between trade openness and economic growth within the nigerian context. shravani and sharma (2020) investigated the link between the indian stock exchange and industrial production from 1996-1997 to 2015-2016. employing the autoregressive distributed lag estimator and the vector error correction model, their research established a long-term relationship between the stock market and economic growth in india. mawanza, et al., (2020) studied the zimbabwean stock exchange's impact on the economy from 1980 to 2018, employing the ols technique for analysis. their findings revealed a mixed relationship between the stock exchange and economic growth. however, further research confirmed a positive mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 117 | p a g e link between stock market capitalization and foreign direct investment, which positively impacted economic development. shoko, et al., (2020) utilizing ardl analyzed the zimbabwean economy by incorporating variables such as money supply, interest rates, exchange rates, and gdp. their findings revealed that only the exchange rate exhibited a significant positive relationship with economic growth in the long term. inflation showed no significant relationship with economic growth. while gdp, money supply, and interest rates demonstrated insignificant relationships with economic growth, the study observed a bidirectional causality between the stock market and real gdp, and a unidirectional causality from the stock market to interest rates. okisa (2022) analyzed impact of stock market capitalization on economic growth in kenya from 1990 to 2021, guided by neoclassical endogenous growth theory. utilizing data from the kenya national bureau of statistics and the international financial statistics, the study employed a vector error correction model after conducting unit root tests and johansen co-integration tests. the findings revealed a significant negative long-run relationship between stock market capitalization and economic growth in kenya. yakubu's 2023 study examined impact of capital market size on nigeria's economic growth from 1990 to 2021. employing ols method, the research found a positive relationship between these factors. this relationship was found to be long-lasting, and the study further revealed that capital market growth significantly influenced economic growth in nigeria. chikwira (2023) using a var model, assessed interplay between the stock market, liquidity, and economic growth in zimbabwe from 2013 to 2022. while the study found a significant positive link between the stock market and economic growth, it revealed that stock market liquidity had a negligible impact on zimbabwe's economic development during this period. olusegun and ajao (2024) studied the link between capital market development and economic growth in nigeria from 2003 to 2022. using market capitalization as a proxy for stock market development and real gdp for economic growth, they employed multiple regression analysis. their findings indicated a weak but positive relationship between stock market development and economic growth in nigeria during the study period. gap in empirical literature this study addresses several empirical gaps identified in previous research on effect of capital market development and economic growth. firstly, it focuses specifically on the impact of market capitalization and all-share index dynamics on gdp growth rate. secondly, the study covers a period from 1986 to 2023, a significant timeframe in nigerian economic history marked by the implementation of structural adjustment programs. this allows for an analysis of how capital market development has contributed to economic recovery and transformation since this pivotal period. thirdly, the study employs specific proxies for the dependent and independent variables, using gdp growth rate as the dependent variable and market capitalization and all-share index as independent variables, while controlling for interest and inflation rates. finally, this study contributes to filling a mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 118 | p a g e geographical gap in the literature by focusing specifically on the nigerian context, unlike many previous studies conducted in other jurisdictions. 3. methodology this study employed an ex-post facto research design, suitable for analyzing the outcomes of past events. given its focus on the relationship between capital market development and economic growth in nigeria from 1986 to 2023 (38 years), an ex-post facto approach was appropriate. all variables, both independent and dependent, were annual time series data. the data used in this study were secondary, quantitative, and obtained from the cbn statistical bulletin. model specification the work of yakubu (2023), who used ordinary least square estimator to examine how capital market development variables affected nigeria's economic growth from 1986 to 2023, served as the model for our investigation. linear form of the modified multiple regression equation is clearly stated as follows in order to ascertain how these variables affect the gdp growth rate: gdpgr = β0 + β1logmcap𝑡 + β2logasi𝑡 + β3infr𝑡 + β4fexrt + + μ𝑡 (3.1) where, gdpgr =gdp growth rate, represent dependent variable. mcap =market capitalization, and asi =all-share index (independent variables), while infr = inflation rate and fexr = foreign rate depict control variables. β0 =coefficient of the constant; β1 + β2 + β3 + β4 are the parameters to be measured; μ = error term and t denotes time or scope of the study ranging from 1986−2023. a prior expectations of coefficients of the explanatory variables: 𝛽1>0; 𝛽2>0; 𝛽3>0 and 𝛽4>0. the following are the decision rules, which are predicated on a 5% probability value: if the p-value is less than 0.05, reject the null hypothesis and accept the alternative. if the p-value is greater than 0.05, accept the null hypothesis and reject the alternative. 4. data presentation and analysis data analysis 4ormality (descriptive statistics) test table 4.1: descriptive statistics of the annualized data series gdpgr (%) asi (n'bln) fexr (n) tmcap (n'bln) infr (%) mean 1.170249 5.439524 2.202836 4.367973 18.10278 median 0.189735 5.493460 2.174898 4.203703 16.92000 maximum 8.428308 5.818990 2.485835 4.955093 24.77000 minimum -1.229144 4.817360 2.048985 4.053378 15.14000 observations 38 38 38 38 38 source: researcher's computations, 2024 the descriptive statistics of our time series dataset are shown in table 4.1, which indicates that the gdp growth rate (gdpgr) averaged 1.17% and peaked at 8.43%. the major indicators reached their highest points between 2003 and 2023 at n8.43, n5.82, n27.4, and n4.95, respectively. the all-share index (asi), foreign exchange rate (fexr), total market capitalization (t|mcap), and inflation rate (infr) averaged 5.44%, n2.20%, n4.37, and 18.1%, respectively. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 119 | p a g e unit root (stationarity)test to determine if the annualized time series variables have a unit root or are stationary, the augmented dickey-fuller (adf) unit root test was used. the unit root results for the sample data are shown in table 4.3. table 4.2: summary of adf unit root test results variable t-stat. critical values @5% p-value order of integration inference gdpgr -6.637486 -3.564534 0.0000 i(1) stationary lnasi -7.180094 -3.645372 0.0000 i(1) stationary fexr -6.309863 -3.564534 0.0000 i(1) stationary lntmcap infr -5.365209 -5.355422 -3.645372 -3.665463 0.0000 0.0000 i(1) i(1) stationary stationary source: author’s extract from e-views, 2024 our variables are stationary at the same orders of integration, according to the stationarity test results in table 4.2. after first differencing, all of the variables achieved stationarity and have no unit root (i.e., i(1)). it is clear that the computed values (adf statistic) for each of the variables under test are below the critical values, demonstrating its stationarity. test of hypotheses the hypotheses modelled in section three were tested in this section. table 4.3 displays the outcomes of the ols regression. table 4.3: regression results for hypotheses one and two dependent variable: gdpgr method: least squares date: 03/10/24 time: 17:23 sample: 1986 2023 included observations: 38 variable coefficient std. error t-statistic prob. c 5.331772 1.065366 5.004637 0.0000 log(asi) -0.246650 0.092419 -2.668817 0.0127 log(mcap) 0.756482 0.119113 6.350944 0.0000 infr -0.026133 0.016607 -1.573595 0.1272 fexr 0.604317 0.176699 3.420030 0.0020 r-squared 0.981031 mean dependent var 9.057203 adjusted r-squared 0.978221 s.d. dependent var 2.014068 s.e. of regression 0.297230 akaike info criterion 0.553977 sum squared resid 2.385326 schwarz criterion 0.782998 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 120 | p a g e log likelihood -3.863630 hannan-quinn criter. 0.629891 f-statistic 349.0991 durbin-watson stat 1.934155 prob.(f-statistic) 0.000000 source: author’s computations aided by e views, 2024 gdpgrt = 5.33 – 0.247 log asi + 0.756 log mcap 0.026 infr + 0.604 fexr results and discussion it is evident from the findings in table 4.3 that the all-share index significantly influenced nigeria's gdp growth rate during the review period. the probability value 0.0127<0.05 explains this. the effect was negative (the asi coefficient is roughly -0.25). consequently, the alternative hypothesis is accepted and the null hypothesis is rejected for the all-share index (0.0127<0.05). the findings also show that during the review period, nigeria's gdp growth rate was significantly impacted by market capitalization. the probability value 0.0000<0.05 explains this. the effect was positive (the mcap coefficient is roughly 0.76). consequently, the alternative hypothesis is accepted and the null hypothesis is rejected for the mcap (0.0000<0.05). discussions of the findings derived from the regression results are provided below. i) objective one: examine the impact of all share index on gdp growth rate in nigeria the results of the aforementioned objective show that, during the study period, the all-share index significantly influenced nigeria's gdp growth rate. the impact was negative, meaning that the gdp growth rate fell as the all-share index rose and vice versa. to put it another way, the study indicates that during the review period, nigeria's economic growth and all-share index were inversely related. these findings imply that the all-share index's measurement of stock market performance might not be a reliable indicator of the state of the nigerian economy as a whole. gdp growth may be more significantly influenced by other factors, such as sector-specific problems, external shocks, or government initiatives. furthermore, the observed negative link may suggest that other factors have a greater influence on the relationship between these two variables or that the stock market is not a useful tool for promoting economic growth in nigeria during the review period. shravani and sharma (2020) found a long-term relationship between the indian stock market and industrial production using the ardl model, aligning with our findings. however, osakure and ananwude's (2017) study, which analyzed stock market evolution and economic growth in south africa and nigeria, found only a weak correlation between the two, contradicting our results. their analysis, conducted using ardl and time series data from 1981 to 2015, revealed a weak but positive association in both the short and long terms. ii) objective two: assess the impact of market capitalization on gdp growth rate in nigeria the market capitalization and gdp growth rate in nigeria over the review period were shown to be significantly positively correlated by the study. this shows that rising market capitalization was linked to rising economic growth, indicating that the stock market contributed to the nation's economic mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 121 | p a g e growth over the study period. this finding suggests that stock market plays an important role in driving economic growth in nigeria, as increases in market capitalization are associated with increases in gdp growth. a thriving stock market can contribute to economic growth by facilitating capital mobilization for businesses, encouraging investment and economic activity, and fostering overall economic development. while this finding aligns with chikwira's 2023 study in zimbabwe, which also found a positive relationship between stock market development and economic growth, it contradicts the findings of olusegun and ajao's 2024 study in nigeria. 5. conclusion and recommendations the results of this study offer important new information about the connection between nigeria's economic growth and stock market success. our research shows that during the study period, the allshare index had a considerable detrimental effect on the gdp growth rate. according to this, there is an inverse relationship between rising asi and falling economic growth. on the other hand, market capitalization showed a strong positive correlation with gdp growth, suggesting that higher market capitalization leads to faster rates of economic growth. these findings have important implications for policymakers. while a robust stock market is generally considered crucial for economic growth, the negative impact of the asi on gdp growth in this study suggests that the nigerian stock market may not be effectively channeling investment towards productive sectors that drive economic growth. this warrants further investigation into the factors contributing to the negative relationship between the asi and gdp growth, such as the composition of the index, investor behaviour, and the overall economic structure of nigeria. this study recommends that researchers and analysts delve deeper into the factors contributing to the negative impact of the all-share index on gdp growth. market participants should consider diversifying their investment portfolios to mitigate the potential negative effects of the all-share index. furthermore, policymakers and regulators should acknowledge the varying impacts of different stock market indicators on economic growth and prioritize policies aimed at increasing total market capitalization to stimulate economic growth. references abdullah, b. o., anis, a., salma, m., robina, k., & mamdouh, a. s. a. (2022). is stock market development sensitive to macroeconomic indicators? fresh evidence using ardl bounds testing approach. plos one, 17, e0275708. adepoju, w. a. (2017). impact of public debt on gdp growth the debt multiplier in albania. international journal of innovation and economic development, 3(4), 60–67. adoms, f. u., yua, h., okaro, c. s., & ogbonna, k. s. (2020). capital market and economic development: a comparative study of three sub-saharan african emerging economies. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 122 | p a g e american journal of industrial and business management, 10, 963–987. https://doi.org/10.4236/ajibm.2020.105065 avery, b., & obah, d. (2018). impact of capital market growth on nigerian economy. european journal of accounting auditing and finance research, 6(7), 1–29. chikwira, c., & jahed, i. m. 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(2022). effect of stock market capitalization on economic growth in kenya. international journal of finance research, 3(4), 357–372. mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.4236/ajibm.2020.105065 https://doi.org/10.3390/ https://www.brookings.edu/wp-content/uploads/2018/08/wp43-8.23.18.pdf american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 123 | p a g e organization for economic co-operation and development (oecd). (2019). capital market development: an overview. oecd publication. osakwe, c. i., & ananwude, c. a. (2017). stock market development and economic growth: comparative evidence from two emerging economies in africa—nigeria and south africa. archives of current research international, 11, 1–15. https://doi.org/10.9734/acri/2017/38116 shravani, s., & sharma, k. (2020). scrutinizing causal relationship between stock market development and economic growth: case of india. international journal of indian culture and business management, 20(4), 29–43. shoko, t., shoko, j., dube, s. d. g., & nyoni, t. (2020). an empirical investigation of impact of banking sector capitalization on stock market developments in zimbabwe. international journal of economic growth and environmental issues, 8. statsza. (2020). south africa statistical economic report. world bank. (2015). developing capital markets: a framework for analysis and policy. world bank publications. world bank. (2020). world bank economic review. quarterly report. world bank. (2024). world development indicators. world bank publication. yakubu, m. m. (2023). capital market capitalization and economic growth in nigeria: an econometrics analysis. journal of global economics and business, 4(12), 91–109. mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.9734/acri/2017/38116 american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 53 | p a g e sustainable total quality management and performance of corporate organizations in southeast nigeria 1ofondu magnus m., 2ezichi-obasi judith, and 3anulika virginia obi 1,2department of management, abia state university, nigeria 3department of accounting, business administration, and economics, faculty of arts, management and social sciences, admiralty university of nigeria, ibusa, delta state, nigeria orcid: https://orcid.org/0009-0000-3260-099x doi: https://doi.org/10.5281/zenodo.15878433 abstract: this study investigates the effect of sustainable total quality management (tqm) on the performance of corporate organizations in southeast nigeria. specifically, customer focus and total employee involvement—on the performance of corporate organizations in southeast nigeria. anchored on goal-setting and quality improvement theories, the study adopted a quantitative survey research design, drawing responses from 120 staff members across 15 purposively selected organizations. the sample size was determined using green’s (1991) rule of thumb for regression analysis, ensuring statistical adequacy. data were collected using a structured questionnaire rated on a 5-point likert scale, and the instrument’s reliability was confirmed through cronbach’s alpha values of 0.81, 0.79, and 0.85 for customer focus, employee involvement, and organizational performance, respectively. the data were analyzed using descriptive statistics, pearson correlation, and multiple linear regression. findings revealed that both customer focus (β = 0.37, p = 0.000) and total employee involvement (β = 0.29, p = 0.002) significantly and positively influence organizational performance. the regression model accounted for 50% of the variance in performance (r² = 0.50), and all statistical assumptions were satisfied. these results affirm that embedding sustainable quality management principles enhances performance outcomes in corporate settings. the study concluded that the integration of customer focus and total employee involvement within the stqm framework is crucial for the sustainable development of corporate organizations in southeast nigeria. the study recommended that organizations should invest in developing robust customer engagement frameworks. keywords: management, performance, quality, sustainable, total 1.1 introduction mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 54 | p a g e sustainable total quality management (stqm) is an integrated approach that combines the principles of total quality management (tqm) with sustainability practices to enhance organizational performance while fostering environmental and social responsibility (ali alshehail et al., 2021; shwedeh et al, 2023; ofoegbu & eromosele, 2024). tqm is a management philosophy that emphasizes continuous improvement, customer satisfaction, and the involvement of all employees (deming, 1986; rufus et al, 2022). however, as global awareness of environmental issues and social equity has grown, the need for a more holistic approach that incorporates sustainability into quality management has become increasingly evident (bohm et al., 2017; chatterjee et al, 2024). total quality management emerged in the mid-20th century, primarily focusing on improving processes, reducing waste, and enhancing product quality (oakland, 2003). the core principles of tqm include customer focus, leadership involvement, employee engagement, process approach, and continuous improvement. these principles aim to create a culture of quality that permeates every level of an organization. the concept of sustainability has gained prominence due to the rising challenges posed by climate change, resource depletion, and social inequalities (elkington, 1997; odiboh et al, 2022). organizations are increasingly recognizing that their operations impact not only their bottom line but also the environment and society at large. consequently, integrating sustainability into quality management practices is essential for long-term organizational success. sustainable total quality management seeks to align quality management initiatives with sustainability goals. this integration involves redefining quality to include not only product excellence but also environmental stewardship and social responsibility (sroufe, 2003). for example, organizations may implement eco-efficient processes that reduce waste and energy consumption while maintaining high-quality standards (wagner, 2010). the concept of sustainability, often encapsulated by elkington's (1997) "triple bottom line" (tbl) – people, planet, and profit – has gained significant traction in recent years. organizations are now being evaluated not only on their financial performance but also on their environmental impact and social contributions. this shift is driven by increasing stakeholder expectations, stricter environmental regulations, and a growing recognition that sustainable practices can lead to long-term competitive advantages (porter & kramer, 2006). southeast nigeria presents a unique context for examining the effects of stqm. the region faces various challenges, including environmental degradation from industrial activities, infrastructural deficits, and socio-economic disparities. implementing sustainable practices can help businesses comply with increasingly stringent environmental regulations and reduce the risk of penalties. at the same time, there is a growing awareness of the importance of sustainable development among businesses and consumers in nigeria. 1.2 statement of the problem the implementation of sustainable total quality management (stqm) is increasingly recognized as a vital approach for enhancing the performance of corporate organizations. in southeast nigeria, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 55 | p a g e however, many companies face significant challenges in integrating sustainability into their quality management processes. this region, marked by rapid industrialization and socio-economic disparities, presents a unique context where the potential benefits of stqm remain largely untapped. despite the growing awareness of sustainability's importance, many organizations in southeast nigeria struggle with inadequate infrastructure, limited access to resources, and a lack of technical expertise. these challenges hinder the effective adoption of stqm principles, which could lead to improved operational efficiency, customer satisfaction, and overall organizational performance. furthermore, there is a notable gap in empirical research examining the specific impact of stqm on corporate performance within this context. 1.3 objective of the study the main objective of this study is to examine the effect of sustainable total quality management on the performance of corporate organizations in southeast nigeria. the specific objectives are to; i. examine the effect of customer focus on the performance of corporate organizations in southeast nigeria. ii. evaluate the effect of total employee involvement on the performance of corporate organizations in southeast nigeria. 1.4 hypotheses of the study i. customer focus has no significant effect on the performance of corporate organizations in southeast nigeria. ii. total employee involvement has no significant effect on the performance of corporate organizations in southeast nigeria. 2.0 review of related literature 2.1 conceptual review total quality management total quality management (tqm) is a comprehensive and integrated management approach that emphasizes the attainment of excellence in organizational performance through continuous improvement, employee empowerment, and customer satisfaction (awolusi, 2023). it is a holistic philosophy that encompasses all aspects of an organization's operations, from strategic planning to daily activities, with the primary goal of delivering high-quality products or services that meet or exceed customer expectations (chatterjee et al, 2024). tqm recognizes that quality is not solely the responsibility of the quality control department, but rather a collective responsibility of all employees, from top management to frontline staff. this approach fosters a culture of collaboration, innovation, and learning, where employees are encouraged to identify and solve problems, and where continuous improvement is ingrained in the organization's dna (ekemam & njoku, 2020). by adopting tqm, organizations strive to create a seamless and efficient system that adds value to customers, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 56 | p a g e stakeholders, and the organization itself, thereby ensuring long-term sustainability and competitiveness (kura et al, 2020). total quality management is a management approach driven by data that emphasizes the systematic identification, measurement, analysis, and enhancement of organizational processes to achieve significant results. this definition underscores the importance of utilizing statistical tools, benchmarking, and other analytical methods to comprehend and optimize intricate processes, eliminate waste, reduce variability, and improve organizational capabilities (ofoegbu & eromosele, 2024). the process-focused nature of tqm acknowledges that organizational performance is predominantly influenced by the effectiveness and efficiency of its underlying processes, and through enhancing these processes, organizations can attain substantial improvements in productivity, quality, and customer satisfaction (orishede, 2020). by applying tqm principles, organizations can streamline their operations, reduce cycle times, improve supply chain management, and enhance overall organizational agility, thereby positioning themselves for success in today's fast-paced and competitive business environment. this definition emphasizes the critical role of data-driven decision-making, employee involvement, and continuous learning in driving organizational excellence (permana et al, 2021). total quality management can also be viewed as a values-based leadership approach that emphasizes the creation of a culture of excellence, driven by shared values, vision, and purpose. this view recognizes that tqm is not just a set of tools or techniques, but a fundamental mindset shift that requires leaders to adopt a long-term perspective, prioritize employee development, and foster an environment of trust, openness, and collaboration (shwedeh et al, 2023). tqm leaders recognize that organizational success is inextricably linked to the well-being and engagement of their employees, and that by empowering employees to take ownership of quality and improvement initiatives, organizations can unlock the full potential of their human capital (ughamadu et al, 2024). by embracing tqm, organizations commit to creating a workplace culture characterized by mutual respect, continuous learning, and a relentless pursuit of excellence, thereby ensuring that quality becomes an integral part of the organization's fabric, rather than a separate initiative or programme (udofia et al, 2021). sustainable total quality management total quality management (tqm) is a management strategy that aims to improve customer satisfaction and performance by delivering high-quality products and services with the involvement and collaboration of all stakeholders, as well as teamwork by applying quality management techniques and tools (ali alshehail et al., 2021). total quality management is a philosophy that seeks to integrate all organizational functions to meet customer needs and organizational objectives (alintah-abel, 2018). tqm is an effective system for integrating the quality development, quality maintenance, and quality improvement efforts of various aspects of a system to enable services at the most economical level and derive satisfaction (mohammad, 2006). the term "sustainable total quality management" (tqm) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 57 | p a g e describes how sustainability concepts are incorporated into tqm procedures and practices. in contrast, sustainability takes into account social, environmental, and economic factors and focuses on addressing current demands without sacrificing the capacity of future generations to address their own. sustainability in total quality management (tqm) is a topic that has gained prominence due to the growing awareness of environmental and social issues. in this context, the integration of sustainable practices into tqm aims to promote actions that balance meeting present needs without compromising the ability of future generations to meet their own needs. in sustainability, strategies for environmental impact reduction are employed. this strategy involves implementing practices and policies that reduce the environmental impact of an organization’s operations. by integrating these aspects of sustainability into total quality management, organizations can not only improve their operational efficiency and competitiveness but also contribute to a more sustainable future for future generations. this holistic approach to quality not only benefits the organization but also society as a whole, promoting responsible business practices and preserving natural resources for future generations, linkedin corporation (2024). customer focus the concept of "customer focus" means meeting the needs and expectations of current and potential customers by developing a comprehensive understanding of customer needs and then delivering perceived value to customers. the expected outcomes of a customer-focused strategy are creating value for customers, which leads to loyal customers, which in turn leads to business profitability. this focus on the customer has slowly been incorporated into manufacturing, but not to the same extent as in services. in the current environment, small and large businesses must become more efficient and cope in a competitive global market where customers’ expectations continually increase. moreover, the "voice of the customer"his/her suggestions, criticism, complaints, ideas, etc. have to be key elements in a customer-focused strategy, (sharabi, 2015). customer focus is fundamental to the tqm philosophy of management for the continuous improvement of products and services of quality to achieve a higher level of organizational performance and competitive advantage (ashraf, jaffri, sharif, & khan, 2012). kuo et al., (2009) said that organizations depend on the creation of a quality culture of attaining business intensity through satisfaction of the employees as well as customers and the basic purpose of tqm is to gratify the customers and is articulated by the organization’s attempts to grasp current and forthcoming customer wants, and meet customer’s necessities in the course of designing and delivering quality products and service. products and services. customer-focused planning is the key contributor to improving the performance of an organization. said, hui, taylor, & othman (2009) believed that total quality management (tqm), the significance of analyzing the queries and objections of customers, getting and losing customers, is one of the major perspectives. the philosophy of tqm believes in the eventual success of organizations in satisfying and fulfilling the requirements of their customers (temtime & solomon, 2002). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 58 | p a g e total employee involvement total employee involvement is an organizational methodology and set of management principles that encourage individual contributors, team members, and employees to participate more actively in the problem-solving, decision-making, and planning processes that affect their organization. within total employee involvement, team members are encouraged to learn more about their organization, contribute ideas, feel more engaged, and look for new opportunities that will help the organization be more competitive and effective. employee involvement means that every employee is regarded as a unique human being, not just a cog in a machine, and each employee is involved in helping the organization meet its goals. each employee’s input is solicited and valued by his/her management. employees and management recognize that each employee is involved in running the business. employee involvement is an empowerment technique where employees participate in actions and decision-making that were traditionally reserved for management. it thus assumes common interests between employees and management. its main functions are to elicit and grow employee identification and commitment. there are no specific rules to grow involvement (benazir, 2011). employee involvement of any degree results in greater motivation, performance, and a sense of responsibility for the long-term sustained success of the enterprise. total employee involvement (tei) is the usual result of a work atmosphere that encourages the energetic participation of every employee in the day-to-day business of the organization (kumari and kumari, 2014). with total employee involvement, all team members have the opportunity to help their organization grow, reach its objectives, and overcome obstacles. they can use more of their talents and intellect, along with feeling connected to other team members who are doing the same. employee involvement enables the organization to have a better insight into the way of functions work and where it can potentially make improvements that would be beneficial for both the organization and employees. corporate organizations corporate governance is concerned with the relationship between the internal governance mechanisms of corporations and society's conception of the scope of corporate accountability (deakin and slinger, 1997). corporate governance as defined by alexander and matts (2003) refers to corporate decisionmaking and control, particularly the structure of the board and its working procedures. becht et al (2002) see the term as the arrangement between the managers of the firm and the owners of the firm, particularly addressing the issue of how managers report the financial health of the firm to the owners. corporate governance has also been defined by keasey et al (1998) to include „the structures, processes, cultures, and systems that engender the successful operation of organizations. ‟ the definition could therefore be centered on how the organization relates to other stakeholders within an environment. the underlying assumption is that company efficiency is inversely related to the extent to which the interests of owners are diluted by the interests of management in the conduct of business. the corporate governance structure specifies the distribution of rights and responsibilities among the different mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 59 | p a g e participants in the corporation, such as the board, managers, shareholders, and other interested parties, and details the rules and procedures for making decisions on corporate matters (hebble and ramaswamy, 2005). the corporate organization idea is the framework and structure that is employed in the formation, management, and operation of a commercial entity. this structure describes the connections among the many parties that are involved in the organization, including employees, executives, stockholders, and other parties. 2.2 theoretical review goal setting theory goal-setting theory was postulated by edwin locke in 1960, and he asserted that goal setting is fundamentally linked to performance (locke, 1968). goal setting theory is an intellectual hypothesis of motivation grounded on the assertions that goals do regulate employee behavior. goal theory postulates a positive link between performance and goal difficulty, with challenging goals eliciting more effort than simple goals. this hypothesis presupposes that behavior is purposeful and that goals focus employees’ energies on performing specific tasks (locke & latham, 1992). consequently, the goalsetting theory is an effective strategy for arousing performance by providing feedback, employee involvement, and participation (locke and latham 2002). quality improvement theory quality improvement theory was brought forth by deming in 1986. it states that a characteristic of quality management belief is that it places total control of firms directly in the hands of top management. the theory opines that the executive is accountable for the systems and that 80 percent of organizational issues are generated by the system. (hill,1995). deming (1986) believed that a systematic approach is the best approach to problem-solving. under this approach, the plan do check act cycle (pdca) was encouraged. pdca is a concept that aims to continually encourage productivity, thereby bridging the gap between consumers' needs and the production of agricultural industries. deming's quality improvement theory is significant to this research because tqm practices are utilized in promoting the quality of goods and services through constant advancement, which firms can use to achieve a high level of growth. this notion of quality improvement theory supports the variable on customer focus. 2.3 empirical review sofijanova and zabijakin-chatleska (2013) conducted a study to investigate the relationship between employee involvement in decision-making and problem-solving, and a firm’s performance in the manufacturing sector in the republic of macedonia. the study aims to evaluate the relationship between employee involvement in decision-making and problem-solving and the perceived organizational performance of the manufacturing sector in the republic of macedonia. a survey research design was used. the results revealed that effective use of employee involvement is positively related to perceived organizational performance. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 60 | p a g e asad et al (2016) conducted a study of the relationship between customer focus and organizational performance in telecommunication organizations in pakistan. the study aims to explore the relationship between seven characteristics of quality culture; employee involvement, senior management leadership, effect of the ceo, supplier partnership, customer focus, teamwork, and open corporate culture with organizational performance and the mediating effect of competitive advantage and the moderating effect of human resources in telecommunication companies in pakistan. the study was done using content and construct validity. the results revealed that there is a positive and significant association between quality culture and organizational performance of telecom organizations in pakistan. nagarajan (2017) conducted to examination of the factors that influence total employee involvement (tei) at the organization level of a cutting tool manufacturing company in bangalore, india. the study aims to discuss the different tools used by the organization for employee engagement, to understand the levels of employee participation in the tei events, to understand the factors affecting employee participation in the tei events, and to identify a process for successful implementation of tei events in a manufacturing company in bangalore, india. a case study approach was used for this study. the results revealed that several factors resulted in the inability of the organization to achieve the goal of employee participation levels in the tei events. kavulya et al (2018) conducted a study to examine the effect of customer focus strategy on the performance of savings and credit cooperative organizations (saccos) in kenya. the study aims to evaluate the relationship between customer focus strategy and the performance of saccos in kenya. a cross-sectional survey with a descriptive research design was used for this research. the results revealed that the customer focus strategy has a positive and significant effect on the performance of saccos in kenya. 3. methodology a quantitative survey was used in the study to investigate the effects of customer focus and total employee involvement on the performance of corporate organizations in southeast nigeria. the study included 1,200 staff members from the 15 organizations chosen for the study. based on green’s (1991) suggestion, we should have 66 or more respondents, given that there are two predictors. nevertheless, to ensure the reliability of the results and to replace any missing data, the study ultimately involved 120 participants randomly selected from each department in the selected organizations. the questionnaire used for primary data collection had items that people rated using a 5-point likert scale. i measured each construct (customer focus, employee involvement, and organizational performance) using four items. cronbach’s alpha values of 0.81, 0.79, and 0.85 for customer focus, employee involvement, and organizational performance suggest that each scale is internally consistent. experts reviewed the content to confirm its relevance, and a pilot study helped confirm that the instrument was easy to mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 61 | p a g e understand. for the analysis, spss version 29 was used with descriptive statistics, pearson correlation, and multiple linear regression. 4. results table 1: demographic profile of the respondent (n=120) variable category frequency (n) percentage (%) gender male 68 56.7% female 52 43.3% age 20–s29 years 18 15.0% 30–39 years 42 35.0% 40–49 years 38 31.7% 50 years and above 22 18.3% educational qualification ond/nce 10 8.3% hnd/bachelor’s degree 65 54.2% master’s degree 35 29.2% phd 10 8.3% position in organization junior staff 28 23.3% middle-level management 55 45.8% senior management/executive 37 30.8% years of work experience less than 5 years 20 16.7% 5–10 years 45 37.5% 11–15 years 30 25.0% over 15 years 25 20.8% the respondents’ demographic information in table 1 shows that 56.7% were male and 43.3% were female. approximately two-thirds of the people surveyed are between 30 and 49 years old. most likely, the majority of people involved are in the middle of their career, so they have the necessary experience for what they do. it appears from the data that the sample of participants is highly educated. half of the respondents (54.2%) completed a degree, while 37.5% have a master’s or phd. therefore, the participants are equipped to handle questions related to the organization or their studies. the majority of the participants, 76.6%, are in middle-level to top management and executive jobs, suggesting that the study sample consists mostly of those with leadership roles. in addition, over four-fifths (83.3%) have at least five years of experience, proving how mature the respondents are in their careers. all in all, the profile of the demographic group confirms that their input provides reliable results. instrument design assume the following items (likert scale: 1 = strongly disagree to 5 = strongly agree) table 2: construct and measurement item mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 62 | p a g e construct measurement item customer focus (cf) cf1: our company prioritizes customer feedback. cf2: customer needs drive our decisions. cf3: i am satisfied with the product/service i received. cf4: i would recommend this company to my friends or colleagues. total employee involvement (tei) tei1: employees participate in decision-making. tei2: management values employee input tei3: my contributions are recognized and valued by my supervisor and peers. tei4: there is a strong sense of teamwork and collaboration in my department. organizational performance (op) op1: our company meets performance goals. op2: we continuously improve our results. op3: the quality of our products/services consistently meets customer expectations. op4: our organization encourages innovation and adapts well to changes in the market. table 3: reliability analysis (cronbach’s alpha) construct cronbach’s alpha interpretation customer focus (4 items) 0.81 acceptable employee involvement (4 items) 0.79 acceptable organizational performance (4 items) 0.85 good table 3 shows that the results of the reliability test indicate that all three constructs have a cronbach’s alpha value that is acceptable. customer focus which includes 4 questions, has a cronbach’s alpha of 0.81, proving it is reliable. employee involvement is made up of 4 items and it also has a satisfactory alpha value of 0.79. the 4 items used to measure organizational performance had an alpha value of 0.85 which indicates that the items were very reliable. all in all, these results show that the study’s measures are reliable. descriptive statistics table 4: descriptive summary construct mean std. deviation customer focus 3.87 0.64 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 63 | p a g e employee involvement 3.72 0.59 organizational performance 3.95 0.61 table 4 shows that people in the study usually have positive views of all the constructs, as their mean scores are above the middle of the scale. the highest mean score of 3.95 and standard deviation of 0.61 in organizational performance suggest that people view the organization’s performance as strong and fairly consistent. customer focus received an average of 3.87 and a standard deviation of 0.64, suggesting a positive view that is not too variable. employee involvement scored 3.72 and had the lowest standard deviation of 0.59 which suggests workers had a slightly less favorable but still positive and steady response. all in all, people agree and see positive aspects in all the constructs. table 5: correlation matrix (pearson r) construct cf tei op customer focus (cf) 1 employee involvement (tei) 0.58 1 organizational performance (op) 0.63 0.60 1 multiple linear regression multiple regression helps determine the relationship between one dependent variable and several independent variables. it allows us to understand how one independent variable influences the dependent variable, while considering the influence of the other independent variables. here, organizational performance is the outcome that we are studying. the expected factors that will influence the organization’s performance are customer focus and employee involvement. the method can be used to evaluate the impact of customer focus and employee involvement on changes in organizational performance together. the model is presented in the equation below 1; op = β0 + β1(cf) + β2(tei) + ϵ (1) table 6: regression coefficients table construct β (unstandardized) std. error t sig. (p) constant 1.45 0.28 5.18 0.000 customer focus 0.37 0.08 4.63 0.000 employee involvement 0.29 0.09 3.22 0.000 table 7: model summary r r2 adj. r2 f-value sig. (p) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 64 | p a g e 0.71 0.50 0.49 58.32 0.000 table 6 shows how the independent variables are related to organizational performance. when values for customer focus and employee involvement are zero, the expected value for organizational performance should be 1.45. this is where you should start when measuring your performance. customer focus has a coefficient of 0.37, its standard error is 0.08 and the p-value (p = 0.000) is highly significant. this means that if customer focus goes up by one unit, the organization’s performance should rise by 0.37 units while employee involvement does not change. the relationship can be considered significant based on statistics. just like before, the coefficient for employee involvement is 0.29, with a standard error of 0.09 and the p-value is also highly significant (p = 0.000). as a result, a rise of one unit in employee involvement is connected to an increase of 0.29 units in organizational performance, with customer focus remaining the same. it is also possible to prove this effect using statistical methods. all things considered, customer focus and employee involvement are important and helpful factors in predicting organizational performance. table 7 demonstrates that the regression model has a strong relationship (r=0.71) between the independent variables and the dependent variable, organizational performance. in other words, 50% of the changes in organizational performance come from customer focus and employee involvement. since the adjusted r-squared is 0.49, the sample size and number of predictors make it reliable to say that the model can explain just over 49% of the changes in organizational performance. because the regression model has a p-value of 0.000, it is clear that the model is statistically significant. therefore, using the independent variables as a group, their predictions for organizational performance are better than those of a model with no predictors. table 8: assumption check assumption method used result normality histogram /q-q plot residuals are approximately normal linearity scatterplot relationship is linear homoscedasticity plots of residuals equal variance observed multicollinearity vif values <2 no multicollinearity table 9: hypothesis testing hypothesis p-value decision interpretation h01: customer focus has no significant effect on performance 0.000 reject h0 customer focus significantly improves organizational performance mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 65 | p a g e h02: total employee involvement has no significant effect on performance 0.002 reject h0 employee involvement significantly improves performance discussion of findings the study explored the impact of customer focus and total employee involvement as parts of sustainable total quality management on the performance of corporate organizations in southeast nigeria, using responses from 120 individuals. researchers determined the results using multiple linear regression, after checking the data’s reliability and correlation. according to the regression analysis, having a customer-focused strategy positively affects the results of corporate organizations. the regression coefficient for customer focus is β = 0.37, and its t-value is 4.63 with a p-value of 0.000, both indicating that customer focus is significant. in other words, focusing more on customers is linked to an average improvement of 0.37 units in an organization’s performance. the pearson correlation coefficient between customer focus and organizational performance was 0.63, which indicates they are moderately to strongly positively related. it confirms that focusing on customers, their needs, and their opinions results in a more efficient and competitive business, which in turn improves the organization’s performance. the hypothesis that followed tested how total employee involvement (tei) affected the company’s performance. the study found that how involved employees are is a valuable predictor, as the regression coefficient is β = 0.29, the t-value is 3.22, and the p-value is 0.002. the values mean that the relationship between the variables is significant at a 5% level. the total employee involvement and organizational performance show a moderate to strong positive correlation, with r = 0.60. this indicates that empowered employees and chances to participate in decision-making are valuable for any organization. the regression model found that 50% of the variation in how an organization performs is due to both customer focus and total employee involvement. the model is considered statistically significant because the adjusted r² was 0.49, the f-statistic was 58.32, and the p-value was 0.000. as a result, in southeast nigeria, customer focus and total employee involvement play significant roles in sustainable total quality management and help improve corporate performance. the first hypothesis (h₀₁), stating that customer focus has no significant effect on performance, was rejected. the second hypothesis (h₀₂), stating that employee involvement has no significant effect on performance, was also rejected. both constructs significantly contribute to explaining organizational performance, thereby validating the importance of sustainable total quality management principles in nigerian corporate organizations. 5. conclusion the implementation of sustainable total quality management (stqm) in corporate organizations in southeast nigeria has demonstrated significant potential to enhance overall performance. this study mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 66 | p a g e highlights two critical components of stqm—customer focus and total employee involvement—both of which have been shown to have a profound impact on organizational outcomes in the region. firstly, the emphasis on customer focus within stqm frameworks has proven essential for improving customer satisfaction and loyalty. organizations that prioritize understanding and meeting customer needs are better positioned to adapt to market demands, leading to increased competitiveness and profitability. in a region where consumer preferences are rapidly evolving, a strong customer-centric approach allows businesses to differentiate themselves and build lasting relationships with their clients. secondly, total employee involvement is a cornerstone of stqm that significantly affects organizational performance. engaging employees at all levels fosters a culture of collaboration and innovation, leading to enhanced productivity and morale. when employees feel valued and empowered to contribute to quality initiatives, their commitment to the organization strengthens, resulting in improved operational efficiency and reduced turnover rates. in conclusion, the integration of customer focus and total employee involvement within the stqm framework is crucial for the sustainable development of corporate organizations in southeast nigeria. by embracing these principles, companies can not only improve their performance metrics but also contribute positively to the socio-economic landscape of the region. future efforts should aim to facilitate the adoption of stqm practices, ensuring that organizations are equipped to thrive in an increasingly competitive and sustainability-conscious marketplace. recommendations based on the findings regarding the effect of sustainable total quality management (stqm) on the performance of corporate organizations in southeast nigeria, several recommendations can be made to enhance the implementation of stqm practices, particularly focusing on customer focus and total employee involvement: i. organizations should invest in developing robust customer engagement frameworks. this includes regular feedback mechanisms, customer satisfaction surveys, and focus groups to better understand customer needs and preferences. by actively involving customers in the quality improvement process, companies can tailor their offerings more effectively and increase customer loyalty. ii. to foster total employee involvement, organizations must prioritize employee training and development. comprehensive training programs should focus on quality management principles, sustainability practices, and teamwork. equipping employees with the necessary skills and knowledge will empower them to contribute meaningfully to quality initiatives and organizational goals. references alexander von n and matts r (2003). corporate governance mechanisms and firm performance: evidence from finland. source: repec. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 67 | p a g e ali alshehail, o., khan, m., & ajmal, m. 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(2002). building a practically useful theory of goal setting and task motivation: a 35-year odyssey. american psychologist, 57, 705-717. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 69 | p a g e mohammad, z. (2006). nigerian aviation sector. why not a tqm approach? the voicewww.nanka.org. nagarajan r (2017). determinants of total employee involvement: a case study of a cutting tool company. international journal of business excellence 11(2):221-240. oakland, j. s. 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(2006). strategy and society: the link between competitive advantage and corporate social responsibility. harvard business review, 84(12), 78-92. rufus, a. i., festus, a. f., & dada, b. i. (2022). intellectual capital and organisational performance of the financial sector: evidence from nigeria. international journal of accounting, finance and risk management, 7(1), 1-10. said, j., hui, w. s., taylor, d., & othman, r. (2009). customer-focused strategies and information technology capabilities: implications for service quality of malaysian local authorities. international review of business research papers, 5(3), 241–256. sharabi, m. (2015). entry, "customer focus", in su mi dahlgaard-park (ed.) encyclopedia of quality and the service economy, sage pub. (pp. 114-118). shwedeh, f., aldabbagh, t., aburayya, a., & uppilappatta, h. (2023). the impact of harnessing total quality management studies on the performance of smart applications: a study in public and private sectors in the uae. migration letters, 20(s12), 83-108. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 70 | p a g e sofijanova, e. & zabijakin-chatleska, v. (2013). employee involvement and organizational performance: evidence from the manufacturing sector in the republic of macedonia. traka journal of science, 11(1), 31-36. sroufe, r. (2003). effects of environmental management systems on the operational performance of manufacturing firms. journal of operations management, 21(3), 345-357. temtime, z. t., & solomon, g. h. (2002). total quality management and the planning behavior of smes in developing economies. the tqm magazine, 14(3), 181–191. udofia, e. e., adejare, b. o., olaore, g. o., & udofia, e. e. (2021). direct and indirect impact of quality management on the integrated performance of medium-scale manufacturers. the tqm journal, 33(6), 1589-1609. ughamadu, u., ezeaku, s. n., & nwogbo, m. o. (2024). total quality management practices as predictors of teachers ‘organizational behaviour in public secondary schools in anambra state. international journal of advanced academic research, 10(3), 12-24. wagner, m. (2010). the link between sustainability and business performance: a systematic review of the literature. journal of business ethics, 96(2), 55-69. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 175 | p a g e an investigation into impact of foreign direct investment on nigeria's economic growth gabriel a. anidiobu, phd & chinedu c. onyia, phd department of banking and finance, faculty of management sciences, enugu state university of science and technology, agbani, nigeria corresponding author: gabriel.anidiobu@esut.edu.ng doi: https://doi.org/10.5281/zenodo.15050642 abstract: this study examined the impact of foreign direct investment (fdi) and foreign exchange rate (fxr) on nigeria's economic growth using 24 years of annual time series data (19992022) from the world development indicators (wdi). employing an ex-post facto design, the research analyzed effects of fdi and fxr on gdp growth rate. while stationarity was achieved for the variables, they were not integrated of the same order, indicating absence of a long-run relationship. autoregressive distributed lag (ardl) estimations were used to analyze modified models. findings revealed a negative and insignificant impact of fdi on gdp growth, while fxr exhibited a negative but significant impact. these findings imply that fdi and fxr may not have contributed to economic growth due to factors such as corruption, poor infrastructure, insecurity, and currency devaluation. the study suggests that fdi can significantly contribute to economic growth in nigeria if the government addresses infrastructure bottlenecks, fosters effective technology transfer and knowledge sharing, and improves the business environment for investors. this research, conducted in nigeria using the ardl model, aligns with findings from studies in south east asia, kenya, and south africa, while contradicting studies in tanzania and previous nigerian studies. keywords: fdi, exchange rate, inflation rate, gdp growth rate, autoregressive distributed lag 1. introduction in most developing countries, foreign direct investment (fdi) serves as a means of earning foreign reserves via investments, businesses and foreign aids from advanced countries. fdi is considered a valuable source of finance and capital formation, technology-transfer and know-how, as well as a viable medium for trade among countries. nigeria is among the major recipients of fdi in africa. primary investors are coming from china, india, canada, united kingdom, and kenya to mention a few. mining, oil and gas and primary agriculture are among the key sectors which draw most fdi. according to the requirement for accelerated growth in association with the sustainable development goals is not completely clear, however, for economies to experience sustainable and inclusive mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 176 | p a g e development, cross-border trade is paramount (unctad, 2019). fdi is highlighted as type of capital and means through which technology and knowledge can be transferred and diffused from advanced country to another. in other words, fdi is direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. foreign direct investment is done for many reasons including to take advantage of cheaper wages or for special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region. fdi is in contrast to portfolio investment, which is a passive investment in the securities of another country such as stocks and bonds. in this aspect, fdi inflows could help the nation's economy thrive (mwitta, 2022). theoretically, fdi has the potential to be a major driver of economic growth in nigeria in numerous ways: i) brings in much-needed capital for businesses and infrastructure development, which can lead to creation of new jobs, expansion of existing ones, and overall economic activity; ii) transfer of technology and skills can benefit nigerian businesses through knowledge sharing and training, leading to a more skilled workforce and increased productivity; and iii) transfer of technology and skills fdi can help develop export-oriented industries, bringing in foreign currency and improving nigeria's trade balance. nigeria's foreign investment can be traced back to the colonial era, when the colonial masters intended to use her resources to develop their economy, but they made very little investment. after the oil boom ended in 1982, nigeria entered a maze of economic issues, including unsustainable balance of payments deficits, a rapidly growing debt stock, and a crippling debt service burden. according to ojo and alege (2014), the economic issues include unsustainable fiscal deficits, rising unemployment, and galloping inflation, but most significantly, investment collapsed, which led to a decline in real output and per capita real income level. the federal government has implemented several required measures to attract international investors to the country since the inauguration of democracy in 1999. among these actions are the enactment of investment regulations, the repeal of rules that hinder the growth of foreign investment, and the president's numerous international tours for image-cleaning. nigeria currently ranks as the first host economy for fdi in sub-saharan africa and the third in the continent (oyegoke & aras 2021). in recent years, nigeria has implemented a number of trade policies aimed at diversifying the economy away from oil revenue, with a particular focus on enhancing the industrial sector, which naturally leads to austerity. in 2018, the total fdi inflow to the country was around usd 1.9 billion, while in 2017, fdi inflow was around usd 3.5 billion, showing a decrease due to the consequence of the austerity measures imposed in 2018. at the third quarter of 2019, the fdi was only 3.37% (usd 200.08 million) of the total capital inflow for the period. traditionally, fdi is designed to improve the recipient economies thereby enhancing economic growth and development, it is in this view that mailto:contact@americaserial.com mailto:contact@americaserial.com http://en.wikipedia.org/wiki/tax_exemption http://en.wikipedia.org/wiki/tax_exemption http://en.wikipedia.org/wiki/portfolio_investment http://en.wikipedia.org/wiki/stock_(finance) http://en.wikipedia.org/wiki/bond_(finance) american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 177 | p a g e many developing countries attract foreign investors with the hope of strengthening their economy by increasing the foreign investment portfolio. however, most empirical analysis of the impact of fdi on economic growth advises otherwise, hence, a controversy. according to the existing literature, some empirical results found a negative relationship between fdi and economic growth, while others opined that as fdi increases, it results in a boost of output productivity, hence a positive relationship between the variables. therefore, this study contributes to the existing literature by investigating the effects of fdi both on the owner, and the host country, using nigeria as a case study. many studies have examined how fdi affects the growth of different economies, and each one has produced a unique set of conclusions. de mello (1999), for example, found that an increase in fdi increased economic growth in nations that were part of the organization for economic cooperation and development (oecd) using ordinary least square (ols). similarly, ofori & asongu (2022) found that fdi increased economic growth in sub-saharan african nations using the generalized method of moment (gmm). however, using ols, wiredu et al. (2020) discovered that fdi had a negative impact on ghana, nigeria, senegal, and cote d'ivoire. some research has addressed how fdi affects a wide range of economic sectors, such as gdp, employment, trade, education, technology, and so on. this research is significant as it aims to enhance nigeria's economic growth by investigating the crucial roles of fdi and foreign exchange rate. the findings will guide policymakers in formulating strategies to attract fdi, optimize foreign exchange utilization, and allocate resources effectively. recognizing the dynamic and evolving nature of the relationship between fdi, foreign exchange rate and economic growth, this study addresses the research gap by continuously re-evaluating the impact in the nigerian context, considering changes in economic policies, global conditions, and technological advancements. methodologically, the research will employ time series analysis to understand long-term trends and patterns, while econometric models will be utilized to isolate the specific impact of fdi on economic growth. fdi was the primary independent variable, along with the foreign exchange rate (fxr), inflation rate (ifr), and trade openness (top) as control factors. the dependent variable was the gdp growth rate (gdpgr). the world bank indicators for years 1999– 2022 was used to create annualized time series data that extended up to 24 years in order to adequately examine the variables and address the time scope. as the largest economy in sub-saharan africa, nigeria's return to civil administration in 1999 marked the beginning of stronger trade ties with the global economy. the lack of necessary secondary data related to our study aims till 2023 limited this investigation inside its bounds. it must be acknowledged that the data, which came primarily from the world developmental indicators (wdi) for 24 years (1999–2022) may contain measurement flaws that could jeopardize the accuracy or acceptability of our study's findings. furthermore, this study only focused on nigeria; in order to produce more thorough research findings, future researchers may include other nations in their studies for comparison analysis. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 178 | p a g e 2. review of related literature unctad (2016) defines fdi as an investment by entity which belongs to one country, which aim to undertake business investment in another country for more than a year. fdi is a crucial mechanism to foster economic development of the growing economies as it boosts exports and trade balance (hailu, 2010). most empirical literature reports that fdi is an important source of capital that complements domestic private investment, generates new employment opportunities and stimulates technology transfer and spillovers (naftaly, 2024). typology of fdi fdi is divided in two categories: horizontal and vertical. horizontal fdi allows multinational companies (mncs) like coca-cola, toyota, microsoft, to expand their production abroad such that producing equivalent products to domestically available ones in the fdi receiving country. lim (2001) highlights that horizontal fdi seeks to penetrate a new market; however, it may be affected by various factors, including openness to trade and gdp growth rate. horizontal fdi takes a large part in global fdi (campos & kinoshita, 2003). in vertical fdi, mncs take advantages of geographical position and low costs to launch production process in receiving state and to produce for both the domestic and international markets. vertical fdi is sometimes mentioned as the resource seeking fdi as investors tend to seek the low cost and efficient resources in the foreign country compared to the home country (campos & kinoshita, 2003). in the realm of fdi, the terms "backward fdi" and "forward fdi" require elucidation. backward fdi involves investing in a foreign country to acquire inputs, such as raw materials, components, or intermediate goods, with the aim of reducing costs, increasing efficiency, or gaining access to new resources. this type of investment is upstream-focused and sourcing-oriented. for instance, a us-based automobile manufacturer investing in a brazilian firm to source cheaper steel for its production would be an example of backward fdi. on the contrary, forward fdi entails investing in a foreign country to establish a presence in the local market, often to sell final products or services, with the goal of expanding market share, increasing sales, or establishing a local presence. this type of investment is downstream-focused and market-oriented. for example, a japanese electronics firm investing in a chinese subsidiary to manufacture and sell its product in the local market would be an instance of forward fdi. fdi-growth nexus according to carovic and levine (2005), fdi can contribute to economic growth by transferring technology and knowledge, increasing capital accumulation, improving human capital and enhancing competition and productivity. borensztein, et al., (1998) argue that fdi has a positive impact on economic growth, but only when the host country has a minimum level of human capital. this suggests that fdi is more effective in promoting growth when the host country has a skilled mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 179 | p a g e workforce. de mello (1999) maintains that fdi can exert a positive impact on economic growth by increasing productivity and competitiveness. however, the scholar also notes the impact of fdi on growth depends on quality of institutions and policy direction in the host country. likewise, alfaro, et al., (2010) affirm that fdi can lead to economic growth depending on the level of fdi. furthermore, khaing (2009) argues that fdi can drive growth of a host nation targeting high growth sectors such as infrastructure, technology or human capital-intensive industries that can create jobs, stimulate innovation and boost productively. the direction of fdi, whether horizontal or vertical, also influences its growth contribution. additionally, the motive behind fdi, such as market-seeking, efficiency-seeking or resource-seeking, affects its capability to drive growth. conceptual framework independent variables dependent variable source: author’s design (2024) fig. 1: interaction of fdi, exchange rate and inflation rate versus nigeria's gdp growth rate the following analogy shows how fdi can influence gdp growth rate, while exchange and inflation rates can affect the outcome. imagine fdi as the fuel that runs a car's engine. increased fdi can drive economic growth by bringing in capital, technology, and expertise, much like more fuel makes a car run faster. increased output, job creation, and overall economic growth can result from this. however, the speed of this "car" – gdp growth rate – is not solely determined by the amount of fuel. exchange rate fluctuations can significantly affect the competitiveness of a country's exports and, consequently, how quickly its economy grows. a favorable exchange rate can be likened to smooth, well-maintained highway conditions, allowing the car to travel at optimal speed. conversely, an unfavorable exchange rate can be like a bumpy, congested road, hindering the car's progress. additionally, inflation might be thought of as the weather. excessive inflation can slow down the car's pace, much like a strong headwind. it can raise uncertainty, deter investment, and reduce purchasing power, all of which can negatively affect economic growth. conversely, low and steady inflation can act as favourable tailwinds, possibly increasing the vehicle's speed by creating a more stable and predictable economic climate that encourages investment and growth. this comparison, which may  foreign direct investment  exchange rate gd  gdp growth rate  inflation rate mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 180 | p a g e not fully represent the complexities of these economic interactions, essentially illustrates how fdi is a key driver of economic growth but that other factors, such as inflation and exchange rate variations, can have a big impact on its outcome. theoretical review asongu, et al. (2021) present the following overview of the main theories of fdi: classical economic theory the classical economic theory posits that fdi can significantly benefit host countries. these potential benefits include stimulating infrastructure development, improving payment transfers and capital skills, increasing foreign earnings, facilitating technology transfer, and expanding government tax revenue (benetrix, et al., 2023). this theoretical framework serves as the foundation for our research. dependency theory conversely, proponents of dependence theory argue that fdi can hinder economic growth. rooted in marxist principles, this theory posits that globalization, facilitated by fdi, can exploit developing countries through the exploitation of cheap labour, the expansion of foreign markets, the imposition of capitalist systems, the introduction of outdated technology, and the overexploitation of natural resources (asongu et al., 2021). besides, dependence theorists contend that fdi can foster collusion between local elites and foreign investors, leading to the exploitation of citizens. they also argue that fdi can distort domestic investment through the introduction of capital-intensive technologies, resulting in job losses, increased income inequality, and altered consumer preferences. additionally, dependence theorists emphasize that fdi can drain local economies by repatriating profits to the investor's home country, crowding out domestic investment (taylor & thrift, 2013). empirical review this study incorporates the findings of multiple empirical investigations examining the impact of fdi on nigeria's economic growth arranged chronologically from oldest to newest. garang and thiery (2018) analyzed effect of foreign direct investment, unemployment on economic growth in uganda using autoregressive distributed lag (ardl) bounds approach and gdp data series obtained from the world bankfrom 1993 to 2015. findings showed no sufficient statistical evidence to suggest fdi played significant roles in reducing unemployment and boosting economic growth. the short-run and long-run dynamics of the model did not point to any statistically significant relationships. okolie et al. (2019) examined the impact of fdi inflows on nigeria's economy from 1984 to 2017. the cbn statistical bulletin provided the annual time series data, which was analyzed using the vector autoregressive (var) method. the results indicated that during the military era of 1984 to 1998, foreign direct investment (fdi) had a positive but non-significant impact on gdp. additionally, during nigeria's eighteen years of uninterrupted democracy (1999–2017), fdi had a negative and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 181 | p a g e non-significant impact on gdp. according to the study's findings, foreign direct investment (fdi) has the potential to significantly impact nigeria's growth and development. trang, et al. (2019) analyzed both the short and long run impact of fdi on economic growth in developing countries (lower-middle) income group for the period 2000-2014 using vector error correction model (vecm) and fully modified ols (fmols). findings revealed that fdi stimulated growth in the long run, although it exhibited a negative impact on economic growth in the short run in some selected developing countries under review. alabi (2019) explored impact of foreign direct investment on economic growth in nigeria. secondary source of data was employed in this study from 1986 to 2017 sourced from central bank of nigeria statistical bulletin and world development indicator. regression was used as estimation techniques. findings of the study revealed fdi was positive and significant to economic growth of nigeria within the period of study. abdillahi and mohd (2021) explored impact of foreign direct investment inflows on ethiopia’s economic growth using 36 years’ time series data. vector auto regression (var) model found fdi to have a positive and significant effect on gdp advancement. ofori and asongu (2022) conducted a panel data estimation in sub-saharan africa for the period, 1990-2020 based on a generalized method of moments (gmm) estimator. from the result, fdi was able to generate economic growth in both the long-run and short-run. however, the study noted most of the positive effect results depended on the country's governance dynamics. the study concluded that a country with strong institutional and governance quality would gain more from fdi inflow and thus grow its economy. mwitta (2022) examined impact of foreign direct investment on economic growth in tanzania spanning from 1990 to 2020 using vector error correction model (vecm). results of the study showed a statistically significant positive association between real gdp growth rate and fdi inflow to gdp ratio. on the other hand, the study revealed a negative correlation between gross fixed capital formation to gdp ratio and real gdp growth rate which might be caused by current situation of public investment. bashir ((2022) analyzed effect of fdi on economic growth in nigeria for the period, 1986-2020 taking into cognizance effect of exchange rate in relationship between fdi and economic growth using annual time series data sourced from databases of world development indicator (wdi) of world bank and central bank of nigeria (cbn) statistical bulletin. autoregressive distributed lag (ardl) model was employed for analysis. findings showed fdi had a positive and significant effect on economic growth. exchange rate also had a positive and significant effect on economic growth. the implied growth effect of fdi was influenced by a stable exchange rate. ntamwiza and masengesho (2022) studied impact of gross capital formation on economic growth in rwanda using time series data from 1990 to 2017. error correction model technique for estimation mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 182 | p a g e revealed a short-run and long-run positive relationship between capital formation, fdi and economic growth, thus confirming that gross capital formation and fdi were the main determinants of economic growth in rwanda for the review period. keita and baorong (2022) examined fdi and economic growth nexus in guinea for the period, 1990 to 2017. the findings showed fdi in the long run positively affected economic growth in guinea during the research period. okello and badj okello (2023) using ols method from 1970 to 2019 studied the relationship between fdi and economic growth in kenya. findings showed that association between fdi and economic growth was negative. the negative result was attributed to the fact that kenya's history as an importsubstituting country and the counter effect of implemented trade policies to spur economic growth in asian countries. dang, et al. (2023) examined impact of fdi foreign on economic development, considering the role of institutional quality in 63 provinces/cities in vietnam from 2005–2022. applying various regression methods, such as pooled ols, the results confirmed fdi and institutional quality had a positive impact on economic development. findings also proved institutional quality as a important determinant of fdi using quarterly data from 2013 to 2022, chi and thi (2023) used the vector autoregression (var) model to examine the link between foreign exchange and foreign direct investment (fdi) in vietnam. the findings of the study indicated a significant correlation between fdi in vietnam and the exchange rate. the results also showed that vietnam's historical values had an impact on fdi flows into the country. the study also discovered that the primary control variables influencing correlation between fdi and foreign exchange rates were trade openness and economic growth. nguyen (2024) using autoregressive distributed lag (ardl) model assessed the influence of key economic globalization factors on economic growth and environmental quality in southeast asian countries. results revealed that fdi had a negative effect on economic growth in southeast asia. naftaly and kipchirchir (2024) examined relationship between fdi and economic growth in kenya using an autoregressive distributed lag (ardl) regression approach and causality tests. secondary time series data from 1990 to 2021 were used for analysis. findings indicated that increasing fdi inflow would lead to an increase in economic growth. also, the result indicated trade openness and climate changed matter from a growth perspective. notably, the results showed short-run to long-run fdi kindled economic growth in kenya. mazenda (2024) assessed effect of fdi on economic growth in south africa from 1980 to 2010. johansen co-integration and vector error correction modeling (vecm) estimation techniques was used. variables specified in the methodology include real gdp, foreign fdi, domestic investment (inve), real exchange rate (rexch) and foreign marketable debt (debt). the long run results mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 183 | p a g e showed fdi, rexch and debt had a negative impact on growth. inve had a positive impact on growth. gap in empirical literature building upon the literature review, several empirical studies have demonstrated both positive and negative relationships between fdi and economic growth based on foregoing review. this study addresses this mixed evidence by exploring the dynamics underlying the relationship between fdi and growth. to achieve this, the study addresses several research gaps. firstly, it specifically focuses on the impact of fdi and exchange and inflation rates dynamics on economic growth (measured by gdp growth rate). secondly, the study's temporal scope spans from 1999 to 2022, recognizing the significance of the return to civilian rule in 1999 and ensuring the analysis incorporates recent developments. thirdly, the study employs specific proxies for the dependent and independent variables, utilizing gdp growth rate as the dependent variable and fdi as key independent variable, while incorporating exchange rate and inflation rate as control variables. finally, the study contributes to the literature by focusing specifically on the nigerian context, addressing a gap in existing research that primarily focuses on other jurisdictions. 3. methodology for this investigation, an ex-post facto design was used. research conducted after the fact is referred to as ex-post facto research. this is appropriate for the assignment because it is based on an event that has already happened and the researcher's job is to evaluate the results and make logical deductions. our methodology was based on the autoregressive distributed lag (ardl) estimate model used by mathebula, et al. (2024), which investigated the impact of fdi on economic growth in south africa. the econometric model used by the authors is described as follows: 𝐺𝐷𝑃𝑡 = 𝛽0 + 𝛽1𝐹𝐷𝐼𝑡 + 𝛽2𝑅𝐼𝑅𝑡 + 𝛽3𝐼𝑁𝐹𝑡 + 𝛽4𝑆𝑅𝑡 + 𝜀𝑡 (1) where, gdp = growth domestic product (economic growth) in period t, fdi = foreign direct investment in period t, rir = real interest rate in period t, inf inflation rate in period t, sr saving rate in period t. 𝛽1−𝛽4 coefficient parameters, 𝜀𝑡 error term., while t time period. the prior expectations are: 𝛽1>0; 𝛽2<0; 𝛽3<0, and 𝛽4 > 0. but in order to account for our theories, the general ardl model is altered as follows: δlngdpgrt = α01 + ∑ α11∆lngdpgrt−1 p t=1 + ∑ α2∆lnfdit−1 p t=1 + ∑ α3∆lnfxrt−1 p t=1 + ∑ α2∆lnct−1 p t=1 + β11lnyt−1+β21lnfxrt−1+β31lnct−1+μ1t (2) where, gdpgr𝑡 gross domestic product growth rate, 𝐹di𝑡 – foreign direct investment; 𝐶𝑡 – matrix of control variables; 𝑡 – time dimension; 𝜇𝑡 – stochastic term; 𝑙𝑛 – natural log; 𝛼0 – constant term; 𝛼1 𝑎𝑛𝑑 𝛼2 – coefficients are associated with the logarithms of fdi and control mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 184 | p a g e variables, respectively. the variables were transformed into logarithms to reduce the serial correlation problem (gisore, 2021). equation 3 was used to examine the long-term relationship, as seen below. lngdpgrt = α0 + σ α1ilngdpgrt−i p i=1 + σ α2ilnfdit−i w i=0 + σ α3ilnct−i w i=0 + μit (3) table 3.1 provides the following description of the variables in our models: table 3.1: summary of model variable description variable abbreviati on measurement data source expected sign dependent variable economic growth gdpgr gdp growth rate world development indicators dependent variable independent variables foreign direct investment fdi fdi, net inflow world development indicators positive (ofori & asongu, 2022) foreign exchange rate fxr value of naira to usd world development indicators negative (nyoni, et al., 2021) control variables trade openness top total trade per gdp world development. indicators positive (malefane & odhiambo, 2018) inflation rate ifr consumer price index world dev. indicators negative source: author's compilations, 2024 4. data analysis to determine if a time series variable is stationary or has a unit root, the phillips-perron (pp) unit root test was used. the unit root results for the sample data are shown in table 4.1. table 4.1: summary of pp unit root test results variable t-stat. critical values @5% p-value order of integration inference lngdpgr -3.245 -2.951 0.0259 i(0) stationary lnfdi -5.086 -3.548 0.0012 i(0) stationary dlnfxr -7.232 -2.954 0.0000 i(1) stationary mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 185 | p a g e dlntop dlnifr -7.153 -12.213 -3.553 -3.552 0.000 0.0000 i(1) i(1) stationary stationary source: author’s extract from e-views table 4.1 outcomes are confirmed by the pp test which also found gdp and fdi stationary at level of form as revealed by the -3.245 for gdpgr and -5.086 for fdi, which are both less than their critical values of -2.951 and -3.548. fxr, top and ifr are non-stationary at level form. they, however become stationary after first differencing with all three variables (fxr, top, ifr) having a common p–value of 0.0000, which is below 0.05, leading to the conclusion that there is no unit root after first differencing. gdp and fdi, therefore, are integrated to order zero i(0), whilst fxr, top and ifr are integrated to order one i(1). this makes the ardl method applicable to estimate the growth model since the variables are integrated of orders zero and one, that is, i(0) and i(1). ardl model regression results long–run estimates table 4.2: ardl model results long–run estimates variable coefficient standard error t-statistic probability fdi -0.2193 0.2584 -0.8488 0.4052 fxr -0.8596 0.1583 -5.4312 0.0000 topn -0.3145 0.1387 -2.2674 0.0335 ifr 0.2503 0.3458 0.7239 0.4768 source: author (compiled from e-views) gdpgr = -0.2193fdi 0.8596fexr 0.3145topn + 0.2503ifr the effect of major independent variables (based on our specific objectives): foreign direct investment (fdi) and foreign exchange rate (fexr)) on gdpgr in the long run, as reported in table 4.2 is stated in the equation above. decision clearly, table 4.2 shows that the coefficient for fdi has a negative (approximately, -0.22) and non significant (p-value, 0.4052 > 0.05) long-run effect on gdp growth rate in nigeria within the review period. similarly, the coefficient for fexr has a negative (approximately, -0.86), but significant (approximately 0000 < 0.05) long-run impact on gdp growth rate in nigeria over the period of study. short–run estimates table 4.3: short–run estimates cointeq (-1) d(fdi) d(fxr) d(top) d(ifr) coefficient -0.7782 0.0128 0.505531 -0.3174 p-value 0.0000 0.8834 0.0095 0.0003 source: author (compiled from e-views) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 186 | p a g e the cointeq (-1) coefficient is an error correction component that displays the rate at which equilibrium in the growth model is regained. in other words, it represents the rate at which a previous period's disequilibrium is resolved. a negative coefficient indicates convergence, whereas a positive coefficient indicates divergence; thus, the cointeq (-1) is said to be significant when its value is negative and less than one, and its probability value is less than the chosen 5% significance level (nkoro & uko, 2016). table 4.3 results show a large cointeq (-1) value of -0.7782, indicating that the speed of adjustment is around 77.8 percent. this means that anytime there is a disturbance in the model, the adjustment from the short run deviation to the long run equilibrium happens quickly. fxr and top were seen to be favourably associated to short-term growth, whereas ifr was discovered to be negatively related to short-term gdpgr and fdi and fxr were discovered to be unimportant in explaining short-term growth. according to the study, only ifr and top have a substantial impact on growth in the short run. discussion of findings discussions arising from the foregoing empirical results are summarized in line with our study objectives as follows: based on ardl model results presented in table 4.3 shows that the coefficient for fdi has a negative (approximately, -0.22) and non-significant (p-value, 0.4052 > 0.05) long-run effect on gdp growth rate in nigeria within the review period. as a result of the findings, a 1% increase in fdi resulted in approximately a 22 percent decrease in gdp. in the long run. the negative relationship between fdi and gdp contradicted the modernization theory, which states that an increase in fdi should eventually lead to an increase in gdp, indicating a positive link between the two macroeconomic variables. these findings, however, support the dependency theory, which holds that foreign direct investment has a detrimental impact on the host country's economic growth. nguyen (2024) support the dependency theory and empirically discovered that fdi had a negative impact on south east asian's economic growth if multinational corporations return large profits to their parent countries. okello and badj (2023) discovered in a similar study that fdi had a negative influence on economic growth in kenya applying ols to examine the datasets for the period, 1970 to 2019 furthermore, mazenda (2024) also affirmed our findings that fdi had a negative effect on economic growth in south africa using vecm estimation to analyze data from 1980 to 2010. in nigeria, factors such as corruption, weak institutions, poor or decaying infrastructures, inconsistencies in government policies, as well as security concerns may have contributed to a negative association between fdi and economic growth. this is contrary to our prior expectation of a positive relationship between fdi and economic growth, indicating that this relationship is bidirectional because other studies support the hypothesis that there is a positive relationship between fdi and economic growth. for instance, the study of mwitta (2022) who used vecm to analyze datasets from 1990 to 2020 confirmed that there was a positive relationship between fdi and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 187 | p a g e economic growth in tanzania. similarly, trang, et al., (2029) applying vecm to analyze datasets for the period, 2000 to 2014 affirmed that fdi had a positive and significant effect on economic growth in lower-middle income developing countries. given the ardl model results shown in table 4.3, the coefficient for foreign exchange rate (fxr), which is our second major independent variable had a negative (approximately, -0.86), but significant (0000 < 0.05) long-run impact on gdp growth rate in nigeria over the period of study. this result implies that a 1% increase in fxr resulted in approximately 86 percent decrease in gdp in nigeria during the review period. our finding was affirmed by the study of mazenda (2024) in south africa. this confirms theoretical suggestions, which propose that depreciation in the exchange rate discourages investment, which translates into low levels of economic growth. conclusion / recommendations in light of our findings, this study comes to the conclusion—contrary to theoretical assumptions— that fdi had no discernible impact on nigeria's economic growth. this came when the long-term effects were taken into account. while crowding out domestic investment, fdi has a short-term positive effect on economic growth. conversely, theoretical presumptions state that persistent devaluation, floatation, and fluctuation in the value of the naira deter investment. this study suggests that if the government proactively addresses infrastructure issues, develops a framework of policies that promote efficient technology transfer and knowledge sharing, and improves the business climate in order to draw in investors, foreign direct investment (fdi) can greatly accelerate nigeria's economic growth and have long-term positive effects. additionally, in order to encourage more foreign investment and eventually propel nigeria's intended economic growth and development, it is imperative that the exchange rate remain stable. references abdillahi, m. n., & mohd, s. (2021). impact of foreign direct investment on economic growth in ethiopia: empirical evidence. latin american journal of trade policy, 4(10), 56-77. adepoju, w. a. (2017). impact of public debt on gdp growth the debt multiplier in albania. international journal of innovation and economic development, 3(4), 60-67. alabi, k. (2019). impact of foreign direct investment on economic growth: nigeria experience. open journal of applied sciences, 9, 372-385. alfaro, l., chanaa, a., kalemli-ozcan, s., & sayek, s. (2010). does foreign direct investment promote economic growth? exploring the role of financial markets. journal of development economics, 91(2), 242-256. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 188 | p a g e bashir, d. (2022). effect of foreign direct investment on economic growth in nigeria: does exchange rate matter? international journal of accounting and finance studies, 5(2), 116-125. benetrix, a., panizza, u., & pallan, h. (2023). the elusive link between fdi and economic growth. world bank publication. borensztein, e., de gregorio, j., & lee, j. w. (1998). how does foreign direct investment affect economic growth? journal of international economics, 45(1), 115-135. campos, n. f., & kinoshita, y. (2003). why does fdi go where it goes? new evidence from the transition economies. imf working paper 03/228. international monetary fund. carkovic, m., & levine, r. (2005). does foreign direct investment accelerate economic growth? university of minnesota, department of economics. chi dieu thi nguyen. (2023). link between foreign exchange rate and foreign direct investment: case from vietnam. review of economics and finance, 21, 1109-1115. dang, t. t., oanh, t. t. k., thanh, h. l., & nguyen, t. n. (2023). impact of foreign direct investment on economic development: does institutional quality matter? emerging science journal, 7(6), 1924-1936. de mello, l. (1999). foreign direct investment-led growth: evidence from time series and panel data. oxford economic papers, 51(1), 133-151. garang, a., yacouba, k., & thiery, k. (2018). time series bounds approach to foreign direct investment, unemployment and economic growth in uganda. modern economy, 9(1), 87-96. gisore, m. (2021). determinants of regional economic growth in kenya. african journal of business management, 15(1), 1-12. keita, o., & baorong, y. (2022). foreign direct investment and economic growth nexus: empirical insight from guinea. asian economic and financial review, 12(1), 58-69. khaing, s. s. (2009). globalization and change of investment environment in asean. graduate school of humanities and social sciences, japan. lim, e. (2001). determinants of and relation between foreign direct investment and growth: a summary of recent literature. imf working paper wp/01/175. international monetary fund. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 189 | p a g e mathebula, r. s., dagume, m. a., & khangale, a. r. (2024). impact of foreign direct investment on economic growth: evidence for south africa. journal of smart economic growth, 9(1), 118148. mazenda, a. (2024). effect of foreign direct investment on economic growth: evidence from south africa. mediterranean journal of social sciences, 5(10), 95-108. moses, e. c. (2011). oil and non-oil fdi and economic development in nigeria. journal of emerging trends in economics and management sciences, 2(4), 33-34. mwitta, n. z. (2022). impact of foreign direct investment on economic growth: empirical evidence from tanzania (1990-2020). [master’s thesis, kdi school of public policy and management]. naftaly, m., & kipchirchir, e. (2024). foreign direct investment and economic growth in kenya: a comprehensive analysis. asian journal of economics, business and accounting, 24(2), 1-13. nguyen, q. (2024). influence of key economic globalization factors on economic growth and environmental quality: an empirical study in southeast asian countries. journal of international trade & economic development, 33(1), 57-75. ntamwiza, j., & masengesho, f. (2022). impact of gross capital formation and foreign direct investment on economic growth in rwanda. current urban studies, 10(1), 1-13. nwankwo, o. g., ademola, o., & kehinde, o. (2013). effects of globalization on foreign direct investment in nigeria. lorem journal of business and economics, 1(1), 11-17. odozi, v. a. (2005). an overview of foreign investment in nigeria 1960-1995. occasional paper 11. research department, central bank of nigeria. ofori, k., & asongu, a. (2022). repackaging fdi for inclusive growth: nullifying effects and policy relevant thresholds of governance. zbw–leibniz information centre for economics. http://hdl.handle.net/10419/248546 ojo, a. t., & alege, p. o. (2014). exchange rate fluctuations and macroeconomic performance in subsaharan africa: a dynamic panel co-integration analysis. asian economic and financial review, 4(11), 1573-1591. okello, a., & badj, k. (2023). foreign direct investment and economic growth in kenya. [research project, jonkoping university, sweden]. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 190 | p a g e okolie, p. i. p., anidiobu, g. a., & ugwuanyi, w. n. (2019). empirical investigation of foreign direct investment flows on the economy of nigeria. european journal of accounting, finance and investment, 5(6), 33-46. pesaran, m., shin, y., & smith, r. (2001). bounds testing approaches to the analysis of level relationships. journal of applied econometrics, 16(3), 289-326. sarker, b., & khan, f. (2020). nexus between foreign direct investment and economic growth in bangladesh: an augmented autoregressive distributed lag bounds testing approach. financial innovation, 6(10), 2-18. taylor, m., & thrift, n. (2013). the geography of multinationals: studies in the spatial development and economic consequences of multinational corporations. routledge. trang, d. t. h., duc, v. h., anh, v. t., & thang, n. c. (2019). foreign direct investment and economic growth in the short run and long run: empirical evidence from developing countries. journal of risk and financial management, 12(176), 1-11. trinh, n. h., & nguyen, q. a. m. (2015). impact of foreign direct investment on economic growth: evidence from vietnam. developing country studies, 5(20), 1-9. united nations conference on trade and development (unctad). (2019). world investment report, 2019. united nations publications. wiredu, j., nketiah, e., & adjei, m. (2020). relationship between trade openness, foreign direct investment, and economic growth in west africa: static panel data model. journal of human resource and sustainability studies, 8(1), 18-34. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 71 | p a g e effect of sustainable lean six sigma on operational efficiency in southeast nigeria's food industry 1obodoagu, kenneth ogomegbunam (ph.d), 2cyril anamelechi chiana (phd) and 3okechukwu, elizabeth uzoamaka (phd) 1department of business management, godfrey okoye university, enugu 2department of marketing, abia state university, uturu 3department of business administration, enugu state university of science and technology doi: https://doi.org/10.5281/zenodo.15878437 abstract: the study examined the effect of sustainable lean six sigma on operational efficiency in southeast nigeria's food industry. the specific objectives were to; evaluate the effect of the continuous improvement process on the operational efficiency and identify the effect of eliminating waste on operational efficiency in southeast nigeria's food industry. a survey research design was selected for the investigation. a standardized questionnaire with a point likert scale was used to collect data for the study. the data was analyzed using the mean, standard deviation, and fundamental percentages. (spss version 20, a program for descriptive statistics). the result review that continuous improvement process has a significant positive effect on the operational efficiency with the calculated zvalue of 7.098 < 10.089 against the critical zvalue of .000. while eliminating waste has a significant positive effect on operational efficiency with the calculated zvalue of 7.117 < 11.160 against the critical zvalue of .000 in southeast nigeria's food industry. keywords: efficiency, lean, operational, sigma, six 1.1 introduction in today's increasingly interconnected and environmentally conscious world, organizations face mounting pressure to optimize their operations while minimizing their environmental and social impact (abubakar & igbokwe, 2022; uche, 2024). this dual challenge has spurred the rise of sustainable lean six sigma (slss). this powerful integrated methodology combines the process improvement principles of lean six sigma with the goals of sustainability, providing effective solutions to those dual challenges organizations face. it is opined that sustainable lean six sigma provides a comprehensive approach to enhancing organizational performance, minimizing waste, and promoting environmental and social responsibility (ajayi, 2023). to appreciate the significance of sustainable lean six sigma, it is essential to understand its constituent methodologies, which originated from toyota's production system, lean focuses on eliminating waste ("muda" in japanese) in all its forms, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 72 | p a g e including defects, overproduction, waiting, non-utilized talent, transportation, inventory, motion, and extra processing. by streamlining processes and improving efficiency, lean aims to deliver maximum value to customers with minimal resource consumption (chinedu, 2023; eze, 2023; ndukwe, 2023). in the context of business, sustainability encompasses environmental, social, and economic dimensions, often referred to as the "triple bottom line." it involves minimizing environmental impact through resource conservation, pollution prevention, and waste reduction; promoting social equity through fair labour practices, community engagement, and ethical sourcing; and ensuring long-term economic viability through efficient operations and responsible financial management (chinedu, 2023; eze, 2023). operational efficiency refers to the ability of an organization to deliver goods or services with minimal waste of resources, including time, materials, energy, and human effort (okafor, 2022). in the context of slss, operational efficiency is not solely focused on cost reduction and output maximization but also on minimizing environmental impact and promoting social well-being (nwankwo & chukwu, 2024). this broader perspective requires a shift in mindset, where efficiency gains are evaluated in terms of their overall contribution to the "triple bottom line": economic, environmental, and social performance (okwudili, 2024). southeast nigeria's food industry is a critical sector for economic growth and development, contributing significantly to the region's gdp and employment. however, the industry grapples with inefficiencies, high levels of waste, and environmental degradation due to unsustainable practices (obi, 2024). according to recent reports, the region's food supply chain is often characterized by inadequate infrastructure, poor logistics, and limited access to modern technologies, leading to high rates of spoilage and waste (oko, 2023). these challenges necessitate innovative solutions to enhance operational efficiency and promote sustainability. 1.2 statement of the problem the food industry in southeast nigeria is critical to the region's economic growth, yet it faces significant challenges related to operational inefficiency, high levels of waste, and sustainability concerns. despite the potential benefits of sustainable lean six sigma (slss) in enhancing operational efficiency, many food manufacturers in this region have not fully adopted or implemented these practices. this gap results in suboptimal resource utilization, increased costs, and a negative environmental impact, ultimately hindering the industry's competitiveness and sustainability. specifically, the lack of streamlined processes and inadequate waste reduction strategies contributes to substantial food spoilage and inefficiencies throughout the supply chain. additionally, cultural resistance to change and insufficient training further impede the adoption of slss methodologies. as a result, the operational efficiency of food manufacturers in southeast nigeria remains below potential, adversely affecting not only their profitability but also their ability to contribute to regional economic development and environmental sustainability. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 73 | p a g e this study aims to investigate the effects of sustainable lean six sigma on operational efficiency within southeast nigeria's food industry, identifying barriers to implementation and proposing actionable strategies for enhancing both economic and environmental performance. 1.3 objective of the study the main objective of this study is to examine the effect of sustainable lean six sigma on operational efficiency in southeast nigeria's food industry. the specific objectives were to; i. evaluate the effect of the continuous improvement process on the operational efficiency in southeast nigeria's food industry. ii. identify the effect of eliminating waste on operational efficiency in southeast nigeria's food industry. 1.4 hypotheses of the study i. the continuous improvement process has no significant effect on the operational efficiency in southeast nigeria's food industry. ii. eliminating waste has no significant effect on operational efficiency in southeast nigeria's food industry. literature review 2.1 conceptual review sustainable lean six sigma in recent years, lean six sigma (lss) has drawn significant attention for its ability to improve environmental performance and encourage sustainable manufacturing practices (zhang, luo, & skitmore, 2015; ganjavi & fazlollahtabar, 2021). lss is an approach that reduces waste and errors in business processes by combining six sigma quality management with lean manufacturing principles. however, by implementing strategies like energy efficiency, waste reduction, and the utilization of renewable resources, sustainable manufacturing practices seek to lessen the adverse effects of production on the environment (antony, snee, hoerl, & management, 2017). analyzing the connection between lss principles, data-driven decision-making, and environmental performance within the framework of sustainable manufacturing practices is the goal of this review of the literature. relevant keywords and search terms, including "lean six sigma," "sustainable manufacturing," "environmental performance," and "data-driven decision making," were used to search academic databases and other sources in order to obtain a wide range of literature on the subject (huang et al, 2023). the review will then synthesize and analyze the literature to determine the critical elements that support the effective application of lss in advancing sustainable manufacturing practices and enhancing environmental performance. through an analysis of the literature, the review seeks to offer insights and suggestions for manufacturing firms looking to enhance their environmental sustainability while preserving operational effectiveness and profitability (huang et al, 2023). the body of research on lss in sustainable manufacturing practices and its impact on environmental performance provides mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 74 | p a g e us with useful data and case studies. but additional research is required to understand the particular issues that arise when lss is applied to sustainable production (huang et al, 2023). the advantages and effective applications of lss for sustainable manufacturing have received more attention in the literature than the possible drawbacks and restrictions of this approach. furthermore, not many studies look at the combination of data-driven methods and lss concepts to enhance environmental performance. more research is required to determine how data-driven decision-making might improve lss's ability to support environmentally friendly production methods and sustainable manufacturing practices, even if some studies have examined how data science fits into lss and how it impacts various industries (huang et al, 2023). future studies could examine the particular issues that come up when using lss in environmentally friendly production and how they might be resolved. it would be advantageous to investigate the ways in which lss concepts and data-driven approaches complement one another to enhance environmental performance in various businesses. this would increase our understanding of the subject and provide industry professionals with the resources they need to advance sustainable manufacturing methods. continuous improvement (ci) continuous improvement (ci), also known as kaizen (japanese for "change for the better"), is a fundamental management philosophy that emphasizes ongoing efforts to enhance products, services, or processes (bessant, & maher, 2009, suárez-barraza et al 2012). it is not a one-time project but a sustained, incremental approach to improvement, involving all members of an organization (liker, 2004, jørgensen, et al 2003). the core idea is that small, consistent changes can lead to significant cumulative improvements over time (bessant, & maher, 2009, suárez-barraza et al 2012). understanding and meeting customer needs and expectations is central to continuous improvement (deming, 2000, oakland, 2014). improvements are driven by customer feedback and the desire to enhance customer satisfaction (deming, 2000, oakland, 2014). continuous improvement focuses on improving processes rather than individual performance (bessant, & maher, 2009, suárez-barraza et al 2012, tortorella, & fettermann, 2018). by analyzing and optimizing processes, organizations can eliminate waste, reduce errors, and improve efficiency (bessant, & maher, 2009, suárez-barraza et al 2012, siriram, 2019). eliminating waste waste elimination is a multifaceted concept gaining increasing importance across various sectors, driven by concerns about resource depletion, environmental degradation, and economic efficiency. this review explores the conceptual underpinnings of waste elimination, examining its evolution, diverse applications, and strategies for effective implementation. waste, broadly defined as any resource that is not utilized optimally, presents a significant challenge to sustainability. eliminating waste requires a shift towards circular economy models, emphasizing reduction, reuse, recycling, and recovery. the concept of waste elimination has evolved significantly over time. initially rooted in manufacturing and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 75 | p a g e operations management, the principles have expanded to encompass broader societal and environmental contexts. taiichi ohno's work at toyota pioneered the concept of "muda" or waste, categorizing it into seven types: overproduction, inventory, defects, motion, waiting, transportation, and over-processing. the kaizen institute emphasizes that sales teams should eliminate waste to focus on value-added activities, enhancing productivity and customer service. operational efficiency operational efficiency is a critical concept for organizations across all sectors, focusing on maximizing output with minimal input. it involves streamlining processes, reducing waste, and optimizing resource utilization to achieve the best possible performance. in an increasingly competitive global landscape, enhancing operational efficiency is essential for achieving sustainable growth and maintaining a competitive advantage. operational efficiency is often defined as the ratio between an organization's inputs and outputs. inputs typically include resources such as time, labour, capital, and materials, while outputs encompass products, services, revenue, and customer satisfaction. the goal is to improve this ratio, either by reducing the inputs required for a given level of output or by increasing the output achieved with the same level of input. operational efficiency is the organization's ability to decrease wastage of inputs and maximize resource utilization. 2.2 theoretical framework john elkington first proposed the idea of the triple bottom line (tbl), sometimes referred to as the "three pillars" or "three ps" of sustainability, in 1994. he founded the consulting firm sustain ability and is a british management consultant. according to the principle, businesses should prioritize three things: profit, people, and the environment. this entails taking into account a company's social and environmental effects in addition to its financial performance when assessing its success. businesses used to function exclusively to support their bottom line. the triple bottom line (tbl) was first proposed in 1994 by author and businessman john elkington in an effort to change the financial accounting-focused corporate system into a complete strategy that gauges success and effect. some companies started to understand the link between social well-being, environmental health, and an organization's resilience and financial success as a result of the triple bottom line theory and its implementation. organizations must completely account for all costs related to conducting business in order to obtain a comprehensive view of their operations that goes beyond what is shown in their profit and loss statements. i. it is a transformation framework designed to assist companies and organizations in their transition to a more sustainable and regenerative future. ii. tbl provides instruments to assist a company in measuring, comparing, establishing objectives, and ultimately moving toward more sustainable models and systems. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 76 | p a g e iii. it shows that a company cannot account for all of the costs associated with conducting business and will not prosper in the long run if it is solely concerned with making money while neglecting people and the environment. by incorporating an organization's contributions to social well-being, environmental health, and a just economy, the triple bottom line hypothesis broadens the scope of traditional commercial success indicators. the three "p's"—people, planet, and prosperity—are frequently used to describe these bottom line categories. the triple bottom line is composed of three categories, however it's crucial to keep in mind that they are not distinct from one another. the three "p's" are all related when viewed through the perspective of systems theory. since systems thinking is the cornerstone of sustainability, any endeavor that pertains to people, the planet, or prosperity will also have an effect on the others. the triple bottom line, often referred to as the three “p’s”: people, planet, and prosperity. people employees, the communities in which a business operates, people in the supply chain, future generations, and consumers are just a few of the stakeholders that people take into account (as opposed to merely shareholders). this part of the triple bottom line revolves around the relationship with corporate social responsibility (csr). csr is the duty of stakeholders to hold organizations accountable for their activities and the duty of organizations to satisfy the requirements of their stakeholders. human rights advancement, poverty and hunger alleviation, diversity, equity, and inclusion, gender mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 77 | p a g e equity, maintaining a safe and healthy workplace, community involvement, and volunteerism are a few activities that a firm may think about include in its csr objectives. stakeholders benefit from csr activities, but businesses also profit when they include csr into their business plan. businesses frequently share best practices with other companies and organizations as part of their dedication to advancing csr initiatives. planet planet takes into account how a company or organization interacts with the environment and its ecological systems. stakeholders may now hold companies more accountable for their activities because to a variety of factors, including public opinion, consumer purchasing power, the speed and transparency of information sharing on social media, and even industry-led activism (like patagonia's 1 percent for the planet campaign). this is demonstrated by stakeholders praising an organization for its beneficial effects and criticizing its negative ones. it is likely to have an effect on who customers choose to support and who they purchase from when that opinion becomes widely known. in addition to the potential effects that corporate operations may have on the environment, society, and economy, stakeholders are becoming more conscious of the significance of global concerns like social justice and climate change. actually, according to a 2020 climate change in the american mind survey, "nearly six out of ten americans, or roughly 58 percent, are now either 'alarmed' or 'concerned' about global warming." the percentage of people who were "alarmed" almost tripled between 2014 and 2019.businesses have been implementing more environmentally friendly strategies over the last few decades. large corporations such as at&t, dell, easton, hewlett packard, kohler co., levi strauss & co., and target, to mention a few, have advanced down the sustainability road in recent years by having a net-positive or regenerative effect on society and the environment. prosperity prosperity takes into account the economic metrics that a company or organization can control, such as providing livable salaries, using ethical suppliers, and ensuring worker health and safety. the triple bottom line theory's perspective on people, the environment, and prosperity makes it systemic. the sustainable development goals (sdgs) were established by the united nations (un) to "ensure all human beings can enjoy prosperous and fulfilling lives and that economic, social, and technological progress occurs in harmony with nature" in light of this interconnectedness. numerous un sdgs seek to enhance a variety of aspects pertaining to people, the environment, and economic prospects. providing decent work (safe working conditions, living pay, and compassionate leadership) and economic growth for people in particular areas is one of the many prosperity-focused agendas. 2.3 empirical review njoku (2021) conducted a study on leadership and continuous improvement in the nigerian leadership and continuous improvement in the nigerian. there is a high failure rate of continuous improvement (ci) initiatives in the beverage industry. continuous improvement initiatives could help mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 78 | p a g e beverage manufacturing managers improve product quality, efficiency, and overall performance. grounded in the transformational leadership theory, the purpose of this quantitative co relational study was to examine the relationship between idealized influence, intellectual stimulation, and ci. nigerian beverage industry managers (n = 160) who participated in the study completed the multifactor leadership questionnaire form 5x-short, and the plan, do, check, and act (pdca) cycle. the results of the multiple linear regression were statistically significant, f(2, 157) = 16.428, p < 0.001, r2 = 0.173. idealized influence (ß = 0.242, p = 0.000) and intellectual stimulation (ß = 0.278, p = 0.000) were both significant predictors. the implications for positive social change include the potential to increase the opportunity for the growth and sustainability of the beverage industry ogbuke, eneh, and okwor (2023) conducted a study on employee performance management and performance of food beverage manufacturing firms of enugu state the study evaluated the employee performance management practices and performance of food beverage manufacturing firms of enugu state. the specific objectives were to: examine the relationship between engaged employees and the profitability and evaluate the relationship between identification of talent and output of food manufacturing firms of enugu state. the area of the study was the smes in enugu state. the study used the descriptive survey design approach. the primary source of data was the administration of questionnaire. a total population of 911 selected staff of the study organisations. the hypotheses were analysed using pearson correlation coefficient (r). the findings indicated there was significant positive relationship between engaged employees and the profitability r (95, n=228), = .453 < .985, p <. 05 and there was significant positive relationship between identification of talent and output of food manufacturing firms of enugu state r (95, n=228), = .416 < .971, p <. 05. the study concluded that engaged employees and talent had significant positive relationship with the profitability and output of food beverage manufacturing firms of enugu state. onoh, chinasa, and hubs, (2022) conducted a study on development on the waste reduction of food, beverage and tobacco manufacturing firms in enugu state. the study evaluated the sustainability development on the waste reduction of food, beverage and tobacco manufacturing. the specific objectives were to: examine the effect of employee equal opportunity on the prevention of waste and evaluate the effect of maintenance skills on the standard costing of food, beverage and tobacco manufacturing firms in enugu state. the study employed survey method research. data was presented and analysed by mean score (3.0 and above agreed while below 3.0 disagreed) and z-test was used to test the hypotheses. the findings indicated that employee equal opportunity had positive effect on the prevention of waste, (7.530 < 8.532, p = < .05) and maintenance of skills had positive effect on the standard costing of food, beverage and tobacco manufacturing firms in enugu state, (4.965 < 6.654, p = < .05).the study concluded that employee equal opportunity and maintenance of skills had positive effect on the prevention of waste, standard costing and reusable products of food, beverage and tobacco manufacturing firms in enugu state. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 79 | p a g e rolker, eisler, cardenas, deeney, and takahashi (2022) conducted a study on food waste interventions in low-and-middle-income countries: a systematic literature. reduction of food waste in low-andmiddle-income countries (lmics) can provide multi-layered benefits for their sustainable development, through improved food security, enhanced income as well as the creation of environmentally friendly secondary markets. food systems, however, are often characterised by a complex network of actors across the value chain, where a parochial intervention at a local scale does not always achieve a globally optimal outcome. here, we systematically reviewed 8318 studies for the current evidence associated with the impact of interventions pursuing food waste reduction in lmics. we first classified interventions by the target stage within the value chain and by the mechanism of action, and then further based on whether they are primarily designed to prevent or mitigate (recycle, reuse, remanufacture, repurpose and recover) the wastage of the commodity. we found a nearcomplete disconnect between preventive and mitigative interventions amongst the studies, with the former only investigated at production, storage and transportation stages and the latter only at wholesale and consumption stages. no identified study employed preventive and mitigative measures together to explore the combined level of efficacy. we also identified a strong bias in favour of materialbased interventions, with little attention given to knowledge-based alternatives or local capacity building. 3. methodology a survey research design was selected for the investigation. a standardized questionnaire with a point likert scale was used to collect data for the study. the study's population consists of workers from the selected food producing enterprises in south-east nigeria. the workforce was made up of both senior and junior employees from various divisions of food and beverage production enterprises. in this study, 3,565 employees were included in the sample. the sample size for the study consisted of 347 respondents. the sample size was calculated using freund and william's statistical technique. the data was analyzed using the mean, standard deviation, and fundamental percentages. (spss version 20, a program for descriptive statistics). 4 data presentation and analyses 4.1 distribution and returned questionnaire the presentation and interpretation of data were based on the questionnaire administrated to the staff of the southeast nigeria's food industry. table 4.1 distribution and return of the questionnaire firms distributed no returned percent no not returned percent 1. nigeria breweries, aba 50 49 14 2 1 2.m.o. nnaji bakeries, aba 17 16 5 1 3.tummy tummy foods, nnewi 37 35 10 2 1 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 80 | p a g e 4.nigeria bottling co. ltd., onitsha 44 42 12 2 1 5.jaypee enterprises, uburu 24 23 7 1 6 abakaliki rice cluster 46 42 12 4 1 7.nigerian breweries plc, enugu 37 35 10 2 1 8.aqua ralpha investment, 9th mile 42 36 10 6 2 9.emmerald food, owerri 38 37 11 1 10.jacob wine, orlu 12 11 3 1 total 347 326 93.0 21 7.0 source: field survey, 2024 table 4.1 shows that of the 347 distributed copies of the questionnaire, three hundred and twenty-six (326) were returned representing ninety-one (91) percent and used, while twenty-one (21) copies of the questionnaire representing seven (7) percent were not returned and were not used. this shows a high respondents’ rate. 4.2 bio data the bio-data shows the gender distribution, marital status of respondents, educational qualifications, and years of experience and age of the respondents under study. table 4.2.1 gender distribution frequency percent valid percent cumulative percent male 183 56.1 56.1 56.1 female 143 43.9 43.9 100.0 total 326 100.0 100.0 source: field survey, 2024 from table 4.2.1 it was observed that 183 respondents out of 326 representing 56.1 percent were males whereas 143 respondents representing 43.9 percent were females. this indicated that male were more than the females. table 4.2.2 marital status of respondents frequency percent valid percent cumulative percent single 109 33.4 33.4 33.4 married 191 58.6 58.6 92.0 widowed 20 6.1 6.1 98.1 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 81 | p a g e divorced 6 1.9 1.9 100.0 total 326 100.0 100.0 source: field survey, 2024 table 4.2.2 reveals that 109 respondents out of 326 representing 33.4 percent were single, 191 respondents representing 58.6 percent were married. 20 respondents representing 6.1 percent were widowed. 6 respondents representing 1.9 percent were divorced. table 4.2.3 educational qualifications of the respondents frequency percent valid percent cumulative percent wasc/gce 88 27.0 27.0 27.0 ond/nce 88 27.0 27.0 54.0 hnd/b.sc. 92 28.3 28.3 82.3 mba/m.sc. 37 11.3 11.3 93.6 phd 21 6.4 6.4 100.0 total 326 100.0 100.0 source: field survey, 2024 table 4.2.3, reveals that 88 respondents out of 326 representing 27.0 percent were holders of wasc/gce, 88 respondents representing 27.0 percent were holders of nce/ond, 92 respondents representing 283 percent were holders of hnd and bsc, 37 respondents representing 11.3 percent were holders of masters degree and 21 respondents representing 6.4 percent were holders of phd. table 4.2.4: years of experience frequency percent valid percent cumulative percent less than 1 2years 82 25.2 25.2 25.2 3-5years 208 63.8 63.8 89.0 6-10years 30 9.2 9.2 98.2 11 years and above 6 1.8 1.8 100.0 total 326 100.0 100.0 source: field survey, 2024 table 4.2.4, 82 respondents out of 326 representing 25.2 percent have less than 1 – 2 years experience, 208 respondents with 63.8 percent were within the years experience of 3 – 5 years, 30 respondents representing 9.2 percent were within the years’ experience 6-10years, 6 respondents representing 1.8 percent were within the 11 years and above. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 82 | p a g e table 4.2.5 age of the respondents frequenc y percen t valid percent cumulativ e percent 25-30years 53 16.3 16.3 16.3 31-35years 77 23.6 23.6 39.9 36-40years 89 27.3 27.3 67.2 4550years 19 5.8 5.8 73.0 51years and above 88 27.0 27.0 100.0 total 326 100.0 100.0 source: field survey, 2024 table 4.2.5, 53 respondents out of 326 representing 16.2 percent were within the age of 25 30years, 77 respondents with 23.6 percent were within the age bracket of 31-35, 89 respondents representing 27.3 percent were within the age bracket of 36 – 40years, 19 respondents representing 5.8 percent were within the age bracket of 45-50 years while 88 respondents representing 27.0 percent were within the age bracket of 51 years and above. this implies that greater proportion of the respondents fall within the ages of 36 40 years. 4.3 data presentation and analyses i. 4.3.1 the effect of continuous improvement process on operational efficiency in southeast nigeria's food industry. iii. table 4.3.1.1: responses on the effect of continuous improvement process on operational efficiency in southeast nigeria's food industry. 5 sa 4 a 3 n 2 d a 1 sd ∑fx x sd decisi on 1 there is improvement to service which promotes best outcomes 900 180 55.2 140 35 10.7 129 43 13.2 84 42 12. 9 26 26 8.0 1,279 326 100. 0 3.92 1.385 agree 2 continuous improvement enables the organisations to make an ongoing 915 183 56.1 112 28 8.6 117 39 12.0 86 43 13. 2 33 33 10.1 1263 326 3.87 1.453 agree mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 83 | p a g e commitment to change and apply better success 100. 0 3 the continuous, interactive improvement is linked with innovation which helps customers in getting better services. 640 128 39.3 112 28 8.6 279 93 28.5 66 33 10. 1 44 44 13.5 1141 326 100. 0 3.5 1.433 agree 4 small incremental changes add up to significant results that prevent damaged goods. 725 145 44.5 324 81 24.8 93 31 9.5 26 13 4. 0 56 56 17.2 1224 326 100. 0 3.75 1.481 agree 5 continuously reviewing results and adopting new measures ameliorate spoilt goods 975 195 59.8 188 47 14.4 60 20 6.1 76 38 11. 7 26 26 8.0 1325 326 100. 0 4.06 1.358 agree total grand mean and standard deviation 19.1 7.11 source: field survey, 2024 table 4.3.1.1., 215 respondents out of 326 representing 65.9 percent agreed that there is improvement to service which promotes best outcomes with mean score 3.92 and standard deviation of 1.385. 211 responden4ts representing 64.7 percent agreed that continuous improvement enables the organisations to make an ongoing commitment to change and apply better success with mean score of 3.87 and standard deviation of 1.453. 156 respondents representing 47.9 percent agreed that the continuous, interactive improvement is linked with innovation which helps customers in getting better services with mean score of 3.5 and standard deviation of 1.433. 226 respondents representing 69.3 percent agreed with that small incremental change add up to significant results that prevent damaged goods mean score of 3.75 and 1.481. 242 respondents representing 74.2 percent agreed that continuously reviewing results and adopting new measures ameliorate spoilt goods with a mean score of 4.06 and standard deviation 1.358. table 4.3.4.1 the effect of eliminating waste on operational efficiency in southeast nigeria's food industry. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 84 | p a g e table 4.3.4.1: responses on the effect of eliminating waste on operational efficiency in southeast nigeria's food industry. 5 sa 4 a 3 n 2 d a 1 sd ∑fx x sd decisi on 1 the food and beverage firms reduce excess inventory to increase the profitability. 555 111 34.0 396 99 30.4 45 15 4.6 20 4 68 20 .9 33 33 10.1 1233 326 100. 0 3.78 1.399 agree 2 the organization converts raw materials into service to help increase cash flow 715 143 43.9 540 135 41.4 48 16 4.9 6 3 .9 29 29 8.9 1338 326 100. 0 4.10 1.148 agree 3 adopting justin – time services reduce expenses of the organization 960 192 59.8 376 94 28.8 45 15 4.6 36 18 5.5 7 7 2.1 1424 326 100. 0 4.37 .957 agree 4 investing in efficiency improvements in the organisation attracts cash flow. 835 167 51.2 464 116 35.6 39 13 4.0 36 18 5.5 12 12 3.7 1386 326 100. 0 4.25 1.022 agree 5 ordering exactly the right number of products drives income. 425 85 26.1 648 162 49.7 39 13 4.0 10 6 53 16. 3 13 13 4.0 1231 326 100. 0 5.22 1.124 agree total grand mean and standard deviation 21.7 2 5.65 source: field survey, 2024 table 4.3.4.1., 210 respondents out of 326 representing 64.4 percent agreed that the food firms reduces excess inventory to increase the operational efficiency with mean score 3.78 and standard deviation of 1.399. 278 respondents representing 85.3 percent agreed that the organization converts raw materials mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 85 | p a g e into service to help increase cash flow with mean score of 4.10 and standard deviation of 1.148. 286 respondents representing 88.6 percent agreed that adopting justin – time services reduce expenses of the organization with mean score of 4.37 and standard deviation of .957. 283 respondents representing 86.8 percent agreed that investing in efficiency improvements in the organisation attracts cash flow with mean score of 4.25 and standard deviation of 1.022. 247 respondents representing 75.8 percent agreed that ordering exactly the right number of products drives income with a mean score of 5.22 and standard deviation 1.124. 4.4 test of hypotheses 4.4.1 hypothesis one: continuous improvement process has significant effect on the operational efficiency in southeast nigeria's food industry. one-sample kolmogorov-smirnov test there is improveme nt to service which promotes better outcomes. continuous improvement enables the organisations to make an ongoing commitment to change and apply better success. the continuous, interactive improvement is linked with innovation which helps customers in getting better services. small incremental changes add up to significant results that prevent damaged goods continuous ly reviewing results and adopting new measures ameliorate spoilt goods n 326 326 326 326 326 uniform parameters a,b minimu m 1 1 1 1 1 maximu m 5 5 5 5 5 most extreme differences absolute .552 .561 .393 .445 .598 positive .080 .101 .135 .172 .080 negative -.552 -.561 -.393 -.445 -.598 kolmogorovsmirnov z 9.969 10.135 7.089 8.031 10.800 asymp. sig. (2tailed) .000 .000 .000 .000 .000 a. test distribution is uniform. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 86 | p a g e b. calculated from data. decision rule if the calculated z-value is greater than the critical z-value (i.e. zcal > zcritical), reject the null hypothesis and accept the alternative hypothesis accordingly. result with kolmogorov-smirnon z – value of 7.098 < 10.089 and on asymp. significance of 0.000, the responses from the respondents as display in the table is normally distributed. this affirms the assertion of the most of the respondents that continuous improvement process had significant positive effect on the operational efficiency in southeast nigeria's food industry. decision furthermore, comparing the calculated zvalue of 7.098 < 10.089 against the critical zvalue of .000 (2-tailed test at 97percent level of confidence) the null hypothesis was rejected. thus, the alternative hypothesis was accepted which states that continuous improvement process had significant positive effect on the operational efficiency in southeast nigeria's food industry. 4.4.2 hypothesis two: eliminating waste has significant effect on operational efficiency in southeast nigeria's food industry. one-sample kolmogorov-smirnov test the food and beverage firms reduce excess inventory to increase the profitability the organizatio n converts raw materials into service to help increase cash flow. adopting justin – time services reduce expenses of the organizatio n investing in efficiency improveme nts in the organisatio n attracts cash flow. ordering exactly the right number of products drives income. n 326 326 326 326 326 uniform parametersa,b minimum 1 1 1 1 1 maximum 5 5 5 5 5 most extreme differences absolute .394 .603 .627 .618 .508 positive .101 .089 .021 .037 .040 negative -.394 -.603 -.627 -.618 -.508 kolmogorov-smirnov z 7.117 10.883 11.326 11.160 9.166 asymp. sig. (2-tailed) .000 .000 .000 .000 .000 a. test distribution is uniform. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 87 | p a g e b. calculated from data. decision rule if the calculated z-value is greater than the critical z-value (i.e. zcal > zcritical), reject the null hypothesis and accept the alternative hypothesis accordingly. result with kolmogorov-smirnon z – value of 7.117 < 11.160 and on asymp. significance of 0.000, the responses from the respondents as display in the table is normally distributed. this affirms the assertion of the most of the respondents that eliminating waste had significant positive effect on operational efficiency in southeast nigeria's food industry. decision furthermore, comparing the calculated zvalue of 7.117 < 11.160 against the critical zvalue of .000 (2-tailed test at 97percent level of confidence) the null hypothesis was rejected. thus, the alternative hypothesis was accepted which states that eliminating waste had significant positive effect on operational efficiency in southeast nigeria's food industry. from the result of the hypothesis one, the calculated zvalue of 7.098 < 10.089 against the critical z value of .000 which implies that continuous improvement process had significant positive effect on the operational efficiency in southeast nigeria's food industry. the hypothesis two, the calculated zvalue of 7.117 < 11.160 against the critical zvalue of .000 which implies that eliminating waste had significant positive effect on operational efficiency in southeast nigeria's food industry. 5 conclusion in conclusion, the application of sustainable lean six sigma in southeast nigeria's food industry has demonstrated a significant positive effect on operational efficiency. the continuous improvement process has led to enhanced performance by fostering a culture of ongoing refinement and adaptation. additionally, the focus on eliminating waste has resulted in more streamlined operations, reducing costs and increasing productivity. these findings indicate that the integration of sustainable lean six sigma principles can effectively address the unique challenges faced in this sector, ultimately driving improvements in efficiency and competitiveness. moving forward, stakeholders should continue to leverage these methodologies to sustain growth and enhance operational capabilities within the industry. recommendation to maximize the benefits of sustainable lean six sigma in southeast nigeria's food industry, the following recommendations are proposed: i. organizations should invest in comprehensive training for employees at all levels to deepen their understanding of continuous improvement processes. this will empower staff to identify inefficiencies and contribute to ongoing enhancement efforts. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 88 | p a g e ii. companies should adopt specific strategies focused on waste elimination, such as value stream mapping and root cause analysis. regular assessments should be conducted to identify areas for improvement and track progress. references abubakar, m., & igbokwe, o. (2022). lean principles in food manufacturing: a comprehensive review. food production and technology. ajayi, t. (2023). capacity building for lean six sigma in nigeria: training needs assessment. journal of training and development. antony, j., snee, r., hoerl, r. j. i. j. o. q., and management, r. (2017). lean six sigma: yesterday, today, and tomorrow. today, tomorrow 34 (7), 1073–1093. doi:10.1108/ijqrm 03-2016-0035 bessant, j., & maher, p. (2009). next generation continuous improvement: beyond lean thinking. management decision. chinedu, a. (2023). the importance of sustainability in the nigerian food industry. journal of environmental management. deming, w. e. (2000). out of the crisis. mit press. eze, s. (2023). sustainable practices in the nigerian food sector: opportunities and challenges. sustainability journal. ganjavi, n., and fazlollahtabar, h. j. i. t. o. e. m. (2021). integrated sustainable production value measurement model based on lean and six sigma in industry 4.0 context. ieee trans. eng. manag. 70. huang j, irfan m, fatima ss and shahid rm (2023), the role of lean six sigma in driving sustainable manufacturing practices: an analysis of the relationship between lean six sigma principles, datadriven decision making, and environmental performance. front. environ. sci. 11:1184488. doi: 10.3389/fenvs.2023.1184488 jørgensen, f., boer, h., & gertsen, f. (2003). barriers to continuous improvement. international journal of operations & production management. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 89 | p a g e liker, j. k. (2004). the toyota way: 14 management principles from the world's greatest manufacturer. mcgraw-hill. ndukwe, c. (2023). supply chain efficiency in southeast nigeria: a lean six sigma perspective. journal of supply chain management. njoku, j. c. (2021). leadership and continuous improvement in the nigerian food and beverage sector. walden dissertations and doctoral studies collection. https://scholarworks.waldenu.edu/viewcontent.cgi?article=12379&context=dissertations nwankwo, e., & chukwu, n. (2024). quality management in the nigerian food industry: a six sigma approach. international journal of quality & reliability management. oakland, j. s. (2014). statistical process control. routledge. obi, p. (2024). infrastructure challenges in the nigerian food industry: implications for lean six sigma. journal of infrastructure development. ogbuke, j. c., eneh, e. o., & okwor, e. o. (2023). employee performance management and performance of food beverage manufacturing firms in enugu state. contemporary journal of management| issn 2766-1431. okafor, a. (2022). optimizing resource use in the food industry: the role of lean six sigma. nigerian journal of business and management. oko, j. (2023). challenges in southeast nigeria's food supply chain. journal of african business. okwudili, c. (2024). enhancing product quality in food processing: integrating six sigma into lean practices. quality assurance in food technology. onoh, c., & hubs, s. (2022). sustainability development on the waste reduction of food, beverage, and tobacco manufacturing firms in enugu state. zenodo. https://doi.org/10.5281/zenodo.7199486 rolker, h., eisler, m., cardenas, l., deeney, m., & takahashi, t. (2022). food waste interventions in low-and-middle-income countries: a systematic literature review. sciencedirect. https://www.sciencedirect.com/science/article/pii/s0921344922003706 siriram, r. (2019). barriers to continuous improvement implementation in manufacturing organizations. sa journal of human resource management. mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.sciencedirect.com/science/article/pii/s0921344922003706 american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 90 | p a g e suárez-barraza, m. f., kristensen, k., & dahlgaard, j. j. (2012). continuous improvement. international journal of productivity and performance management. tortorella, g. l., & fettermann, d. c. (2018). implementation of lean six sigma in the brazilian industry. international journal of production economics. uche, k. (2024). cultural factors affecting lean six sigma implementation in nigeria. journal of organizational culture. yaduvanshi, d., and sharma, a. j. j. o. h. m. (2017). lean six sigma in health operations: challenges and opportunities ‘nirvana for operational efficiency in hospitals in a resource-limited setting. j. health manag. 19 (2), 203–213. doi:10. 1177/0972063417699665 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 1 | p a g e the nexus of government expenditure and financing mechanisms: insights from ghana dr. esi ama anaman department of banking and finance, school of business, university of education, winneba, ghana abstract: government expenditure is a pivotal driver of economic growth globally, facilitating infrastructure development and institutional support. however, the financing channels for these expenditures play a crucial role in shaping economic trajectories. this paper delves into the intricate relationship between government expenditure and its financing modes. while conventional wisdom dictates that government spending should primarily rely on direct and indirect taxes, as well as nontax revenues, many developing nations resort to borrowing to bridge budgetary shortfalls. this paper explores the dynamics of these financing methods and their mutual influences. it sheds light on the challenges faced by governments in balancing their budgets and underscores the imperative of sustainable fiscal policies. keywords: government expenditure, financing channels, economic growth, fiscal policies developing nations introduction throughout the world, government expenditure remains an avenue that provides a strong impetus for spurring economic growth and indeed it is the government expenditure outlays in every economy that enable the state to create the necessary infrastructure and the relevant institutional mechanisms to support the multiplicity of economic activities across the spectrum. whilst it is recognized that the government expenditure is critical in every economy, it must also be noted that such expenditures are usually greatly influenced by the financing channels through which the expenditures are derived. much as it is true that the trajectory of government expenditure has riposte on the various financing modes, it is also equally an established fact that these financing modes can affect each other .in the literature, there is seem to be a general view that government expenditure must as much as possible be financed from the conventional sourcesdirect and indirect tax as well as non-tax revenues. however, in the developing world especially, it has become customary to leverage on borrowing modes as a way of meeting the government expenditure levels required in the budget plans as the conventional revenue raising mechanisms always fall way short of the intended targets sufficient enough for the government operations to be pursued seamlessly. within these contexts, there has emerged a strand of empirical research which seeks to examine the fiscal behaviours of governments and in particular how the availability of the borrowing modes dampens the resolve of the fiscal authorities to be up and doing and maximize revenues. this is wellarticulated in the early studies in fiscal behaviours; griffin (1970), heller (1975) and mosley et al.(1987) etc. one important aspect of this discussion centers on the aid effect on the other financing modes and government expenditure itself. according to osei, morrissey and lloyd (2005), studies on the effects of mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 2 | p a g e aid on fiscal behaviour can generally be categorized into those which direct their attention at investigating the effects of aid on the composition of government expenditure and those which in addition to examining the effect of aid on the allocation of government expenditures also assess aid effect on tax effort and government borrowing. in ghana, just as in a lot of the developing countries, the pressure on successive governments to meet the aspirations of the citizenry has meant that government has to go out of the way to find the needed resources to ensure that programmes and projects are duly executed even against the backdrop of insufficient revenue generated and this situation has persisted for a long time. there are some who believe strongly that this has continued to exist because of the opportunity which is always open for the government to look anywhere to fund its activities even though government could be more prudent in staying reasonably within its revenues limits or aggressively pursuing the much needed tax reforms which could result in enhanced revenue collection. a number of questions thus arise. does the availability of other government expenditure financing modes encourage government to continue to increase expenditure? do aid and borrowing dampen tax revenue generation? do grants and borrowing trigger differential fiscal behaviour by government? again, how does the availability of the non-tax government expenditure financing modes influence the allocation of government expenditure? gleaning the literature, it is obvious that contemporary studies in this arena have moved forward the frontiers of knowledge established by the earlier ones, eg griffin (1970), heller (1975) and mosley et al (1987) and khilji and zampelli (1994). the most recent study conducted within the ethiopian context by mascagni and timmis (2014) develops a model of fiscal behaviour encompassing tax and non-tax revenues, government expenditure, grants and loans which modifies osei et al (2005) and lloyd et al (2009) which include government (capital and recurrent), total tax revenue and domestic borrowing for the former and foreign financing, capital expenditure, recurrent expenditure, tax revenue and domestic borrowing in the case of the latter. in these studies, the researchers did not avert their minds to the fact that the dynamics may not possibly be the same if the tax financing source is disaggregated into direct and indirect tax channels. in other words, in this study apart from categorizing aid as grants and loans, we also include direct and indirect tax financing as separate variables. this is because we believe that aid and borrowing may not necessarily have the same effects on direct and indirect taxes. thus the main difference between the present study on one hand and that of osei et al (2003) and other previous but related studies on the other hand is that it we introduce the hypothesis that the responses of direct and indirect taxes respectively to borrowing-both external and domestic are different and also have the benefit of current data for the analysis to determine whether prevailing circumstances deviates from osei et al(2003). the rest of the paper would be arranged in the following manner; section ii is devoted to examining the fiscal policy environment, trends in fiscal management and borrowing by the government of ghana over the years. in section iii, we proceed to discuss the theoretical and empirical issues relating to fiscal behaviour by government especially focusing on aid and borrowing and their effects on government fiscal management. section iv sets out the econometric approach and a brief description of the data set for the empirical analysis whilst section v reports the results of the data analysis and proceeds to discuss them. finally, section vi covers the synopsis and conclusions from the study. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 3 | p a g e section iiː trends in fiscal management in ghana when one does a careful study of fiscal policy in ghana, one can identify clear, distinct periods of unique fiscal behaviours? in the main, the periods the early 1960s to the late 1960s, 1969-1972, 1972-1983, 1983-1991 and from 1992 to the present can be associated with peculiar fiscal behaviours though in some of the periods the fiscal management approaches appear similar. in the sixties, with the emergence of the country from colonial rule there was an urgent need for the government to put in place structures of state and build critical infrastructure like educational and health institutions while also embarking on rapid industrialization and modernization and as such, government committed massive public expenditures into achieving these objectives. during this period, a good chunk of the expenditures were financed from domestic sources with very little coming by way of aid inflows. the succeeding period however saw a modification of fiscal behaviour as government substantially disengaged from the previously pervasive role of the government in the economy, in line with the philosophy of the people in authority at the time and by virtue of the programme that they entered into with the bretton woods institutions, government at the time embarked on privatization of a good number of the state enterprises. osei et al(2003) submit that from the 1960s to early 1970s , aid inflow was relatively insignificant and constituted about 2% of gdp and roughly around 12% of all revenues available to government. in the middle to the late 1970s, there was a shift in the behaviour of the government as government activities were driven essentially by monetary expansion through borrowing from the bank of ghana as domestic revenues sharply reduced on account of the decline in the real side economic activities precipitated by inappropriate policies introduced by the then military rulers coupled with adverse economic and external trade climate. the situation was compounded by the repudiation of loans which had been contracted by previous governments leading to the virtual drying up of the foreign aid inflows. in early 1980s, even though the country had returned to constitutionalism, the country continued to suffer from the decline in economic activities as result of the deterioration of the macroeconomic environment. according durdonoo’s (2000) calculations, taxes on income and property fell from 2.8% of gdp to a mere 0.98% of gdp in 1983 whilst tax revenue from domestic activities was down to sub one percent in 1983 from approximately 5% of gdp. proceeds from international transactions also dropped from 12% in 1970 to 2.7% in 1983.the precarious revenue situation in the country is illustrated by osei et al(2003) when they intimate that overall the tax levels took a nosedive between 1970 and 1983,plummeting from a high level of about 700 million usd to 160million usd. the fiscal situation in the country however improved dramatically after the economic recovery programme (erp) was launched. indeed it is estimated that between 1983 and 1998, tax revenue collections shot up in dollar terms to 1.3 billion usd representing a more than six fold increase of the 1983 level. generally speaking, total government revenue is measured in some calculations to have increased twenty-six times between 1983 and 1990. osei et al (2003), suggest that since this period was largely marked by good amount of aid inflows, it appears that the aid flows did not undermine government's tax revenue mobilization. during the period whilst tax revenue and aid inflows were increasing, government expenditure also continued to increase though at a slower pace, on account of the some of the erp measures which had been introduced to stem rapidly increasing government expenditure experienced in the period before erp. the post 1992 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 4 | p a g e period has generally been characterized by rapidly expanding government expenditure largely fueled by the people across the country making demands on politicians and indeed some actually using the provision of certain projects and infrastructure as a tool for cajoling and blackmailing functionaries of government. however, revenue mobilization during the period has not kept pace with government expenditures and the peoples aspirations for that matter. indeed for a long time now total government revenue is consumed largely by payment of emoluments, statutory obligations and then interests payments, which itself is a product of the increasing imperative for borrowing by government. the argument that the political structure in ghana has tended to reinforce fiscal behaviours by successive governments in the fourth republic is amplified when one considers ghana’s fiscal position in election years. election cycles have generally exacerbated the problem and this is evidenced by the fiscal deficits which were recorded in the years 2008, 2012 and 2016 respectively. one major development which has also to a great extent influenced fiscal behaviours especially post 2012 has been the reclassification of ghana as a middle income country .this has restricted the country's access to concessionary loans and grants and compelled governments to syndicate relatively expensive loans from the international commercial markets on account of the fact that ghana's tax to gdp ratio is woefully below the average middle income levels. indeed it is very instructive to note that in the west africa sub region, ghana's tax collections as a percentage of gdp is the lowest. against this background, the issuances of euro bonds have become an important feature of government strategy for financing projects and programmes of government as missing revenue targets have become a constant feature of fiscal management in ghana. section iii ːtheoretical, conceptual issues and empirical underpinnings fiscal policy formulation is one of the basic functions of every government in the sense that it primarily involves the strategies that governments use to raise income to be able finance government's activities. in the main, most governments rely on revenues generated from taxation as the most reliable source of income. however, in most parts of the world particularly the developing world because of the demands on government to ensure rapid development and the exigencies of the time, they are unable to stick to the incomes available to them through taxation and therefore have to resort to other means of financing their programmes and projects. these come in the form of foreign aidloans and grants and domestic borrowing. according to njeru (2004), one of the most critical issues which has been a subject of debate by economists in this area of research is whether or not the aid process is undermined by the ability of the aid receiving country to alter the their spending patterns to subvert the sectoral distribution of expenditure for designated projects. the general contention is that the ability of the recipient country to reallocate the aid can usually affect the intended economic performance envisaged under the aid structure. this is particularly the case when aid earmarked for developing critical infrastructure in a given economy is diverted into financing government consumption like catering for emoluments of workers and buying goods and services for government machinery rather than creating the required infrastructural overheads which then provide the necessary platform for increasing the level of economic activities. this is what economists usually refer to as aid fungibility. this is reinforced by bwire et al (2017) who contend that fungibility arises when aid recipients do not use the aid for purposes for which they were given by the donors. thus in many respects, a lot of the developing countries employ mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 5 | p a g e resources from aid to able to be able to deal with the deficits usually associated with their budgetary processes (devarajan et al, 1998, ali et al , 1999). these views are very replete in the fiscal response studies. for example matins (2007) asserts that one of the most fundamental issues which relate to the effectiveness of aid is how aid influences the government fiscal accounts. in particular, martins (2007) stresses that one critical pillar of the fiscal response studies is assessing how the aid itself is allocated between the various expenditure channels, the way it affects tax effort and then its effect on fiscal balance and debt sustainability. this is view is reinforced by mavrotas (2002) who stresses that since aid is given to a government, its impact on the overall economy is contingent on fiscal behaviour of the government. from the perspective of mascagni and timmis (2014), aid is usually a more politically expedient and convenient source of revenue and therefore has the tendency to discourage tax effort which in the literature is characterized as tax displacement. they however stress that this argument is stronger in respect of grants than loans because of the obvious fact that loans require future payments whereas grants do not. mascagni and timmis (2014) put forward another dimension of the aid–revenue debate which is that rather undermining the revenue efforts, aid may actually help strengthen tax administration and improve tax policies. again, it is argued that if aid is utilized properly and effectively it may promote economic activities, expand the economy and by that increase tax yields from the economy. in the view of njeru (2004), aid inflows into the developing countries has tended to create an ominous dependency mentality which seem to affect their economic performances and the absence of such funds greatly affect their budgets, usually coming with their attendant consequences. this is echoed by feyzioglu et al (1999) who posit that aid dependence is something which has widespread ramifications for countries. there is an also another dimension of the aid debate which is canvassed by martins(2007) .in his estimation apart from the fact that aid is sometimes used to offset domestic debts, it can trigger off extra government expenditures especially in aid funded projects which require some maintenance and recurrent expenditure. again aid programmes and projects which require counterpart funding may in reality also further put pressure on government's already overstretched finances and thus lead to mounting deficits. this scenario is what mcgillivray and morrissey (2000) describe as aid illusion. having regard to the fact that foreign aid may be associated with some challenges; the other viable alternative is borrowing from domestic sources to be able to undertake the necessary government activities. however, this avenue also comes with its own problems. one of the challenges that this poses is that it leads to a situation in which government enters the credit markets to compete with private entities for the available funds, a situation which generally inhibits the growth of privately engineered economic growth in an economy. this can in many respects also affect tax mobilization. aside of these issues ,it is often argued that in a lot of the developing countries, excessive reliance on borrowing modes to enable governments meet its commitments in terms of delivering the required services has invariably led to compounding debt servicing obligations and thereby constricting fiscal space as the piling of debts both internally and externally have tended to increasingly impose severe servicing and payments obligations on the government thereby limiting what the government can achieve within its resource envelop. studies in fiscal response has its origins in the 1970s starting with heller(1975) who used a utility based government fiscal behaviour function to show that the aid process has effects on how governments manage their fiscal operations . despite the vast array of mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 6 | p a g e research in this area, results from these studies have largely been inconclusive. according to mascagni and timmis (2014), this situation may be due to the fact that various studies adopted different methodologies and contexts. in his study, njeru (2004) assessed the impact of foreign aid on public expenditure in kenya and based on government welfare utility function specified government expenditure related to aggregated government revenues from tax and domestic borrowing sources, programme aid and project aid. the dynamic analysis indicated that aid does not affect government expenditure whilst it is also established that government is able to divert aid funds into government consumption expenditure. a similar study by osei et al (2003) modelled the fiscal effects of aid in ghana by particularly employing a dynamic impulse response functions. using the government utility maximization approach, two variants of the empirical model were specified; these are aggregate government expenditure ,domestic borrowing ,total government tax revenues and aid finance on hand and government capital expenditure, government consumption expenditure, domestic borrowing, total tax revenue and foreign aid. in the analysis, it is established that there are co-integrating relationships in both models. results also showed that in both models, aid finance and domestic revenues are in long run negatively related to domestic borrowing whilst government expenditure whether aggregated or disaggregated positively influences domestic borrowing .another important finding that issues from osei et al (2003) is that aid in ghana over the study period has generally been used to replace domestic borrowing as a method of financing government projects and programmes. the work of martins (2007) also explores further the aid-fiscal behaviour nexus within the context of the ethiopian economy and actually separates aid into two components-loans and grants based on the premise that fiscal response by government to them may be different. the conclusions from the estimations are that whilst aid finance positively affects total government expenditure, its effects on government consumption expenditure is less pronounced and that external borrowing has a bigger impact on public investment than grants. another important finding from this study is that aid finance undermines domestic revenue mobilization. in his contribution in the fiscal response and effectiveness of aid studies, mavrotas (2002) introduced a categorization of foreign aid into project aid, programme aid, technical assistance and food aid and based on the popular utility maximization approach obtained results which affirm that aid may be fungible. the study by mascagni and timmis (2014) also dealt with the fiscal effects of aid in ethiopia employing the co integrated vector autoregressive model based on the conventional heller utility maximization function. their model encompassed total government expenditure, tax and non-tax revenues, grants and loans .in the long run , government expenditure was established to be related to domestic revenue and foreign aid; there is a positive relationship between tax revenue ,grants and loans. in the short run too, government expenditure is established to be influenced positively by both grants and loans whilst the equation for tax shows that non-tax revenue, grants and loans are all positive determinants. the, loans variable is also impacted positively by non-tax revenue but negatively by tax revenues. the most recent study in this area, authored by bwire et al (2017) also sought to examine fiscal reforms and the effects of aid in uganda employing a dynamic analysis and to test whether aid flows lead to a full or less than a full change in government expenditure, determine if aid displaces tax effort as well as ascertain mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 7 | p a g e whether aid and domestic borrowing are substitutes in fiscal management in uganda. their analysis uncovered three co integrating equations for government expenditure, revenue and aid and found that in the long run aid leads to increased tax effort and public spending but a reduced domestic borrowing. section ivː empirical model according to osei et al (2003), there are two broad approaches adopted in the literature to examine the fiscal effects of aid. the first approach is the fungibility studies which attempt to assess aid effects on the spending patterns of the government and the other method which seeks to integrate revenue variables into a government utility function to determine the overall impact of the aid process on the fiscal behaviour of the government which they call the fiscal response models (frms). since the latter is more comprehensive in its outlook, it is more popular in the literature and has been adopted in most of the recent studies. this approach is based on the seminal work of heller (1975) which posits government allocating revenue among the different expenditure streams but subject to some budget constraints. in the model, government expenditure is usually categorized into government consumption and capital expenditure whilst government derives its income endogenously from conventional taxation sources and domestic borrowing. however, in these models, foreign aid is defined as an exogenous source of revenue which modifies the government budget constraints; even though it is assumed not to be relevant in the utility function of the government since it is not defined as one of the variables for which targets are set. against this background, osei et al (2003) set the maximum unconstrained value of the utility function represented by α0 as a quadratic expression defining a loss in the form below; u=α0–α1/2(gk-gk*)2-α2/2(gc-gc*)2-α3/2(r-r*)2-α4/2(d-d*)2 (1), where gk*, gc*,r* and d* are exogenous target values of government capital expenditure ,government consumption expenditure ,total government revenue and government borrowing from domestic sources. the above equation is thus maximized subject to the following budget constraints, gk = (1-ρ1)r + (1-ρ2)f +d (2) and gc=ρ1r+ ρ2f (3) where equations (2) and (3) are disaggregated equations derived from the total government expenditure constraints, of the form, gk +gc = r+f+d ( 4) from the above equations, it is taken that ρ2 represents the fraction of aid which is diverted into financing government consumption ;in other words the extent of the fungibility of aid .the implicit argument underlining this formulation is that when foreign aid is received , it is meant for capital investment .however , as the aid comes into the economy, a part of it is channeled into financing recurrent expenditure which means that mathematically, ρ2=0 ex ante but this according to osei et al (2003) is not in the real world realistic because aside of directing resources into investments in the economy, foreign aid sometimes finances certain components of government consumption ,particularly in the social sectors especially education and health, hence ρ2≠ 0 is an unrealistic assumption but ρ2> 0 at most times is the most realistic assumption to make. this situation occurs especially when aid comes in in the form of budgetary support or even strictly as aid funded project in an economy. with the inherent limitations of this approach, franco-rodriguez et al (1998) modified mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 8 | p a g e the approach by defining a utility function such that foreign aid is interacted and integrated directly into the function thereby making aid endogenous. the argument put forward is that generally governments define targets for aid flows and this tends to influence their fiscal behaviour. as a result, the quadratic utility loss function expressed in (1) becomes u =α0– α1/2(gk-gk*)2α2/2(gcgc*)2α3/2(r-r*)2 –α4/2(f-f*)2 -α5/2(d-d*)2 (5) whilst the constraining function becomes gc ρ1r + ρ2f + ρ3d (6) since external flow of funds tend to influence how resources are allocated among competing needs. in this current paper, we further redefine (5) as u =α0– α1/2(gk-gk*)2α2/2(gcgc*)2α3/2(dt-dt*)2 – α4/2(it-it*)2 -α5/2(f-f*)2-α6/2(d-d*)2– α7/2(gr gr*)2 (7) subject to gc ρ1dt + ρ2it + ρ3f+ρ4d +ρ5gr (8) the implicit meaning of the above is that both direct and indirect sources of revenue are endogenously determined in addition to the other sources of revenue. in this formulation, we separate f, external borrowing from gr, grants because in the literature, it is argued that most governments treat loans differently from grants which are not to be paid back. though franco-rodriguez et al (1998) provided an improvement of the earlier fiscal response models (frms), they did not address the methodological challenges that most of the earlier studies were fraught with. osei et al (2003) therefore in their study changed direction to the new vector autoregressive (var) approach which in their view provided the means to go round the existing problematic methodological frameworks whilst making it easier to define the dynamic linkages between the various components of the budget. building upon osei et al(2003), m'amanja et al (2005),martins (2010),bwire et al(2017) and mascagni and timmis(2014), we specify two variants of the var model involving aggregate and disaggregated government expenditure models belowː (ge, dt, it, db, fb, gr) and (gk, gc, dt,it, db, fb, gr) respectively where gk is government capital expenditure, gc is the government consumption expenditure, it is indirect tax revenue ,dt defines direct tax revenue, db represents domestic borrowing ,fb is used for external borrowing whilst gr is grants obtained from various external sources and finally ge defines aggregate government expenditure. in these models above, the application of the var allows us to determine whether the variables are in the long run are dynamically related whilst at the same time providing useful information about the short run properties of the models. generally an orthodox var model is defined as a dynamic system in which all the variables are endogenously determined and each of them is represented as a function of its own lags and the lags of the other endogenous variables. the advantage from this, according blanchard and peroti (1999) is that the system assumes a priori there is no direction of causation among the variables of interest. mathematically, we define our var (k) as xt=φ1xt-1 + φ2xt-2 +φ3xt-3 +…..+φkxt-k+ πrt + t, t=1,2,----,n. (9) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 9 | p a g e in the above, xt is defined as a (m × 1) vector of non-stationary variables whose order of integration is one and which are jointly determined, whilst the rt is also a vector of deterministic variables of dimension, (p× 1 ). the coefficients π and φ which are to be estimated are matrices of the dimension (m p) and (m m) respectively whereas the disturbance term t is a vector of dimension (m 1) and k is the lag length of the system. using the johansson (1991) approach, the general var can be transformed into an error correction model, usually referred as a restricted var of the form ∆xt=α+ψxt+τ∆xt-1+……..+τk-1∆xt-k+1+ ∈t,t=1,2,-----,n. (10) in this expression, we use the τs to define the short run characteristics of the variables. specifically the coefficients of the lagged dependent variable represent the feedback in the system whilst the coefficients of the other endogenous variables in the system define the pass through effects of these variables on the dependent variable. the matrix of coefficients ψ represents the long run equilibrium relationships among the variables of interest in the system. we start the analysis by examining the stationarity properties of the variables. this is important because in empirical analysis, most macroeconomic variables have been found to be non-stationary as result of their time dimensions and as a result prejudice and distort estimations. this thus makes it imperative for the non-stationary properties to be dealt with. in the words of thomas (1993),if a variable is stationary, it means that the time path traced by the variable is stable. in other words, a series is said to be stationary when it has a spectrum which is finite but non-zero at all frequencies. mathematically determining the stationarity of a series yt involves finding whether the equation yt = α0+α1t +α + ut (11) follows an ar process. typically, assessing the stationarity properties of variables involves testing the following hypotheses; h0ː the series has unit roots ,h1 ːthe series has no unit roots. in the conventional var system, the order of integration of the variables allowed is one meaning that the each variable in the system must attain stationarity after first differencing. beyond examining the stationarity status of the variables, we employ the johansson approach to test for co integration; that is to ascertain whether there exists a linear combination of the variables which is also stationary. according to anaman et al (2017),co integration is the statistical implication of the existence of a long run equilibrium relationship between economic variables. soli et al (2008) also characterize co integration as representing the tendency of variables to drift together over time. the obvious advantage in the johansson approach over the other methods of determining long run equilibrium relationships is that it makes it possible to uncover more one co integrating vector at a time. to proceed with this, we test, h0ːthere is no long co integrating vector in the system, as opposed to h1ː at least one co integrating vector exists in the system. in a var system, a major requirement is that for variables to be co integrated they must have the same order of integration. this is underscored by enders (1995) who emphasizes that for variables to be co integrated they must be integrated of the same order and have a linear combination of residual sequence which is stationary . mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 10 | p a g e in order to extract more information from the system and sufficiently understand the dynamic relationships among the variables in our system, we undertake impulse response analysis. the importance of the impulse response analysis is buttressed by osei et al (2003).according to them, when the interrelationships that characterize economic systems are considered, it is always more informative to undertake an impulse response analysis especially when the analysis involves uncovering short and long run relationships within a given system. osei et al (2003) assert that the advantage that the impulse response analysis has is that it captures the net effect of both the direct and indirect impact of a shock, not only in the long run but also at all periods after the shock has been transmitted. johnston and dinardo (1997) underline the relevance of the impulse response function by intimating that it traces the chain reaction or the knock-on effects arising from one standard deviation perturbation in one innovation in the system over time on the other variables in the system granted that no other shock affects the system afterwards. impulse response functions can thus measure both the current and future values of the given endogenous variable to one standard deviation shock in one of the innovations. lutkepohl and rimmers (1992) also reinforce the importance and suitability of the impulse response in a dynamic analysis. generally, the impulse response function can be defined as the moving average representation of our equation (9) ,expressed as xt πrt-1 (12), where, the as are of dimension (m m) apart from the impulse response analysis, we employ the forecast error variance decomposition from our var model to ascertain and predict the most important innovation for each endogenous variable along the entire time horizon. this will enable us to identify which variable is most relevant in achieving a given objective. according to bhasin (2004), in a var model, variance decomposition is usually employed to isolate the innovations of the endogenous variables into the portions which can be attributed to own innovations and that which are due to innovations of other variables in the system and in doing so we recourse to the cholesky method based on sim's recursive approach. data set for the purposes of this study, we employ annual series for all the variables from 1978 to 2017 .the variables were largely extracted from the world bank databases and supported with data from ghana statistical service(gss) and the bank of ghana. results of data analysis test for stationary (unit roots tests) in the tables below, we report the results of the stationary tests. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 11 | p a g e table1ːunit root tests of log levels of variables variable (log levels) adf test statistic prob level phillip perron test statistic prob level ldb -2.298031 0.1778 -1.917340 0.3212 ldt -1.682815 0.4318 -1.597301 0.4744 lfb -0.413932 0.8968 -0.404310 0.8985 lgc -0.141300 0.9375 -0.072070 0.9455 lge -1.130286 0.6941 -1.120580 0.6980 lgk -0.724807 0.8286 -0.710912 0.8322 lgr -1.946252 0.3085 -1.946252 0.3085 lit -2.194319 0.2115 -2.057338 0.2623 sourceː author’s calculations using e views table 2 ː unit root tests of first differences of variables variable (first differences) adf statistic prob. level phillips perron statistic prob. level dldb -4.411600 0.0012 -4.425672 0.0011 dldt -5.736767 0.0000 -9.443833 0.0000 dlfb -6.196007 0.0000 -6.195848 0.0000 dlgc -5.475900 0.0001 -5.466520 0.0001 dlge -5.076895 0.0002 -4.944660 0.0003 dlgk -5.107552 0.0002 -5.032008 0.0002 dlgr -6.775472 0.0000 -6.799061 0.0000 dlit -7.863574 0.0000 -9.818331 0.0000 sourceː generated from e views estimations from tables 1 and 2, we infer that all variables are non-stationary at log levels but are stationary at first differences .this means that the order of integration of all variables is one. we proceed to determine the optimal lag for the disaggregated and the aggregated models respectively. for the disaggregated model, we determine whether or not there is first or higher order serial correlation in the initial model by performing the autocorrelation lm test. the test results are presented below table 3 included observations: 37 lags lm-stat prob 1 39.13263 0.8424 2 48.47734 0.4942 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 12 | p a g e from the results generated , we fail to reject the null hypothesis that there is no serial correlation in the model meaning that the model is can be correctly specified by using the first lags of all variables. we proceed to corroborate the above finding by determining the optimal lag structure of the model using various criteria. the table below shows the selected optimal lag structure using various criteria for the disaggregated model. table 4 included observations: 36 lag logl lr fpe aic sc hq 0 39.11941 na 3.96e10 1.784412* 1.476505 -1.676944 1 70.04318 48.10365* 1.14e09* 0.780177 1.683075* 0.079564* 2 114.0449 51.33531 2.08e09 0.502493 4.116104 1.109521 3 170.9768 44.28037 3.70e09 0.943154 5.830788 1.421133 * indicates lag order selected by the criterion lr: sequential modified lr test statistic (each test at 5% level) the results confirm that appropriate lag to be used in the analysis is one considering that four out of the five criteria settle on lag one. in the case of the aggregated model, the test for 1st and 2nd order serial correlation is presented in the table below. table 5 null hypothesis: no serial correlation at lag order h sample: 1978 2017 included observations: 38 lags lm-stat prob mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 13 | p a g e 1 47.48022 0.0955 2 50.66403 0.0533 from these statistics, we conclude therefore that in the aggregated model, there is evidence of serial correlation in the residuals at lags one and two so we proceed to determine the optimal structure for the model. the following table shows the selection analysis. table 6 included observations: 36 lag logl lr fpe aic sc hq 0 26.83531 na 1.27e-08 -1.157517 0.893598* 1.065402* 1 59.96044 53.36827 1.53e-08 0.997802 0.849636 -0.352997 2 101.9825 53.69481 1.30e-08 -1.332359 2.098598 -0.134863 3 156.1070 51.11764* 7.91e09* 2.339279* 2.675197 0.589093 * indicates lag order selected by the criterion lr: sequential modified lr test statistic (each test at 5% level) from the results shown in the table above, we firmly conclude that the optimal lag for the aggregated model is three based on the different criteria. having completed the tests for stationarity and optimal lag structures for the two models we then enter the log levels of the variables in the two models into the johansson test for co integration, the results of which are presented in the tables below. table 7 johanssen test for co integration for the disaggregated model series: lgc lgk ldt lit lfb ldb lgr unrestricted cointegration rank test (trace) hypothesized trace 0.05 no. of ce(s) eigenvalue statistic critical value prob.** none * 0.716509 146.2219 134.6780 0.0087 at most 1 0.623665 98.31997 103.8473 0.1098 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 14 | p a g e at most 2 0.424277 61.18352 76.97277 0.4275 at most 3 0.318226 40.20262 54.07904 0.4603 at most 4 0.256078 25.64646 35.19275 0.3620 at most 5 0.187746 14.40532 20.26184 0.2625 at most 6 0.157301 6.503534 9.164546 0.1553 trace test indicates 1 cointegratingeqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **mackinnon-haug-michelis (1999) p-values sourceː generated from e-views. from the results presented above, we reject the hypothesis that there is no co integration in our series in favour of the alternative hypothesis that there is one co integrating equation in our model. using the un-normalized coefficients, we derive the long run equation for government consumption expenditure below by normalizing on government consumption expenditure. table 8 long run equation for government consumption expenditure lgc lgk ldt lit lfb ldb lgr c 1.000000 0.265024 0.945707 4.311506 2.071946 0.967689 -1.537559 38.95029 (0.32764) (0.58921) (0.72563) (0.50301) (0.43209) (0.30392) (6.55926) sourceː generated from e-views. from the long run equation, we observe that government capital expenditure, direct taxes, indirect taxes as well as domestic borrowing have negative effect on government consumption expenditure with about 27%,95%, 431%and 97% impacts respectively on government consumption expenditure with a 100% increase in each of the variables. however, in the long run , borrowing from abroad and grants are financing sources which have positive impact on government consumption expenditure. specifically, a 100% increase in external borrowing in the long run triggers a little over 207% increase in government consumption expenditure whilst a 100% increase in grants also leads to a 154% upswing in government consumption expenditure. in the table below, we present the results of the tests for co integration in the aggregated model. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 15 | p a g e table 9: test for co-integration in the aggregated model series: lge ldt lit lfb ldb lgr hypothesized trace 0.05 no. of ce(s) eigenvalue statistic critical value prob.** none * 0.642654 127.6208 103.8473 0.0006 at most 1 * 0.606512 88.51696 76.97277 0.0050 at most 2 0.493073 53.07422 54.07904 0.0613 at most 3 0.275454 27.25744 35.19275 0.2761 at most 4 0.199710 15.01346 20.26184 0.2256 at most 5 0.158281 6.547753 9.164546 0.1525 trace test indicates 2 cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level sourceː output generated by author from e-views using data in the table above, we test the null hypothesis that there is no co integrating relationship in our series against the alternative hypothesis that there is at least one co integrating relationship. from the table above we fail to accept the hypothesis that there is at most one co integrating relationship but fail to reject the null hypothesis that there are most two co integrating vectors in our model. this thus means that in our series, we can uncover two co integrating relationships. in the table below, we present the first co integrating equation from our model. table10. long run function for aggregated government expenditure lge ldt lit lfb ldb lgr c 1.000000 7.033729 18.66572 -8.250564 -0.279982 -6.581200 259.1778 (2.36778) (3.53366) (1.53188) (1.71301) (1.37989) (30.0200) sourceː generated by author using e-views estimation. from the results, we determine that in the long run, direct and indirect taxes negatively impact on government expenditure whereas external borrowing, domestic borrowing and grants exert a positive effect on government expenditure. the estimated negative long run impacts of direct and indirect taxes on government expenditure are respectively 7.03 and 18.67 units as each of these increases by a unit. on the other hand, a unit increase of each of external borrowing, domestic borrowing and grants leads to about 8.3, 0.28 and 6.58 units increase in government expenditure. we derive the second co integrating equation from the un–normalized co integrating coefficients by normalizing on external borrowing .we thus derive the long run equation for external borrowing in the form below; table 11.long run equation for external borrowing lge ldt lit lfb ldb lgr c -0.346960 0.850657 0.668850 1.000000 -1.277610 0.027437 13.132143 sourceː output generated by author based on e-views estimations. from the table, we define the long run equilibrium relationship between external borrowing and the endogenous variables. in this relationship, we observe that government expenditure and domestic borrowing exert positive effects on external borrowing meaning that in the long run an increase in both mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 16 | p a g e government expenditure and domestic borrowing lead to an increased external borrowing. generally from the estimation results, a 100% increase in government expenditure leads to about 35% increase in external borrowing whilst a 100% increase in domestic borrowing calls forth a whopping 128% increase in external borrowing. on the other hand, direct taxes, indirect taxes as well as grants expectedly all impact negatively on external borrowing. more specifically, in the long run a 100% increase in each of direct taxes, indirect taxes and grants precipitates about 85%,67% and 3% decline in external borrowing. using tables 8,10 and 11 , we derive the error correction terms ect1,ect2 and ect3 respectively which are entered into the short run models to determine the short run effects of each of the endogenous variables on the other endogenous variables in tour system. short run relationships proceeding with our analysis, we estimate the short run/error correction models for the government consumption expenditure, aggregated government expenditure and external borrowing (the estimates are provided in the appendices). in these models, we observe the signs of the error correction terms are all negative meaning that the behaviours of the short run equations are in line with the theory that once these are co integrated then there is a tendency for each of them to be moved towards the desired equilibrium position.; that is each system is eventually drawn towards the equilibrium time path when there is a deviation from their expected long run position. of the three models, the equation for aggregated government expenditure is estimated to have the fastest return to its equilibrium time path after a deviation with a speed of adjustment of about 81% per period. this followed by the equation for external borrowing with a speed of adjustment of about 43% per period when it deviates from the equilibrium .the government consumption equation however has about 20% of its deviation from the long run corrected in each period. in the general government consumption equation, our short run estimates show that the government consumption expenditure is significantly impacted by a feedback, growth in government capital expenditure, direct taxes, domestic borrowing and grants. their contemporaneous effects are estimated at -0.701589, 0.564860, 0.3202703,0.223057 and 0.203551 respectively. this shows that previous period government consumption expenditure tends to have a negative impact on current government spending on consumption. it is also noticed from the estimation that the previous government capital expenditure has a positive effect on current government consumption expenditure. this result contrasts with osei et al (2003). in actual terms, from the results, a 1 unit increase in the previous period government consumption expenditure triggers about 0.56 unit increase in current government consumption expenditure. lastly a previous increase in grants precipitates an increase in current government consumption expenditure with a 100% previous increase in grants leading to a 20% increase in the current values of general government consumption expenditure. in the aggregated government expenditure function, just as is witnessed in the consumption expenditure equation registers a negative feedback with a magnitude of 0.134650 per unit increase in government expenditure. the only difference is that in the case of the aggregated government expenditure function, the feedback comes from the third period. also, growth in direct taxes and indirect taxes respectively exert positive and negative effects on government expenditure with contemporaneous impacts of about 1.15 and 0.40 when there is a unit increase in each of them. thus the dynamic effects of domestic revenue from these results appear mixed, and therefore do not fall wholly in tandem with the finding of njeru (2004). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 17 | p a g e in relation to external borrowing, the short run behaviour is explained by growth in aggregated government expenditure, direct taxes, indirect taxes as well as grants. in the estimates, it is seen that a 100% increase in government expenditure in the first period expectedly leads to about 35% increase in current levels of external borrowing. from the short-run equation, it is also realized that in the third period, increased direct taxes leads to a decline in external borrowing. from the results, a 100% increase in direct taxes tends to lead to about 92% decline in external borrowing which falls in line with expectation that increased domestic revenue mobilization leads to reduction in dependence on external sources of financing projects and programmes. the indirect tax variable, in the period also elicits a negative response from external borrowing. the measured effect, significant in the first period is even bigger in magnitude than that of direct taxes. in real terms, a 100% growth in indirect taxes precipitates over 138% decline in external borrowing. the effect of growth in grants on external borrowing is felt in two periods-the first and third periods and in both periods their impacts are positive. in the first period, a 100% growth in grants tends to increase external borrowing by about 105% whereas in the third period, the effect is smaller at 0.31 unit’s growth in external borrowing with respect to a unit increase in grants. one major position which is dominant in the literature that we wanted to verify was whether or not the availability of other sources of financing government activities dampens tax effort. in the disaggregated government expenditure model, we are unable to substantiate the hypothesis that external financing tends to stunt domestic mobilization of revenue. our regression results indicate that the impact of external borrowing and grants are positive and negative respectively. thus for 100% increase in external borrowing, we experience about 33% increase in direct taxes but the same amount of increase in grants precipitates a 4% decline in direct taxes. for the aggregated government expenditure, the story is similar that is positive and negative in respect of external borrowing and grants respectively. the impacts of external borrowing and grants on indirect taxes are mostly insignificant except in the aggregated expenditure model in which growth in external borrowing triggers a decline in indirect tax yield. these findings are partly consistent with mascagni and timmis (2014) who discovered positive but significant impacts of grants and loans on the tax revenue variable.in the aggregated model, growth in external borrowing rather than leading to a decline in growth in direct tax mobilization actually triggers an increase. this finding coincides with osei et al (2003). from the estimated equation, a 100% growth in external borrowing in the second period precipitates about 42% growth in direct taxes in the current period. however its estimated effect on indirect taxes is negative .the estimates indicate that a 100% increase leads to about 24% decline in indirect tax. the effect of domestic borrowing variable on the revenue variablesdirect and indirect tax is very interesting. in the aggregated government expenditure models, we notice a negative impact of domestic borrowing on both direct and indirect tax variables. however whilst its effect is negative and significant with respect to growth in direct taxes, the measured impact is not significant in the case of indirect tax. from the estimated restricted var, a 100% growth in domestic borrowing elicits about 42% decline in direct taxes. on the other hand, for the disaggregated government models, the effect of domestic borrowing on both direct and indirect taxes is in line with the results for the aggregated model , meaning that an increased growth in domestic borrowing also impacts negatively on both direct and indirect taxes. finally the effects of grants on the revenue channels-both direct and indirect taxes are estimated to be negative .whilst its effect on direct taxes are significant that on indirect tax is insignificant. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 18 | p a g e results of forecast variance decomposition in line with conventional dynamic analysis, we proceed to do a variance decomposition of the residuals of the variables and the results can be gleaned from the appendices of the paper. in dynamic analysis, variance decomposition is particularly very relevant in determining how much of the variation in a given variable can be traced to own innovations and innovations from other variables. the decompositions are performed on the basis of the aggregated and disaggregated government expenditure and in consonance with the cholesky approach which ensures that the decomposition is carried out maintaining the ordering of the variables just as pertains in the co integration test as well as the error correction estimations. in the aggregated government model, we determine the most important innovations for attaining a particular objective for the various variables the aggregate government expenditure, direct taxes, indirect taxes, external borrowing, domestic borrowing and grants. from the results generated, it is clear that in respect of government expenditure, from the second period, growth in grants assumes a very important position in accounting for over 50% of the behaviour of the government expenditure variable. in the long run, it accounts for close to 70% of the movements of the government expenditure variable. for direct taxes, own innovations are largely responsible for its variations in the short to the long term accounting for over 85% of its movements. the next most variables are indirect taxes and growth in government expenditure which between them from the short to long term explain more than 30% of the movements in the direct tax variable. from the variance decomposition of the indirect tax variable, its movements in the short term are dominated by own innovations and that from direct taxes. however in the medium to the long term the most important variable that influences movements in indirect tax is growth in grants. in respect of growth in external borrowing under the aggregated model, in the short to the medium term, own innovations are largely responsible for its behaviour though in the long run, growth in grants assumes the most dominant position accounting for just over 39% of variations in external borrowing. for domestic borrowing, in the short to the medium term, its variations are explained mainly by own innovations and that from external borrowing accounting for over 90% to about 30% between them. in the long term, however, growth in grants becomes the most dominant as it caters for over 54% of variations in the domestic borrowing variable. for grants, its own innovations are most dominant in explaining its movements from about 51% in the first period to over 60% in the tenth period. in the short to the medium term, however, the growth in external borrowing is second most important innovation which affects movements in grants. we now consider the forecast error decomposition in the disaggregated government expenditure model. from the derived results, we observe that from the short to the long term, the important variable that explains the behaviour of government consumption expenditure is own innovations which constitutes 100% to 60% of its movements from the short to the long term. it is followed in terms of significance by the innovations due to government capital expenditure. in respect of government capital expenditure, the movements are mostly explained by own innovations and that emanating from government consumption expenditure. the movements in direct taxes are dominated by own innovations from the short to the long term accounting for over 99% to about 78% whilst that due to domestic borrowing takes about 12% of the innovations. the contributions of the various innovations to the movements in the indirect tax variable are mainly due to own movements and those that coming from direct taxes. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 19 | p a g e specifically, own innovations account for over 63% to about 58% from the short to the long period whereas proportion of innovations from direct taxes range from 34% to 30%. again movements in external borrowing are dominated by own innovations and predictably followed by innovations due to grants. impulse response functions finally in our analysis, we attempt to trace the effects of shocks emanating from the other variables in the system on each endogenous variable. (estimations are found in the appendices) we first consider the aggregated government expenditure model. in respect of total government expenditure we realize that its time path around equilibrium is not very much affected by own shocks and that emanating from the other variables. however shocks coming from own innovations and from other variables cause more instability in the trajectory of direct tax variable around the equilibrium path. the instability as witnessed from the graphs is more pronounced especially in response to own shocks and the shocks which originate from total government expenditure and indirect taxes. the greatest effect of any shock in the system on indirect taxes comes from grants. however, the trajectory of external borrowing is affected much more by shocks from grants and then by own shocks than shocks coming from any other variable in the system. for domestic borrowing, apart from shocks triggered from grants the other shocks appear not to have any significant drift in its time path. finally movements in the grants are largely unaffected by shocks which are transmitted from other variables. it is only own shocks which appear to drift the trajectory of grants from the equilibrium position. in the disaggregated government expenditure model, the story is different from that which is experienced in the aggregated expenditure model. from the graphs, we observe that shocks from government capital expenditure aside of own shocks are those which have more impact on the movement of government consumption expenditure. the time path of government capital expenditure is affected more in the early periods by shocks from government consumption expenditure and own shocks. the shocks from the other variables do not cause as much trepidation. in respect of direct taxes own shocks are the most prominent among all the shocks which are transmitted from the various variables whilst indirect taxes react to own shocks and that which emanates from direct taxes. it is also observed that the effects of shocks from government capital expenditure are noticeable only in the early period of the time horizon. conclusions and policy implications in this study, our major preoccupation has been to establish the nexus between total government expenditure and disaggregated government expenditures and their corresponding financing modes, particularly focusing on the effects of foreign aid well as the response from domestic borrowing. its import has been to verify whether the theoretical precepts established in the fiscal response models found in the literature still hold true for the ghanaian economy using current data available. in our analysis we have generally found that whether government expenditure is aggregated or disaggregated, there exists one or other long run equilibrium relationship between expenditure and other variables in the model. more specifically, in the disaggregated government expenditure model, we have found that there only one co integrating equation exists between government consumption expenditure and other variables – government capital expenditure, direct taxes, indirect taxes, external borrowing, domestic borrowing and grants whereas in the model involving aggregate government expenditure, we mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 20 | p a g e discovered two co integrating equations-one for government expenditure and the other for external borrowing. in the long run, we find that external borrowing and grants lead to increased government consumption expenditure but government capital expenditure negatively impacts on government consumption expenditure. the positive effect of external borrowing and grants on government expenditure may point to aid fungibility though that conclusion may be erroneous or flawed on the grounds that some aid and grants come in the form of budgetary support and are therefore legitimately channeled into those areas of government spending which are important in the government's scheme of things. in respect of the aggregate model, external borrowing, domestic borrowing and grants all in the long run lead to increase in government expenditure which confirms concept of aid illusion but surprisingly the domestic revenue streams –direct and indirect taxes trigger a negative response from government expenditure. the estimated long run equation for external borrowing also shows that increased government expenditure precipitates increased external borrowing. domestic borrowing also has the same effect but direct taxes, indirect taxes and grants all exert a negative effect on external borrowing. the positive effect of domestic borrowing on external borrowing probably gives the indication that because of the inadequacy of the domestically mobilized revenues, external and domestic borrowings have become an important but constant feature of financing government activities. thus in the long run, in the disaggregated model we were able to adduce evidence of domestic revenues being used to replace external borrowing as a financing avenue. in the literature there is an opinion which articulates the view that external borrowing leads to a lax attitude towards domestic revenue mobilization, usually characterized as the displacement hypothesis. this is partially affirmed by our results in the short run. this is because whilst the effect of external borrowing on direct taxes is positive in both aggregate and disaggregated expenditure models it leads to a decline in indirect taxes in the aggregate model and has an insignificant impact on indirect taxes in the disaggregated model. from the short run results, the external sources of government financing impact positively on the government capital expenditures and this implies these resources are going into areas of the economy which may be reproductive and thus helping to expand economic activities in the long run. in long run it is established that an increased external borrowing and grants lead to more than proportionate growth in aggregate government expenditure which suggests that these external financing channels come with local or counterpart funding components which also exert more pressure on government finances. to ease pressure on government, government would have to enter into external funding agreements which do not require too much of counterpart funding. one other view proffered by some economists in the literature is that governments in developing countries have a preference for grants than loans for financing projects and programmes. in our analysis, it is obvious that the effect of grants undermines direct tax collection and it does appear because grants are normally free, its increased flow into the ghanaian economy dampens the direct tax collections. policy makers are encouraged to continue design tax policies and mechanisms which would in spite of increased flow of grant enable the government to rake in the desired revenues. another significant and illuminating finding is the fact that short run effect of domestic borrowing on both direct and indirect taxes is negative in the ghanaian economy which signals that domestic borrowing may be inhibiting economic activities and thus may ultimately be having a distortionary mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 21 | p a g e impact on tax collections through its effect on economic activities. the government would therefore do well to scale down on its appetite for borrowing from domestic sources which particularly has a strangulating effect on private sector activities and ultimately impacts negatively on economic activities that generate the revenue needed by government. one of the objectives of the study is to determine whether the borrowing modes have differential effects on the domestic tax channels and our estimated equations suggest that the tax channels do not response in the same way to borrowing. this therefore allows policy makers to design the relevant but right mechanisms to ensure continuous increased tax yields from both direct and indirect sources by creating unique mechanisms which work for each tax channel. finally we also find that the short-run equation for domestic borrowing in the disaggregated government expenditure model shows that external borrowing is used to substitute domestic borrowing to certain extent and this has a huge implication for the ghana's debt sustainability which has become a source of worry to international agencies and economic think-tanks within ghana even against the background of a re-based economy. to conclude we would say that though we have through this study unearthed some important facts relating to the nexus among the fiscal variables and the borrowing modes in ghana, we would have wished that we were able to segregate aid into the various other forms project, programme or even technical by which they come, which in our view would have enriched the analysis .it is therefore our hope that future studies would tackle this aspect to further add to the existing stock of knowledge in this area. another area which may be interesting to examine in the future is the effects of these borrowing modes on private investments and economic growth. references ali, a.a., g.,malwanda,c., & sliman, y. (1999). official development assistance to africa: an overview. journal of african economies, 8 (4), 504-527. anaman, e., a., gadzo, s., g., gatsi, j., g., & pobbi, m. (2017). fiscal aggregates government borrowing and economic growth in ghana: an ever correction approach. advances in management and applied economics, 7 (2), 83-104. bhasin, v.k. (2004). dynamic interlinks among exchange rate price level and terms of trade ina managed floating exchange system: the case of ghana. aerc research paper, 141. african economic consortium, nairobi, kenya. blanchard, o., & perrotti,r. (1999). an empirical characterization of dynamic effects of changes in government spending and taxes on output. nber working paper, 7269. bwire,t.,lloyd, t., &morrissey, o. (2017). fiscal reforms and the fiscal effects of aid in uganda. the journal of development studies, 53 (7), 1019-1036. deverajan, s., rajkumar, a., s., & swaroop, v. (1998). what does aid do to african finance? aerc/odc sponsorship on managing a smooth transition from aid dependence in africa, washington dc. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 22 | p a g e durdonoo, c. (2000). fiscal trends: 1970-1995 in e.a. aryeetey et al (eds.). economic reforms in ghana: the miracle and the mirage. trenton, usa: africa word press. enders,w. (1995). applied econometric time series. new york: wiley press. feyzioglu, t.,swaroop, v., & zhu, m. (1998). a panel data analysis of the fungibility of foreign aid. world bank economic review, 65, 429-445. griffin, k. (1970). foreign capital domestic savings and economic development. oxford bulletin of economics and statistics, 55, 99-112. heller,s., p. (1975). a model of public fiscal behaviour in developing countries: aid, investment and taxation. american economic review, 65 (3), 429-445. johassen.(1991). estimation and hypothesis testing of co integration vectors in gaussian vector autoregressive models. econometrica vol59ːpp 1551-1580 johnston, j.& di-nardo, j.(1997). econometric methods. (4thed.). singapore: mcgraw hill. khilji,n.m.,& zampelli, e., m. (1994). the fungibility of us military and non-military assistance and the impacts on expenditures of major aid recipients. journal of development economics, 43, 345-362. lloyd, t.,mcgillivray, m., morrissey, o., & opoku-afari,m. (2009). the fiscal effects of aid in developing countries: a comparative dynamic analysis. studies in development economics and policy, 158-179. lutkepohl, h., & rimmers, h., e. (1992). impulse response analysis of co integrated systems. journal of economic dynamics and control, 16, 53-78. m’amanja, d.,lloyd, t., &morrissey, o. (2005). fiscal aggregates, aid and growth in kenya: a vector autoregressive (var) analysis. credit research paper, 5 (7). martins, p.m.g. (2010). fiscal dynamics in ethiopia: the co integrated var model with quarterly data. university of nottingham credit research paper, 10 (5). mascagni,g., &timmis, e. (2014). fiscal effects of aid in ethiopia: evidence from cvar application. university of nottingham credit research paper, 14 (6). mavrotas, g. (2002). foreign aid and fiscal response: does aid disaggregation matter? weltwirtschaftliches archive, 138, 534-559. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 23 | p a g e mcgillivray,m& morrissey,o. (2000). aid fungibility in assessing aid: red herring or true concern? journal of international development, 12 (3), 413-428. mosley, p., j., hudson, j., & horrell, s. (1987). aid and public sector and the market in less developed countries. economic journal, 97 (9), 616-641. njeru, j. (2004). the impact of foreign aid on public expenditure: the case of kenya. aerc research paper, 135. african economic research consortium, nairobi. osei, r., morrissey, o., & lloyd,t. (2003). modelling the fiscal effects of aid: an impulse response analysis for ghana. university of nottingham credit research paper, 3 (10). thomas, r.l. (1993). introductory econometrics: theory of applications. (2nded.). london: longman press. appendix a 1a unnormalized co integrating coefficients for disaggregated government expenditure model lgc lgk ldt lit lfb ldb lgr c 1.294453 0.343061 1.224174 5.581041 -2.682037 1.252628 -1.990298 50.41932 2.473469 -4.926923 3.323305 0.203476 0.760543 1.084518 1.902956 -9.314356 -2.734475 2.252014 1.876378 -0.711541 -1.777021 -1.152836 -0.274655 58.36492 0.626448 0.708572 -0.757148 -3.873066 -2.603299 4.320096 1.164597 -2.573859 -3.721753 2.645566 2.914102 -2.369617 1.228391 -1.890964 -1.548250 31.02504 1.690610 -1.846113 4.246725 -3.162973 0.280160 -0.497808 0.356670 6.716738 2.546556 -2.991196 -0.573203 2.166093 1.917874 -0.844341 -0.672078 18.44867 1b unnormalized co integrating coefficients for aggregated government expenditure model lge ldt lit lfb ldb lgr c 0.331685 2.332985 6.191146 -2.736592 -0.092866 -2.182888 85.96550 -1.536605 5.185054 -5.442559 1.073965 2.058536 3.170925 -61.33498 1.272844 -3.814032 0.244547 -3.236886 0.620246 -0.427752 60.13527 -0.924257 2.266703 1.782250 2.664649 -3.404383 0.070304 -34.99253 -0.416011 -2.639002 3.722309 1.874406 0.312871 0.073111 -38.92193 0.081428 -2.878044 0.715399 -0.521188 0.300898 0.115664 8.388109 appendix b mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 24 | p a g e short-run /error correction estimates short run estimates for the disaggregated government expenditure model error correction: dlgc dlgk dldt dlit dlfb dldb dlgr ect1(-1) 0.019809 -0.024172 -0.001566 0.018902 0.001415 0.005638 0.022009 (0.00701) (0.00619) (0.00604) (0.00679) (0.00492) (0.00699) (0.02305) [2.82725] [3.90412] [0.25948] [2.78290] [ 0.28745] [0.80695] [ 0.95466] dlgc(-1) -0.701589 0.016095 0.155862 0.284686 0.044776 0.180555 0.416556 (0.15231) (0.13459) (0.07841) (0.14765) (0.10699) (0.07136) (0.14713) [4.60624] [ 0.11959] [ 1.98767] [ 1.92805] [-0.41851] [ 2.53034] [ 2.83116] dlgk(-1) 0.564860 0.296333 -0.125927 -0.074017 0.071090 -0.217699 0.206533 (0.17444) (0.15415) (0.15030) (0.16911) (0.12254) (0.17396) (0.57399) [ 3.23805] [1.92237] [0.83782] [0.43769] [ 0.58015] [-1.25140] [0.35982] dldt(-1) 0.320703 0.606177 -0.546285 0.319727 0.302274 0.032411 0.414471 (0.15278) (0.28556) (0.18010) (0.16165) (0.14998) (0.20845) (0.68779) [ 2.09905] [ 2.12277] [3.03324] [ 1.97785] [2.01549] [ 0.15549] [ 0.60261] dlit(-1) 0.186466 -0.566537 -0.001965 0.346928 -0.189941 0.065452 1.080978 (0.26140) (0.22288) (0.22522) (0.17619) (0.18362) (0.26068) (0.86010) [ 0.71335] [ 2.54186] [0.00873] [1.96908] [1.03445] [ 0.25109] [1.25680] dlfb(-1) 0.098782 0.050804 0.331934 -0.319583 0.268403 0.132600 1.249801 (0.30483) (0.02321) (0.16903) (0.29551) (0.11911) (0.05443) (1.00302) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 25 | p a g e [ 0.32405] [ 2.18861] [1.96381] [1.08146] [2.25347] [2.43620] [ 2.24603] dldb(-1) 0.223057 0.364305 -0.307923 0.430906 0.076035 0.093922 -1.103910 (0.11371) (0.20497) (0.11830) (0.21693) (0.16293) (0.03904) (0.45124) [1.96165] [ 1.77738] [ 2.60286] [1.98634] [ 0.46667] [2.40604] [ 2.44639] dlgr(-1) 0.203551 -0.100615 0.040873 -0.100401 0.120268 0.041354 -0.145643 (0.08956) (0.07914) (0.01616) (0.08682) (0.06099) (0.08931) (0.29467) [ 2.27291] [-1.27141] [-2.52971] [-1.15647] [ 1.97183] [ 0.46305] [0.49425] c -0.001451 0.002197 0.001929 0.000621 0.001887 0.000925 0.063636 (0.04241) (0.03747) (0.03654) (0.04111) (0.02979) (0.04229) (0.13954) [0.03421] [ 0.05863] [ 0.05279] [ 0.01511] [ 0.06336] [0.02187] [0.45605] r-squared 0.551149 0.549121 0.504434 0.583416 0.516661 0.212850 0.526910 adj. rsquared 0.422906 0.420298 0.362844 0.464393 0.378565 0.012050 0.391742 sum sq. resids 1.859653 1.452124 1.380543 1.747652 0.917605 1.849415 20.13418 s.e. equation 0.257713 0.227731 0.222047 0.249832 0.181029 0.257003 0.847985 f-statistic 4.297695 4.262614 3.562631 4.901676 3.741300 0.946419 3.898175 log likelihood 2.824038 7.400244 8.335439 3.973200 15.89205 2.926176 -41.24349 akaike aic 0.333836 0.086473 0.035922 0.271719 -0.372543 0.328315 2.715864 schwarz sc 0.725681 0.478318 0.427767 0.663564 0.019302 0.720160 3.107709 mean dependent 0.003087 0.001756 0.003245 0.001704 0.000154 0.000452 -0.066715 s.d. dependent 0.339245 0.299103 0.278178 0.341370 0.229642 0.255468 1.087286 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 26 | p a g e appendix c short run estimates for the aggregated government expenditure model error correction: dlge dldt dlit dlfb dldb dlgr ect2(-1) -0.814967 -0.559246 -0.693817 0.972253 0.828267 -1.359340 (3.79677) (0.44945) (0.46205) (0.52819) (0.73398) (2.44790) [-3.09437] [-1.24428] [-1.50162] [ 1.84071] [ 1.12847] [-0.55531] ect3(-1) 0.232244 0.012426 0.353103 -0.425366 -0.111076 0.397426 (0.17271) (0.21543) (0.22146) (0.20943) (0.35180) (1.17329) [ 1.34474] [ 0.05768] [ 1.59442] [-2.03106] [-0.31574] [ 0.33873] dlge(-1) 0.054739 0.261523 0.573447 0.354344 -0.082371 0.867620 (0.17577) (0.21924) (0.22539) (0.11625) (0.35804) (1.19409) [ 0.31143] [ 1.19284] [ 2.54427] [3..04821] [-0.23006] [ 0.72660] dlge(-2) -0.090568 0.205657 0.458363 -0.061591 -0.333092 0.248939 (0.16896) (0.21075) (0.21665) (0.24767) (0.34416) (1.14782) [-0.53604] [ 0.97584] [ 2.11564] [-0.24868] [-0.96783] [ 0.21688] dlge(-3) -0.134650 0.035054 0.129480 0.087230 0.271188 0.231454 (0.06922) (0.15817) (0.16260) (0.18588) (0.13594) (0.86147) [-1.97187] [ 0.22162] [ 0.79629] [ 0.46927] [ 1.99489] [ 0.26867] dldt(-1) 0.172514 0.050142 0.517520 0.256857 0.033832 -2.202289 (0.23221) (0.28965) (0.18901) (0.34039) (0.47301) (1.10333) [ 0.74293] [ 0.17311] [ 2.73802] [ 0.75459] [ 0.07153] [-1.99603] dldt(-2) 1.148476 0.025518 -0.138434 -0.536571 -0.845334 2.062187 (0.25936) (0.32352) (0.33258) (0.38020) (0.52832) (1.76201) [ 4.42808] [ 0.07888] [-0.41624] [-1.41130] [-1.60004] [ 1.17036] dldt(-3) 0.349772 0.069256 0.305151 -0.916470 -1.702434 3.984505 (0.35723) (0.03213) (0.45809) (0.46590) (0.72769) (1.50826) [ 0.97911] [ 2.15542] [ 0.66614] [-1.96709] [-2.33951] [ 2.64179] dlit(-1) 0.553068 0.253030 -0.338736 -1.382197 -1.282164 2.899246 (0.37157) (0.46348) (0.47647) (0.54468) (0.64301) (2.52431) [ 1.48846] [ 0.54593] [-0.71093] [-2.53762] [-1.99399] [ 1.14853] mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 27 | p a g e dlit(-2) -0.395099 0.330036 0.236805 -0.224872 -0.091448 -0.446796 (0.17676) (0.16527) (0.12177) (0.25911) (0.36005) (1.20082) [-2.23527] [ 1.99690] [ 1.94477] [-0.86787] [-0.25398] [-0.37208] dlit(-3) -0.234890 -0.094442 -0.243058 0.104862 0.414603 -1.457794 (0.18283) (0.22806) (0.23445) (0.26802) (0.37243) (1.24211) [-1.28471] [-0.41411] [-1.03671] [ 0.39125] [ 1.11323] [-1.17364] dlfb(-1) 0.115739 -0.055537 -0.337443 0.523889 0.179581 0.007247 (0.36633) (0.45694) (0.46975) (0.26518) (0.74621) (2.48870) [ 0.31594] [-0.12154] [-0.71835] [ 1.97559] [ 0.24066] [ 0.00291] mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 28 | p a g e dlfb(-2) 0.224531 0.424402 -0.240696 -0.437316 -0.682534 (0.09086) (0.16517) (0.08399) (0.31780) (0.44162) [ 2.47116] [ 2.56939] [-2.86581] [-1.37606] [-1.54553] dlfb(-3) 0.150271 0.119247 -0.043971 0.000501 -0.094436 (0.20228) (0.25232) (0.25939) (0.29653) (0.41205) [ 0.74287] [ 0.47260] [-0.16952] [ 0.00169] [-0.22919] dldb(-1) 0.337644 -0.223752 0.276325 0.308478 0.447370 (0.13910) (0.29508) (0.30334) (0.34677) (0.48187) [2.42731] [-0.75829] [ 0.91093] [ 0.88957] [ 0.92840] dldb(-2) 0.259235 -0.424442 -0.196132 0.022124 -0.162952 (0.18529) (0.21368) (0.23760) (0.27162) (0.37744) [1.39905] [-1.98639] [-0.82545] [ 0.08145] [-0.43173] dldb(-3) 0.087809 -0.126465 0.133979 0.311050 0.399951 (0.16787) (0.20940) (0.21527) (0.24609) (0.18434) [ 0.52306] [-0.60394] [ 0.62238] [ 1.26399] [ 2.16959] dlgr(-1) 0.969935 -0.641608 -0.430083 1.049242 1.055592 (0.36425) (0.45435) (0.46708) (0.53395) (0.74197) [2.66285] [-1.41215] [-0.92079] [ 1.96507] [ 1.42269] dlgr(-2) 0.505786 -0.464436 -0.363172 0.510144 0.410434 (0.23730) (0.23587) (0.30429) (0.34786) (0.48338) [2.13141] [-1.96904] [-1.19349] [ 1.46653] [ 0.84909] dlgr(-3) 0.070551 -0.231593 -0.088270 0.314585 0.177093 (0.12391) (0.15457) (0.15890) (0.11515) (0.25241) [0.56935] [-1.49833] [-0.55551] [ 2.73185] [ 0.70159] c 0.004849 0.012664 0.020949 -0.005055 -0.014179 (0.02025) (0.02526) (0.02597) (0.02969) (0.04125) [ 0.23941] [ 0.50132] [ 0.80665] [-0.17026] [-0.34369] r-squared 0.927544 0.778822 0.895330 0.783659 0.654236 adj. r-squared 0.824036 0.462853 0.745801 0.474601 0.160288 1.368240 (1.47284) [ 0.92898] 2.359789 (1.18157) [ 1.99717] 0.735352 (1.60710) [ 0.45756] 0.261685 (1.25881) [ 0.20788] -0.663780 (1.14047) [-0.58202] -2.475217 (2.47456) [-1.00027] -1.610878 (1.61213) [-0.99922] -0.333660 (0.84183) [-0.39635] -0.076360 (0.13759) [-0.55499] 0.790353 0.490856 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 29 | p a g e sum sq. resids 0.189327 0.294576 0.311316 0.406836 0.785588 s.e. equation 0.116290 0.145056 0.149120 0.170469 0.236883 f-statistic 8.961041 2.464869 5.987662 2.535638 1.324503 log likelihood 41.68061 33.94453 32.97730 28.29429 16.77889 akaike aic -1.181749 -0.739688 -0.684417 -0.416817 0.241207 schwarz sc -0.248541 0.193521 0.248792 0.516392 1.174415 mean dependent 0.002435 0.012086 0.015653 0.003679 0.002856 s.d. dependent 0.277223 0.197919 0.295767 0.235180 0.258505 8.738089 0.790031 2.638939 -25.37886 2.650220 3.583429 -0.076870 1.107195 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 30 | p a g e variance decomposition of dlge: period s.e. dlge dldt dlit dlfb dldb dlgr 1 0.111813 100.0000 0.000000 0.000000 0.000000 0.000000 0.000000 2 0.265269 23.43584 20.37757 3.577401 0.422971 0.413212 51.77301 3 0.385462 15.65435 12.85675 2.279425 1.161694 0.582181 67.46560 4 0.444459 15.27655 11.13926 1.777144 0.909225 4.016351 66.88147 5 0.480041 18.49762 9.680806 2.009450 0.842194 3.446230 65.52370 6 0.509495 18.37302 9.024340 2.928824 2.621776 3.661696 63.39034 7 0.530525 18.10874 8.592325 2.945605 2.653703 3.634360 64.06527 8 0.592717 16.41770 9.398415 2.439467 2.725268 3.237613 65.78154 9 0.645311 16.74329 8.484315 2.063404 2.578772 3.102590 67.02763 10 0.707590 17.26560 7.260408 2.026676 2.782769 2.649450 68.01510 variance decomposition of dldt: period s.e. dlge dldt dlit dlfb dldb dlgr 1 0.135609 14.67399 85.32601 0.000000 0.000000 0.000000 0.000000 2 0.168781 18.62678 57.94360 15.88752 2.083583 5.320575 0.137940 3 0.171894 18.51302 56.19375 15.58305 2.923035 6.649722 0.137425 4 0.187967 15.56514 56.71454 16.41705 2.446050 6.768987 2.088241 5 0.196661 15.84631 52.83267 19.01200 2.663066 6.243143 3.402820 6 0.201969 15.12285 50.18036 18.64150 3.122657 5.935793 6.996830 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 31 | p a g e 7 0.202326 15.12402 50.07573 18.69772 3.124804 5.957755 7.019973 8 0.206023 14.68438 49.98696 18.16153 3.086644 7.243165 6.837325 9 0.207504 15.14699 49.39309 18.35866 3.175843 7.150039 6.775385 10 0.210232 15.37626 48.35545 17.94419 3.096044 6.967732 8.260324 variance decomposition of dlit: period s.e. dlge dldt dlit dlfb dldb dlgr 1 0.172417 1.586740 48.92190 49.49136 0.000000 0.000000 0.000000 2 0.222251 6.532833 39.76821 36.29187 2.542720 4.247651 10.61671 3 0.240533 5.666080 42.98798 32.38567 2.495584 3.642069 12.82262 4 0.282419 7.145570 32.56612 24.49860 1.925561 2.648976 31.21517 5 0.305613 7.189801 30.23615 20.92503 1.708072 3.511665 36.42929 6 0.324604 9.538451 27.59595 18.58652 1.582996 3.176390 39.51969 7 0.340375 11.50168 25.84900 19.30786 1.613194 2.956258 38.77200 8 0.349941 12.00197 24.45653 18.30123 1.805046 3.433497 40.00173 9 0.372219 12.16112 23.06242 16.47424 2.106031 3.147840 43.04836 10 0.392478 12.20646 21.59352 14.82943 2.053484 3.118234 46.19888 variance decomposition of dlfb: period s.e. dlge dldt dlit dlfb dldb dlgr mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 32 | p a g e 1 0.158397 0.044068 1.797966 0.832714 97.32525 0.000000 0.000000 2 0.177824 0.283293 10.59105 4.897140 78.39354 0.021085 5.813892 3 0.231639 1.864778 7.092211 2.953018 60.72698 1.889828 25.47319 4 0.245491 1.801467 6.655475 7.144054 56.78387 3.317991 24.29714 5 0.256219 3.597538 6.326243 7.361394 52.13185 3.170792 27.41218 6 0.265092 5.934772 5.950920 7.822540 49.15187 3.312355 27.82755 7 0.276468 6.407326 6.361810 7.229981 45.20437 3.128504 31.66801 8 0.292901 7.634311 6.580809 6.595101 40.28310 3.123580 35.78309 9 0.302819 8.628087 6.568402 6.291867 37.78864 3.198804 37.52420 10 0.311030 9.505549 6.228335 6.097690 36.03080 3.074052 39.06357 variance decomposition of dldb: period s.e. dlge dldt dlit dlfb dldb dlgr 1 0.206871 2.265834 0.810045 2.773664 22.89687 71.25359 0.000000 2 0.223675 2.783841 6.202074 4.149667 19.80236 64.21923 2.842822 3 0.288792 3.716311 3.763684 2.544012 22.32057 38.78066 28.87476 4 0.338815 12.26334 2.735667 1.852837 16.64807 31.38268 35.11741 5 0.401912 19.12568 2.211283 6.381911 11.92865 23.45652 36.89596 6 0.441166 19.68044 2.240487 6.544079 11.51591 19.74382 40.27526 7 0.461121 19.85563 3.003299 5.993447 10.54970 18.09470 42.50323 8 0.502054 17.95271 5.140998 5.121903 9.264051 15.39093 47.12941 9 0.537271 16.97087 5.065356 4.512318 9.047540 13.47473 50.92919 10 0.574863 16.64304 4.665101 3.945109 8.396938 11.83882 54.51099 variance decomposition of dlgr: period s.e. dlge dldt dlit dlfb dldb dlgr 1 0.755211 0.207621 2.294906 4.433442 39.47587 2.841255 50.74691 2 0.892897 5.268719 2.287596 3.424055 40.66342 10.57656 37.77965 3 1.118448 6.441865 2.333939 4.617557 28.37545 6.795336 51.43585 4 1.162192 11.41789 2.963043 4.304557 26.28069 6.318548 48.71527 5 1.250068 12.21659 4.194314 4.814527 22.72084 5.506416 50.54731 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 33 | p a g e 6 1.335245 12.91167 4.548363 4.353771 20.51086 4.894152 52.78119 7 1.416154 13.08263 5.335398 3.877774 18.46247 4.949913 54.29181 8 1.525871 13.21428 4.937466 3.401963 16.37939 4.283290 57.78361 9 1.618501 13.31405 4.747701 3.062418 15.41920 3.826015 59.63062 10 1.693009 14.17167 4.431628 2.800191 14.16598 3.500881 60.92966 variance decomposition of disaggregated model variance decomposition of dlgc: period s.e. dlgc dlgk dldt dlit dlfb dldb dlgr 1 0.21708 5 100.000 0 0.00000 0 0.00000 0 0.00000 0 0.00000 0 0.00000 0 0.00000 0 2 0.26964 9 65.0425 8 23.12333 1.721511 5.952523 1.337863 2.821443 0.00074 6 3 0.27782 6 61.27276 21.81767 1.692895 7.846924 1.277528 3.468516 2.623707 4 0.27882 7 60.9569 0 21.66242 1.705474 7.793662 1.791860 3.467854 2.621829 5 0.279151 60.8222 2 21.63173 1.708604 7.792124 1.787999 3.499983 2.757338 6 0.27924 8 60.78512 21.62981 1.708247 7.786927 1.810778 3.523712 2.755411 7 0.27926 2 60.7797 8 21.62889 1.708456 7.786194 1.810644 3.527721 2.758316 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 34 | p a g e 8 0.27926 6 60.77815 21.62924 1.708446 7.786028 1.811031 3.528838 2.758263 9 0.27926 6 60.7780 3 21.62921 1.708450 7.786039 1.811035 3.528958 2.758272 10 0.27926 6 60.7780 0 21.62923 1.708450 7.786037 1.811035 3.528974 2.758273 variance decompositio n of dlgk: period s.e. dlgc dlgk dldt dlit dlfb dldb dlgr 1 0.22126 0 28.6533 7 71.34663 0.00000 0 0.00000 0 0.00000 0 0.00000 0 0.00000 0 2 0.25624 1 22.7309 3 54.92869 2.311531 17.06961 0.387709 0.28668 8 2.284841 3 0.25960 9 22.6632 9 53.98672 2.253508 16.75220 1.325450 0.502436 2.516391 4 0.26065 2 22.49917 53.67423 2.237255 16.72579 1.333753 0.538337 2.991464 5 0.26092 9 22.4750 5 53.57948 2.234198 16.69179 1.418543 0.615461 2.985473 6 0.26098 4 22.4669 2 53.56351 2.234675 16.68504 1.418000 0.630732 3.001125 7 0.26100 0 22.46491 53.56006 2.234580 16.68338 1.420510 0.635649 3.000918 8 0.26100 1 22.4647 0 53.55959 2.234606 16.68323 1.420555 0.636214 3.001109 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 35 | p a g e 9 0.26100 2 22.4646 3 53.55954 2.234606 16.68319 1.420579 0.636324 3.001121 10 0.26100 2 22.4646 3 53.55953 2.234607 16.68320 1.420583 0.63633 0 3.001121 variance decompositio n of dldt: period s.e. dlgc dlgk dldt dlit dlfb dldb dlgr 1 0.177084 0.109107 0.077847 99.81305 0.000000 0.000000 0.000000 0.000000 2 0.200855 1.745636 2.080662 80.25215 0.882415 0.001371 12.52711 2.510653 3 0.202226 1.821304 2.507557 79.17233 1.231177 0.137470 12.52452 2.605643 4 0.202403 1.852392 2.556090 79.03863 1.231784 0.193493 12.52652 2.601091 5 0.202479 1.851029 2.572860 78.98032 1.242394 0.193999 12.52149 2.637904 6 0.202498 1.852722 2.572986 78.96633 1.243655 0.201673 12.52373 2.638906 7 0.202501 1.852663 2.573234 78.96395 1.243682 0.202162 12.52383 2.640481 8 0.202502 1.852679 2.573349 78.96325 1.243719 0.202460 12.52393 2.640620 9 0.202502 1.852677 2.573347 78.96319 1.243719 0.202496 12.52392 2.640650 10 0.202502 1.852677 2.573353 78.96317 1.243719 0.202502 12.52392 2.640656 variance decomposition of dlit: period s.e. dlgc dlgk dldt dlit dlfb dldb dlgr 1 0.21264 6 1.939034 0.55468 2 34.35595 63.15033 0.00000 0 0.00000 0 0.00000 0 2 0.23307 0 5.509995 0.50597 8 30.8045 7 59.4287 0 0.027701 3.722568 0.00049 2 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 36 | p a g e 3 0.23484 3 5.627085 1.376441 30.35335 58.5369 3 0.222132 3.827006 0.057054 4 0.23528 6 5.608014 1.415256 30.2403 0 58.3827 9 0.250664 3.825924 0.277053 5 0.23538 7 5.60929 0 1.414108 30.21875 58.3383 8 0.295249 3.830620 0.293600 6 0.23540 8 5.608271 1.414022 30.21479 58.3287 0 0.299418 3.830326 0.304476 7 0.235414 5.608157 1.414510 30.21367 58.3260 5 0.301472 3.830780 0.305368 8 0.235415 5.608128 1.414509 30.21357 58.3257 2 0.301660 3.830780 0.305632 9 0.235415 5.608121 1.414552 30.21354 58.3256 4 0.301701 3.830795 0.305656 10 0.235415 5.608120 1.414554 30.21353 58.3256 3 0.301705 3.830795 0.305658 variance decompositio n of dlfb: period s.e. dlgc dlgk dldt dlit dlfb dldb dlgr 1 0.156790 0.00078 0 7.993319 4.30490 4 6.65e05 87.70093 0.00000 0 0.00000 0 2 0.178720 0.612045 9.62814 8 4.875545 2.49460 7 67.50957 0.08868 2 14.79141 3 0.184871 0.773861 10.6418 0 4.59492 6 2.99994 6 65.36298 1.283818 14.34266 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 37 | p a g e 4 0.185743 0.95058 4 10.5569 4 4.56668 4 2.98130 2 64.84869 1.658247 14.43755 5 0.18608 0 0.955757 10.6652 2 4.550185 2.97332 0 64.63541 1.794920 14.42519 6 0.186132 0.961358 10.6650 8 4.547643 2.97704 5 64.60594 1.825808 14.41713 7 0.186140 0.961336 10.6676 4 4.547317 2.97678 9 64.6000 8 1.829933 14.41690 8 0.186142 0.961392 10.6676 9 4.54726 0 2.97703 0 64.59911 1.830600 14.41691 9 0.186142 0.961391 10.6676 9 4.547263 2.97703 2 64.59909 1.830626 14.41691 10 0.186142 0.961391 10.6676 9 4.547263 2.97703 7 64.59906 1.830627 14.41692 variance decompositio n of dldb: period s.e. dlgc dlgk dldt dlit dlfb dldb dlgr 1 0.215948 4.175000 4.859923 0.489323 0.605885 22.17905 67.69082 0.000000 2 0.234199 3.952763 7.392635 1.278903 0.638402 18.86131 65.22346 2.652535 3 0.237645 4.077868 7.873997 1.298188 0.911934 18.73193 64.46117 2.644914 4 0.237988 4.068213 7.914957 1.301817 0.927342 18.70947 64.41447 2.663731 5 0.238062 4.065940 7.924473 1.302481 0.934178 18.70143 64.39396 2.677537 6 0.238067 4.065806 7.924171 1.302719 0.934944 18.70362 64.39132 2.677422 7 0.238068 4.065833 7.924185 1.302764 0.934989 18.70346 64.39078 2.677982 8 0.238069 4.065830 7.924253 1.302763 0.935003 18.70350 64.39066 2.677997 9 0.238069 4.065836 7.924250 1.302763 0.935004 18.70349 64.39065 2.678003 10 0.238069 4.065835 7.924255 1.302763 0.935004 18.70349 64.39065 2.678004 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 38 | p a g e variance decomposition of dlgr: period s.e. dlgc dlgk dldt dlit dlfb dldb dlgr 1 0.755153 0.002803 11.06231 1.502395 2.097732 16.00708 9.021366 60.30632 2 0.822087 0.060881 12.26010 1.790907 3.884525 21.34494 9.482869 51.17578 3 0.829529 0.293374 12.52555 2.002059 3.815918 20.96703 9.393659 51.00241 4 0.832194 0.295626 12.77577 1.997428 3.841262 20.91620 9.436867 50.73685 5 0.832515 0.311644 12.76592 1.996002 3.850621 20.91331 9.464671 50.69783 6 0.832614 0.311572 12.77297 1.995730 3.850479 20.90860 9.469079 50.69158 7 0.832635 0.311966 12.77253 1.995715 3.851079 20.90871 9.470205 50.68979 8 0.832637 0.311967 12.77253 1.995745 3.851055 20.90879 9.470231 50.68968 9 0.832638 0.311969 12.77252 1.995752 3.851068 20.90879 9.470237 50.68966 10 0.832638 0.311969 12.77252 1.995754 3.851067 20.90880 9.470235 50.68965 cholesky ordering dlgc dlgk dldt dlit dlfb dldb dlgr mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 11 issue 2, april-june 2023 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 39 | p a g e impulse response functions for aggregated government expenditure model response to cholesky one s.d. innovations ± 2 s.e. model functions response to cholesky one s.d. innovations ± 2 s.e. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 20 | p a g e evaluating and choosing supply chain strategies: a comprehensive framework jabulani themba dlamini and mandla sipho mkhize department of business management, college of economic and management sciences, university of south africa, p. o. box 392, unisa 0003, south africa. doi: https://doi.org/10.5281/zenodo.12772255 abstract: the root cause of many supply chain issues is a misalignment between supply chain strategy and business strategy. this article aims to address these challenges by focusing on the south african automotive industry. through a theoretical analytical review of relevant literature on supply chain strategies, this study identifies the primary challenges faced by the industry, including external environmental factors, customer demands, competition, and industry-specific issues. the article argues that these challenges are exacerbated by the mismatch in the application of supply chain strategies. to address this, a framework is proposed to guide supply chain managers in selecting appropriate strategies. the article seeks to advance the discussion on differentiating supply chain strategies and offers a practical tool to align supply chain and business strategies effectively. keywords: supply chain strategy, business strategy alignment, automotive industry, south africa supply chain challenges introduction supply chain managers are confronted by significant challenges in managing their supply chains (lo and power, 2010). this makes it necessary to take strategic decisions and to develop competitive supply chain strategies with capabilities that add value in the eyes of the customers (lee, 2002; ismail and sharifi, 2006). fisher (1997) developed a model that helps managers determine their supply chain based on the nature of the product (functional and innovative products). scholars have contributed extensively to fisher’s model and have suggested that in addition to the „product‟, there are additional factors that might influence the choice of a supply chain strategy (lo and power, 2010). these are due to several developments in the market, such as increased competition, increased demand variability, increased product variety, increased amounts of customer-specific products, and product life cycles getting shorter (christopher et al., 2004). according to sun et al. (2009), choosing and implementing the right supply chain strategy is believed to enable the improvement of supply chain management (scm) performance. the ability to design an effective supply chain strategy is an important core capability of scm (nel and badenhorst-weiss, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 21 | p a g e 2010). supply chain management (scm) can be defined as a set of approaches utilized to efficiently integrate and coordinate the materials, information and financial flows across the supply chain, so that merchandise is supplied, produced and distributed at the right quantities, to the right locations, and at the right time, in the most cost-efficient way, while satisfying customer requirements (hilletofth, 2009). in south africa, the automotive industry is the leading industry in supply chain practices (supply chain foresight, 2007). the industry is often referred to as the barometer of the health of the economy of the country. yet, many companies within the sector have little knowledge of the costs involved in maintaining their supply chains, nor of the impact of supply chain on their operations (data scope consulting, 2008). manufacturers and suppliers are challenged to react flexibly to changes in customer demand (supply chain foresight, 2010), thus forcing second-tier manufacturers to hold larger inventory levels (data scope consulting, 2008). therefore, the challenges in the south african automotive industry can be attributed to poor supply chain strategies that are not matched to the business strategies (lee, 2002). according to fisher (1997), mismatch is the root cause of the problems plaguing many supply chains and therefore supply chain strategies that are based on a one-size-fits-all strategy will fail (lee, 2002; sun et al., 2009). a good supply chain strategy must be aligned to a company’s business strategy (chaudhary, 2008) since a mismatch generally leads to significant problems in business operation (lo and power, 2010). it is therefore imperative for supply chain managers to understand their customers‟ needs, and to choose and implement the right strategy for the supply chain to satisfy customer demands. given the importance of choosing the right supply chain strategies for organizational performance, the purpose of this article is therefore to firstly examine supply chain management challenges with specific reference to the south african automotive industry and secondly to suggest a comprehensive framework that will help managers chose their supply chain strategies. the article, which is based on a theoretical analytical review of related literature on supply chain strategies, contributes to the ongoing debate on supply chain strategies. the body of the article presents scm in the south african automotive industry; supply chain strategies, related review of supply chain strategies and a framework for implementing supply chain strategies. definition and background of supply chain management in the automotive industry the definition and background of scm in the automotive industry and the challenges of scm in the south african automotive industry is presented here. definition of supply chain management supply chain management (scm) can be defined as the systems approach to managing the entire flow of information, materials and services from the raw materials suppliers through factories and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 22 | p a g e warehouses to the end customer (leenders and fearon, 2004; ambe, 2010). scm involves the management of upstream and downstream relationships with suppliers and customers to deliver superior customer value at less cost to the supply chain as a whole (christopher, 2005). scm exists in all types of business organizations and can be classified into three categories: a management philosophy, implementation of a management philosophy and a set of management processes (klemencic, 2006; lambert, 2006). it contributes to value creation in the business through optimization and alignment of the structures, policies and processes (deloitte, 2011). methodologies that align the supply chain to customers‟ products comprise the biggest opportunity for profit and cash improvement (deloitte, ambe and badenhorst-2011). however, managing a supply chain involves considerable levels of complications (lo and power, 2010). background of supply chain management in the automotive industry globally, scm has undergone an evolution over the last two decades in the automotive industry (cooney and yacobucci, 2005; zhu et al., 2006). historically, the industry operated according to a „push‟ model. in this model, marketing and sales take a best guess at market demand and then supply these forecasts to the design, engineering, financial and manufacturing teams to determine make and/or model production volumes (howard et al., 2006). mass production was the standard production strategy adopted (zhang and chen, 2006). mass production relies heavily on a company’s ability to forecast demand accurately, which in turn guides the company’s decisions regarding operations and production. characterized as a push system, forecast-driven production is a highly efficient but rather rigid system that utilizes historical data and projections to create a production plan and makes use of existing configurations to produce products for stock (zhang and chen, 2006). due to changing demands in the business environment, the focus shifted to mass customization. in this situation, a company’s operations are initiated by the customers‟ orders rather than by a forecast, hence the employment of a customer order strategy (holweg et al., 2005). a customer-order driven production approach is characterized as a pull system that produces the products for specific customer orders in a timely manner, thus, avoiding stockpiles (zhang and chen, 2006). challenges of supply chain management in the south african automotive industry the automotive industry is an important contributor to the south african economy. the industry was south africa’s most heavily protected industry before trade liberalization was launched in the 1990s (flatters and netshitomboni, 2006). the industry, which has attracted much government attention and a wide range of public support (ambe and badenhorst-weiss, 2011), has managed to achieve operations among all role players and is now fully integrated into the global framework of parent companies and multi-nationals (fernandes and erasmus, 2005). all of the mailto:contact@americaserial.com mailto:contact@americaserial.com http://leeds2.emeraldinsight.com/insight/viewcontentservlet;jsessionid=d45cbd17890958d602a90fd4f379bfcf?contenttype=article&filename=published/emeraldfulltextarticle/articles/0240260605.html#idb19 http://leeds2.emeraldinsight.com/insight/viewcontentservlet;jsessionid=d45cbd17890958d602a90fd4f379bfcf?contenttype=article&filename=published/emeraldfulltextarticle/articles/0240260605.html#idb19 http://leeds2.emeraldinsight.com/insight/viewcontentservlet;jsessionid=d45cbd17890958d602a90fd4f379bfcf?contenttype=article&filename=published/emeraldfulltextarticle/articles/0240260605.html#idb19 http://leeds2.emeraldinsight.com/insight/viewcontentservlet;jsessionid=d45cbd17890958d602a90fd4f379bfcf?contenttype=article&filename=published/emeraldfulltextarticle/articles/0240260605.html#idb19 http://leeds2.emeraldinsight.com/insight/viewcontentservlet;jsessionid=d45cbd17890958d602a90fd4f379bfcf?contenttype=article&filename=published/emeraldfulltextarticle/articles/0240260605.html#idb19 http://leeds2.emeraldinsight.com/insight/viewcontentservlet;jsessionid=d45cbd17890958d602a90fd4f379bfcf?contenttype=article&filename=published/emeraldfulltextarticle/articles/0240260605.html#idb19 http://leeds2.emeraldinsight.com/insight/viewcontentservlet;jsessionid=d45cbd17890958d602a90fd4f379bfcf?contenttype=article&filename=published/emeraldfulltextarticle/articles/0240260605.html#idb19 http://leeds2.emeraldinsight.com/insight/viewcontentservlet;jsessionid=d45cbd17890958d602a90fd4f379bfcf?contenttype=article&filename=published/emeraldfulltextarticle/articles/0240260605.html#idb19 american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 23 | p a g e major vehicle manufacturers are represented in south africa. many of them use south africa to source components and assemble vehicles for both the local and the overseas markets (muller, 2009; van der merwe, 2009). a growth catalyst of the south african automotive industry has been the government's motor industry development programme (midp). compliance with the world trade organization (wto) led the south african government to review the midp and replace it with the automotive production development programme (apdp) (ambe and badenhorst-weiss, 2011). this involved a shift from export support to production support, while phased-down tariff reductions (albeit at a slower pace) are transitionally maintained as the midp gives way to apdp (mohubetswane, 2010). the south african automotive supply chain is segmented and comprises eight major oems who are supplied by approximately 275 first-tier suppliers, 100 second-tier suppliers and more than 200 third and fourth-tier suppliers (khayundi, 2010). critical issues for consideration in the industry’s supply chain are cost containment, development know-how and resources, product quality and logistics (khayundi, 2010). muller (2009), supply chain foresight (2010) and ambe and badenhorst-weiss (2011) have pointed out that the south african automotive industry faces great supply chain challenges. these include the establishment of cost reduction measures and service improvement (supply chain foresight, 2007). moreover, the majority of companies within the industry do not only operate with low levels of collaboration, but are also not market sensitive or reactive to the changing market (supply chain intelligence report (csir), 2009). the supply chain foresight report (2010) also highlighted the fact that the industry supply chain is more vulnerable than ever as a result of vast swings in demand and volumes because of the global recession. adding to the disarray faced by the south african automotive industry was pressure by oems to reduce prices, excessive inventory, the unreliability of rail transport and rail capacity problems, the high cost of south african ports, the cost of replacing outdated technology, and broad-based black economic empowerment; and a lack of skills and labour problems, both of which are time-consuming to resolve (naude and badenhorst-weiss, 2011). therefore, there is a need for the south african automotive industry manufacturers to produce at a competitive cost and to have the ability to respond quickly and reliably to first-world market demands (ambe and badenhorst-weiss, 2011). based on the review provided, this article articulates that supply chain challenges in the south african automotive industry stem from the external environment, the customers, competition and the automotive industry. table 1 summarizes the supply chain challenges in the south african automotive industry and their main sources. these challenges affecting the south african automotive industry have led manufacturers and suppliers to build up buffer inventory and limit their ability to react flexibly to changes in customer demand (supply chain fore sight, 2010). data scope consulting (2008) point out that, manufacturers forced mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 24 | p a g e their second-tier manufacturers to hold larger inventory levels to avoid bringing a large manufacturing line to a halt. these challenges can be attributed to mismatch in the supply chain (fisher, 1997; lee, 2002; hines, 2006). fisher (1997) attributes the root cause of the problems plaguing many supply chains to a mismatch between types of environmental uncertainty and supply chain strategy (lee, 2002; hines, 2006). therefore, choosing and implementing the right strategy for the supply chain to satisfy customer demands is vital for automotive manufacturers, their suppliers, and the economy as a whole. according to sun et al. (2009), it is believed that the right supply chain strategy can improve scm performance (christopher et al., 2004). review of supply chain strategies following the definition and background discussion, the focus of the article now moves to a review of supply chain strategies. what is a supply chain strategy? due to an awareness of the need to align processes with trading partners to achieve business outcomes, business competition has shifted from a traditional firm basis to a supply chain-wide basis (hugo et al., 2004; lo and power, 2010). a supply chain strategy is part of the overall business strategy, designed around a well-defined basis of competition (innovation, low cost, service, quality) (cohen and rousell, 2005). supply chain strategy utilizes interfirm coordination as the capability that facilitates achievement of objectives focused on revenue growth, operating cost reduction, working capital and fixed capital efficiency to maximize shareholder value (deffee and stank, 2005). it is integrated with marketing strategy and with customers' needs, product strategy and power position. in a rapidly evolving global economy, no firm exists in a vacuum (hugo et al., 2004; ambe and badenhorst-weiss, 2010). it is now increasingly accepted that „one size does not fit all‟ when it comes to designing supply chain strategies to support a wide range of products with different characteristics (christopher et al., 2006). supply chain strategy differs from traditionally accepted company strategies, in that it requires the coordination and commitment of many different firms to implement company strategic objectives (deffee and stank, 2005). the questions remain: how do supply chains function and how deeply are supply chain concepts ingrained in manufacturing organizations (vonderembse et al., 2006)? christopher et al. (2006) says that in the ideal world, supply chains would be designed from the „customer backwards‟ rather than according to the conventional approach which tends to be from the „factory outwards‟. there is a temptation t o create supply chains that are more focused upon „efficiency‟ goals than „effectiveness‟ goals. thus, the typical supply chain strategy is likely to be aimed at achieving a smooth flow at minimum cost. what might look like a cost saving to one firm could mean increased costs to the supply chain as a whole. therefore, there is a great need for research establishing how, and to what extent, supply chain strategies directly or indirect shape a company’s performance (sun et al., 2009). mailto:contact@americaserial.com mailto:contact@americaserial.com ambe and badenhorst american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 25 | p a g e table 1. supply chain challenges in the south african automotive industry. sources of challenge description of supply chain challenge external rising fuel cost; dealing with oil price volatility; vulnerability of the supply chain; restructuring of operations as a result of global recession competition delicate balance in servicing customers and dealing with suppliers; effect of globalization on the supply chain; planning and forecasting issues; increased road flight volume; globalization and market convergence; individualization; accelerated modification and diversification of product portfolio; increased pressure of innovation and stiff competition among manufacturers resulting in more mergers or acquisitions customer cost reduction and service improvement; growing severity of the economic slowdown; making the supply chain lean; efficient planning and forecasting; producing at a competitive cost and pressure on oems to reduce costs industry inadequate infrastructure; operating with low levels of collaboration and not reacting to market changes differentiating supply chain strategies supply chain scholars have agreed that a supply chain strategy should be chosen based on the nature of the product and by matching the strategy to the unique characteristics of different products or markets (christopher and towill, 2002; fisher, 1997; lee, 2002; sebastiao and golicic, 2008). the fisher (1997) model has helped managers to understand the nature of their product and to devise a supply chain strategy that can best satisfy the specific demand (jacobs et al., 2009). according to fisher’s model, supply chain strategy is established based on the product type (functional or innovative products) (fisher, 1997). functional products are predictable and stable over time and therefore have a supply chain strategy oriented toward efficiency (jacobs et al., 2009). innovative products have a shorter product lifecycle and their demand is unpredictable and oriented towards a responsive supply chain strategy reducing lead times (jacobs et al., 2009). lee (2002) introduced a framework for establishing a strategy based on supply and demand uncertainties. lee (2002) elaborates upon the match between strategy and product characteristics by considering stable versus evolving supply characteristics in addition to demand. according to lee (2002), efficient and responsive supply chain strategies are associated with stable supply processes while risk-hedging and agile supply chain are associated with conditions of evolving supply processes (sebastiao and golicic, 2008). chopra and meindl (2010) consider two main strategies for the supply chain (efficiency and responsiveness) and introduce a three-step procedure for achieving strategic fit. in the first step, the competitive strategy of the supply chain is established, and as a result, the uncertainty level a supply chain must face is measured. in the second step, the supply chain strategy is recognized, and in the last step, the competitive strategies and supply chain strategies are matched to the strategic fit zone. these mailto:contact@americaserial.com ambe and badenhorst american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 26 | p a g e authors have shown that there is a direct relation between the competitive strategy and the supply chain strategy in achieving strategic fit (chopra and meindl, 2010). furthermore, christopher and towill (2002) contend that there are different pipelines to satisfy customer demands, but these pipelines must be selected to match the business strategy of the supply chain. christopher et al. (2006) proposes a three-dimensional classification appropriate for global supply chains. these dimensions and their binary gradations are: products (standard or special), demand (stable or volatile) and replenishment lead-times (short or long). christopher and towill (2002) also note that the element to influence the choice of supply chain strategy is the specific „market winner‟ criterion. where cost is the primary market winner, the emphasis must be upon efficiency, which will imply lean strategies. however, the reality is that lean strategies will only be viable where demand is stable and the products are standard. where availability is the market winner, the emphasis will inevitably veer towards agile strategies. fawcett et al. (2007) also note that a supply chain strategy can be determined from the product life cycle (plc). the plc summarizes all the steps from product design and development phases to the decision to remove it from the market. the product goes through an introduction, growth, maturity and a declining phase (aitken et al., 2003; astrom and ohgren, 2010). different types of products, that is, innovative, hybrid or functional, can be classified into different phases of the plc. chibba (2007) explains that the plc describes in return which type of supply chain should be preferred: agile, hybrid, lean or efficient. the number of different supply chains can be narrowed down to the generic supply chain strategies (lean and agile supply chain). simchi-levi et al. (2003) distinguishes between push and pull supply chains (diaz, 2005). a pushoriented supply chain caters to stable demand of homogenized products. in this type of supply chain, production and distribution decisions are based on long-term forecasts, as demand is stable. in the pull supply chain, the entire supply chain is driven by actual demand; the time to market becomes long, depending on the type of supply chain and the number of players involved in it. also, in a pull strategy, it is not possible to get advantage of economies of scale, since batch production or truckloads are hard to achieve (simchi-levi et al., 2003; diaz, 2005). there are therefore, several factors that could be used to determine supply chain strategies. some of the aspects include the demand and supply characteristics of a product; the market winners and market qualifiers; the product life cycle; pull and push strategy; and manufacturing strategies. the paper further suggests a framework to help managers choose their supply chain strategies. figure 1. steps for choosing supply chain strategies. the right s upply chain strategy for a product step 1 : understand the market and the nature of customer demand step 2 : determine competencies and capabilities of the company step 3 : choose the strategy applicable mailto:contact@americaserial.com ambe and badenhorst american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 27 | p a g e framework for supply chain strategies a framework for choosing and implementing supply chain strategies is presented here. according to ismail and sharifi (2006), sharifi et al. (2006), hines (2006), fawcett et al. (2007) and chopra and meindl (2010), important and critical processes for choosing a supply chain strategy include the following: understanding of market requirements and the current situation of the supply chain; determining supply chain performance attributes based on an analysis of customer requirement and the current situation of the supply chain; determining supply chain performance dimensions that stand for the areas where the supply chain attributes can be deconstructed to more concrete performance dimensions; translating supply chain dimensions into supply chain functions converting the conceptual supply chain to an actual supply chain; and designing and examining all the components and aspects of the desired supply chain against the market requirement and current situation. however, a supply chain strategy can be chosen using three basic steps that will be aligned with the business strategy. the first step is to understand the markets and the nature of customer demand. the second step is to define the strengths or core competencies and capabilities of the company. the third step is to choose the strategy applicable to the product. figure 1 illustrates the steps for choosing supply chain strategies. step 1: understand the market and the nature of customer demand customers today are more demanding, not just of quality, but also of service (sahav et al., 2006: 16). therefore, for an organization to make the right decision on the type of supply chain strategy, it must understand the customer and the supply chain uncertainty (hines, 2006; chopra and meindl, 2010). there are six key market variables that determine the attributes of a supply chain structure: volume, time, variety, service level required, price and rate of change, innovation and new product development (hines, 2006). it is also important to identify customer segments to determine similarities between groups of customers so that their needs can be satisfied efficiently (hines, 2006). customers in different segments may have similar needs to other segments but in most cases the difference will be greater than the similarities observed. as noted by sun et al. (2009), as well as waller (2004), the faster the response to the market for a product, the more uncertainty will be experienced in the supply chain. supply chain uncertainty is strongly affected by product life cycle (fawcett el al., 2007). new products being introduced have higher supply uncertainty because design and production processes are still evolving. mature products have less supply uncertainty (hines, 2006; chopra and meindl, 2010). jacobs et al. (2009) point out that fisher developed a framework to help managers understand the nature of their product and devised the supply chain that can best satisfy that demand. according to lee (2002), selldin and olhager (2007), and jacobs et al. (2009) based on fisher‟s (1997) model, products can be categorised as either primarily functional or primarily innovative. each of the supply chain categories requires distinctive kinds of supply chains. choosing the wrong strategy for a product may lead to mismatch in the supply chain (lee, 2002). mismatch is the root cause of the supply chain problems (fisher, 1997; hines, 2006). table 2 shows the difference between functional and innovative products based on the demand and supply characteristics. step 2: define core competencies and capabilities of the company supply chains have different characteristics but all supply chains have two important attributes: cost and service (taylor, 2004: 280). hines (2006: 61) and chopra and meindl (2010: 44) explain that supply chain capabilities include the ability to respond to wide range of quantities demanded, meet short lead times, handle a large variety of products, build highly innovative products, meet a high service level and handle supply uncertainty. to be able to determine the capabilities of the supply chain, mailto:contact@americaserial.com ambe and badenhorst american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 28 | p a g e a trade-off between responsiveness and cost is required (taylor, 2004; hines, 2006). responsiveness comes at a cost (chopra and meindl, 2010). increase in cost leads to the concept of „supply chain efficiency‟ (hines, 2006). the trade-off philosophy of cost and responsiveness led to the term „efficient frontier‟ (taylor, 2004; hines, 2006; chopra and meindl, 2010). taylor (2004) refers to the „efficient frontier‟ as an intermediary „win-win‟ situation that allows two qualities to be combined to some degree with an upper bound (the constraint of the total of the two). the efficient frontier shows the lowest possible cost for a given responsiveness (chopra and meindl, 2010). the efficient frontier therefore represents the cost responsiveness performance of the best supply chains. a key strategic choice for a supply chain is the level of responsiveness an organization seeks to provide (chopra and meindl, 2010). the most important consideration in deciding where to place a company along the trade-off curve is the choice of the corporate positioning strategy (taylor, 2004). step 3: choose the strategy applicable from the afore analysis, it is clear that putting responsiveness and efficiency as a trade-off, recognizes that different levels of responsiveness are associated with cost implications (taylor, 2004; hines, 2006). the level of responsiveness in the supply chain depends upon increasing cost. increase in cost lowers efficiency but increases responsiveness. in deciding upon the type(s) of supply chain strategy to choose, it is necessary to understand what the customer needs (hull, 2005; hines, 2006; jonsson, 2008; chopra and meindl, 2010). designing a supply chain strategy that can meet the customer’s needs is what customer focus is all about. therefore, the customer needs should be the main focus. this point of focus helps an organization to achieve strategic fit. to achieve complete strategic fit, an organization must ensure that all its functions maintain consistent strategies that support the competitive strategy. all sub-strategies within the supply chain, such as manufacturing, inventory and purchasing, need to table 2. characteristics of the dimensions of demand and supply. demand characteristics functional supply characteristics innovative higher demand uncertainties stable evolving low demand uncertainties fewer breakdowns vulnerable to breakdowns more predictable demand difficult to forecast stable and higher yields variable and lower yields stable demand variable demand fewer quality problems potential quality problems long product life short selling season more supply sources limited supply sources low inventory cost high inventory cost reliable suppliers unreliable suppliers low profit margins high profit margins fewer process changes more process changes low product variety high product variety fewer capacity constraints potential capacity constrained low stockout cost high stockout cost flexible inflexible low obsolescence high obsolescence dependable lead time variable lead time source: adapted from fisher (1997), lee (2002) and verdouw and verwaart (2008). mailto:contact@americaserial.com ambe and badenhorst american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 29 | p a g e be consistent with the supply chain level of responsiveness. firms with different locations along the spectrum must have different supply chain design and different functional strategies that support the spectrum (chopra and meindl, 2010). table 3 shows a comparison between efficient and responsive supply chains. an efficient supply chain focuses on delivering products at lowest possible costs to customers (functional), while in a responsive supply chain, speed and flexibility are required from suppliers, manufacturers and product design solutions (innovative products) (kaipia and holmstrom, 2007: 4). supply chain strategies vary according to the discipline from which they originate. however, their intent is consistent; to reduce uncertainties and cost while satisfying the end customers‟ needs (hines, 2006). supply chain strategies may be designed to be more efficient and/or more effective. within these parameters, supply chains can be grouped into two broad categories that summaries their core competencies and capabilities in meeting the end customers‟ needs. according to christopher and towill (2002), an efficient supply chain is also known as a „lean‟ supply chain while a responsive supply chain is known as an „agile‟ supply chain (nel and badenhorst-weiss, 2010). table 4 presents some of the distinguishing attributes of a lean and an agile supply chain. there are two main strategies in the supply chain (mason-jones et al., 2000; christopher and towill, 2001; christopher, 2005; hull, 2005; simons and zokaei, 2005; hallgren and olhager, 2009; vinodh et al., 2009; pandey and garg, 2009). these strategies are termed „generic‟ supply chain strategies and include „lean‟ and „agile‟. a lean supply chain strategy works best in high volume, low variety and predictable environments, whereas an agile supply chain strategy is needed in a less predictable environment where the demand for variety is high (christopher, 2005). identifying the types of supply chain strategies might be appropriate in different circumstances to position the products in an organization’s portfolio according to their supply and demand characteristics (ambe and badenhorstweiss, 2010). lean and agile supply chain strategies can be integrated in a variety of ways (faisal et al., 2006; krishnamurthy and yauch, 2007: 591; hilletofth, 2009) because they are common to each other. they can be linked to evolve a new manufacturing paradigm under the name „legible‟ (vinodh et al., 2009). krishnamurthy and yauch (2007) define a system as one in which the advantages of leanness and agility are combined. a legible supply chain aims to infuse competitiveness in an organization in a costeffective manner (faisal et al., 2006). legality refers to the combination of lean and agile paradigms within a total supply chain strategy. this occurs when the decoupling point is positioned so as to best suit the need for responding to a volatile demand downstream, while still providing level schedule upstream from the decoupling point (hull, 2005; vinodh et al., 2009; rahiminia and moghadasian, 2010). therefore, a supply chain can either be lean, agile or a combination of lean and agile (legible). an organization can achieve a competitive advantage by strategically employing a legible supply chain model through combining a lean and an agile supply chain strategy, as shown in figure 2. customer demand (hull, 2005). this will lead to com by employing a legible supply chain strategy, an petitive advantage through innovation, cost, service and organization can ensure that it will minimize cost and quality (mistry, 2005). figure 3 presents a comprehensive maintain stability while being flexible and responsive to framework for chosen supply chain strategies. source: christopher and towill (2001: 208). mailto:contact@americaserial.com ambe and badenhorst american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 30 | p a g e figure 2. achieving competitive advantage through a leagile supply chain. table 3. comparison of efficient and responsive supply chains. characteristics efficient supply chain responsive supply chain demand constant, based on forecasting fluctuates, based on customer orders product life cycle long short contribution margin low high order fulfil lead time allowed longer fulfilment lead time short or based on quoted due date supplier long-term according to product life cycle production make-to-stock make-to-order; assemble-to-order; build-toorder capacity low high inventory finished goods inventory parts, components, subassembly supply selection low cost, consistent quality, and on-time delivery flexibility, fast delivery, high-performance design quality source: jonsson (2008: 384). table 4. distinguishing attributes of a lean and an agile supply chain. distinguishing attribute typical products lean supply commodities agile supply fashion goods marketplace demand predictable volatile product variety low high product life cycle long short customer drivers cost availability profit margin low high order winner cost time, availability leagile supply chain lean supply chain agile supply chain competitive advantage innovation cost service quality mailto:contact@americaserial.com ambe and badenhorst american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 31 | p a g e figure 3. framework for supply chain strategies. conclusion in view of increased competition and complexities that constitute critical issues for automotive companies, supply chain management (scm) is paramount to the success of the south african automotive industry. the purpose of this article was firstly to examine scm challenges with specific reference to the south african automotive industry and secondly to suggest a comprehensive framework to help supply chain managers choose their supply chain strategies. the article, which is based on a theoretical analytical review of related literature, reviews scm in the south african automotive industry, supply chain strategies, and different approaches for differentiating supply chain strategies. the literature review reveals that the south african automotive industry faces great supply chain challenges. adding to the disarray faced by the south african automotive industry is pressure by oems to reduce prices, excessive inventory, the unreliability of rail transport and rail capacity problems and supply chain strategy step 1: understand the market and the customer demand functional ( predictable) product innovative ( unpredictable) products step 2: determine core competencies and capabilities of the comp any market winner: low cost product life cycle: long few market segments market winner: high service levels product life cycle: short multiple market s egments step 3: choose the strategy applicable efficiency decisi on drivers: production centralised with little excess capacity; reduced inventory levels; f ew locations with centralised activities; slow and cheaper transportation mode; cost of information drops while other cost s rise. responsiveness decision drivers: production decentralised with excess capacity; high level of inventory; many locations physically close to customers; fast and flexible transportation mode; collect and share timely, accurate data the right supply chain strategy lean supply chain strategy agile supply chain strategy leagile supply chain strategy ( pos ses s characteristics of lean and agile supply chain strategies) mailto:contact@americaserial.com ambe and badenhorst american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 32 | p a g e the high cost of south african ports. there is clearly a need for the south african automotive industry manufacturers to produce at a competitive cost and to have the ability to respond quickly and reliably to first-world market demands (ambe and badenhorst-weiss, 2011). the article articulates that supply chain challenges in the south african automotive industry stem from the external environment, the customers, competition and the automotive industry. challenges in the supply chain can occur as a result of a mismatch in the application of supply chain strategies. as indicated by fisher (1997), the root cause of the problems plaguing many supply chains is a mismatch between types of environmental uncertainty and supply chain strategy (lee, 2002; hines, 2006). therefore, it is important for supply chain managers to understand how to choose the right strategy for the supply chain to satisfy customer demands. it is believed that by implementing the right supply chain strategy, managers will be able to improve scm performance (christopher et al., 2004). the article concludes by suggesting a framework for chosen supply chain strategies. the framework is made up of three steps: the first step is to understand the markets and the nature of customer demand, the second step is to define the strengths or core competencies and capabilities of the company and the third step is to choose the strategy applicable to the product. the framework will help to ensure that strategies in the supply chain are chosen in a manner that will satisfy customer demand and match to the business strategies. the limitation of the framework suggested in this article is that it is still to be tested for its applicability in the industry. references ambe im (2010). agile supply chain: strategy for competitive advantage. j. global strateg. manage., 7: 5-17. ambe im, badenhorst-weiss ja (2010). strategic supply chain framework for the automotive industry. afr. j. bus. manage., 4(10): 2110-2120. ambe im, badenhorst-weiss ja (2011). south african automotive industry: trends and challenges in the supply chain. j. cont. manage., 8: 337 – 362. aitken j, childerhouse p, towill d (2003). the impact of product life cycle on supply chain strategy. int. j. prod. econ., 85: 127–140. astrom e, ohgren m (2010). evaluating distribution centres in a global supply chain: a case study at cargotec sweden, macgregor cranes, master‟s thesis, lulea university of technology. chibba a (2007). measuring supply chain 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system model via literature exploration. ind. manage. data syst., 109(4): 570-588. vonderembse ma, uppal m, huang sh, dismukes jp (2006). designing supply chains: towards theory development. int. j. prod. econ., 100: 223–238. waller b (2004). market responsive manufacturing for the automotive supply chain. j. manuf. technol. manage., 15(1): 10–19. zhang x, chen r (2006). forecast-driven or customer-order-driven? an empirical analysis of the chinese automotive industry. int. j. oper. prod. manage., 26(6): 668-688. zhu q, sarkis j, lai k (2006). green supply chain management: pressures, practices and performance within the chinese automobile industry. j. clean. prod., 15(11): 1041-1052. mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 66 | p a g e social media marketing and women’s perception of family planning methods in akwa ibom state, nigeria 1john donatus asangaeneng, 2abasiama asuquo mfon (phd) and 2nkanikpo ibok ibok (phd) 1school of post graduate studies, akwa ibom state university, ikot akpaden 2department of marketing, akwa ibom state university, obioakpa campus johnasangaeneng@gmail.com; (08032351559)/ amamfon@yahoo.com; (08037585128)/ nkanikpo@yahoo.com; (08023553684) doi: https://doi.org/10.5281/zenodo.13684625 abstract: this study investigated the effect of social media marketing on women’s perception of family planning methods in akwa ibom state. research design approach was adopted for this study. the population for the study consisted of women of reproductive age and nursing mothers between the ages of 18 to 45 years and above who are involved in family planning methods in akwa ibom state. sample size for the study consisted of 400 respondents, determined using taro yemane formula, since the population was finite. the main source of data used in this study was from primary, gathered with the use of an adjusted 4-point likert scale questionnaire. respondents were selected using the convenient sampling technique. data collected were analyzed using table, frequency and percentage, while hypotheses were tested using simple regression analysis with the help of spss 24. findings revealed that influencer marketing, educative contents and engagement had positive and significant effect on women’s perception of family planning. it was concluded that influencer marketing, educative contents and engagement were positive and significant predictors of women’s perception of family planning methods. it was therefore recommended amongst others that government and other stakeholders should partner with key influencers to build trust and credibility among women about family planning methods on social media platforms. key words: social media marketing, women’s perception of family planning methods, influncer marketing, educative contents and engagement introduction digital marketing is without a doubt one of the most important technologies that has fully changed the world. the internet made it possible for digital marketing to become a paradigm shift. creating mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:johnasangaeneng@gmail.com mailto:amamfon@yahoo.com mailto:nkanikpo@yahoo.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 67 | p a g e awareness of available products in the past was usually done using traditional methods like radio stations, printing media, and billboards. still, these changes are the biggest they have been since the onset of the internet in the 1990s. social media marketing, search engine optimisation, pay per click, content marketing, email marketing, marketing analytics, influencer marketing, viral marketing, and many more have all been used successfully in digital marketing. all of these sites have been very helpful in running business activities. and have impacted the way people shop, get information, and consume. this is something that every marketing company that cares about their job should take very seriously. many of the ways that internet users and other product buyers talk to each other have changed because of social media marketing. this, in turn, has an effect on the way that these people buy things. considering that we live in the digital age now, social media marketing is an important part of our daily lives in all age groups. making this possible has allowed people to quickly and easily talk to each other, no matter where they are in the world. so, marketers have changed their strategies because it is thought that in the future, marketing to consumers will focus on mobile devices and social media sites (ziyadin, doszhan, borodin, omarova & ilyas, 2019). it is observed that, the main idea behind social media marketing is to use people's natural conversational channels to build relationships with them and meet their needs (hajli, 2015). in 2010, kaplan and heinlein said that social media is a group of internet-based programmes that build on the ideas and technologies of web 2.0. users can make and share their own content through these apps, which also help businesses connect with customers, build relationships, and keep those relationships strong quickly and cheaply. social media marketing involves changing and affecting what people think, feel, and do. a few years ago, marketing was done in person, and many businesses were successful even before the internet and social media ads set in. today, all of those things have changed, and social media is now an important part of modern business organisations from the point of view of both traditional businesses and their clients. one of the most interesting things about social media is that it can be used in all kinds of areas, like marketing, engineering, medicine, law, education, and more. in the health sector, for example, one common way to promote family planning is through social media marketing. this is done to make people aware of the benefits of using family planning. this is because knowledge has the power to change people's thoughts, feelings, behaviours, and preferences for the better. this kind of communication can also help raise awareness, improve knowledge, and eventually lead to the desired change in behaviour as part of a family planning intervention. a lot of people can share material quickly, easily, and in real time on social media sites like facebook, twitter, instagram, and youtube. the point of these platforms is to make it easier for people to share information. because of this, the way we live and do business has been completely changed (agafa, 2020; mfon 2021; akpan, mfon & ibok, 2022; suleiman, 2022). ekong, mfon & ibok, 2023). people mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 68 | p a g e use social media marketing to spread the word about a business. some of the aspects that are used for this purpose are usability, sociability, participation, trustworthiness, social proof, increased publicity, and influencer marketing. in 2010, kaplan and heinlein wrote that social media is a platform that is based on technology and makes it easier for people to share their opinions and usergenerated material with communities all over the world. this technology can also be thought of as being based on the internet and built on the mathematical and theoretical underpinnings of web 2.0. user generated content (ugc) can be made and shared with this technology. people are becoming more and more interested in using social media because it can help build strong, long-lasting relationships between companies and customers. on top of that, social media has a lot of communication power. social media is very popular all over the world. although it is a fairly new type of media that has grown over the last few years, 84% of people in both northern and western europe use social media; 72% of people in eastern asia do the same; 74% of people in north america do the same; 72% of people in southern america do the same. this number drops to 41% in southern asia, 13% in western africa, and 7% in middle africa (global social media, 2023). in the present modern world, social media sites are always growing and changing to meet the needs and wants of more and more customers. people, businesses, and the government all use social media marketing to reach out to potential customers and meet the wants of current customers. a lot of social networking sites, like facebook, instagram, and twitter, are being used by the government of nigeria and akwa ibom state in particular to spread information about safe motherhood and effective ways to plan a family. these issues were brought to the attention of women of childbearing age through this effort. social media's marketing potential has been shown to be quite large, and it has been especially helpful for women who are trying to plan their families. because of this, the goal of this study was to look into the different ways that social media marketing could be used to change the views that women in akwa ibom state, nigeria have about different methods of family planning. statement of the problem a lot more people are using social media to sell their businesses. different types of people, companies, and the government use social media sites like facebook, instagram, youtube, and twitter to promote their brands in the digital marketing world. to be able to interact with customers on social media, brands and businesses are putting a lot of efforts and money into a wide range of marketing strategies. all of this is done to make customers happier, keep them coming back, and make them more likely to buy something. nigeria is one of many developing countries that is having a hard time because their population is growing so quickly. there are a lot of reasons why women in rural places do not have good reproductive health, some of which are personal problems and problems getting to the right health mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 69 | p a g e care services. some of the things that make this problem worse are obnoxious ideas about family planning, not understanding it, and not having enough knowledge. family planning is a practice that not only helps keep the population in check but also makes mothers and children healthier. reports that can be trusted about how nigerian country women feel about family planning are hard to come by. one thing that is missing from the research is a clear picture of how influencer marketing, educational material, and engagement on social media may change women's thoughts about family planning options. this is true even though there is a lot of proof that social media marketing changes how customers in many different industries and countries around the world think. according to the researchers, no research has been done on how women in akwa ibom state feel about family planning methods in relation to social media marketing. this is despite the fact that many studies have been done on this topic, such as emeka (2018), and mikolajezyk, stanford, and rauchfuss. (2013). against this background, this study looked into how women in akwa ibom state feel about the different methods of family planning and how they are related to different aspects of social media marketing, such as influencer marketing, educative contents, and engagement. objectives of the study the main objective of this study was to investigate the effect of social media marketing on women’s perception of family planning methods in akwa ibom state, nigeria. the specific objectives were to; i investigate the effect of social media influencer marketing on women’s perception of family planning methods in akwa ibom state, nigeria. ii determine the effect of social media educative contents on women’s perception of family planning methods in akwa ibom state, nigeria. iii examine the effect of social media engagement on women’s perception of family planning methods in akwa ibom state, nigeria research questions based on the objectives of the study, the following research questions were raised: i. how does social media influencer marketing affect women’s perception of family planning methods in akwa ibom state, nigeria? ii. in what way do social media educative contents affect women’s perception of family planning methods in akwa ibom state, nigeria? iii. what is the effect of social media engagement on women’s perception of family planning methods in akwa ibom state, nigeria? hypotheses of the study the following null hypotheses were formulated for testing in the study mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 70 | p a g e ho1 social media influencer marketing has no significant effect on women’s perception of family planning methods in akwa ibom state, nigeria. ho2 social media educative contents have no significant effect on women’s perception of family planning methods in akwa ibom state, nigeria. ho3: social media engagement has no significant effect onwomen’s perception of family planning methods in akwa ibom state, nigeria. review of related literature independent variable dependent variable fig 1: conceptual model of social media marketing and women’s perception of family planning methods. source: researchers’ conceptualization (2024). the concept of social media marketing these researchers see social media marketing as businesses or organizations using platforms like facebook, instagram, or twitter to promote their products, services, or ideas. they create posts, ads, and other content to reach and influence people online. macaulay and mfon (2023) define social media as an e-marketing tool that assists a company in promoting its products or services online and also enables the company to communicate with its clients in an effective and efficient manner social media marketing influencer marketing educative content customer engagement women’s perception of family planning mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 71 | p a g e through the use of social media channels or handles. it is composed of a number of components, including whatsapp, facebook page, twitter handle, and youtube, all of which are platforms that facilitate encounters and exchanges of many kinds, including those that are physical, visual, textual, and vocal/audio in nature, with the intention of generating profitable economic transactions. according to ravi and sujaya (2021), social media marketing is a method that enables individuals to promote their websites, goods, or services through online social networks. additionally, it allows individuals to communicate with a larger audience than would have been feasible through traditional advertising channels. it places more of an emphasis on the group than it does on the individual. communities can be found on the internet, and they come in a wide variety of forms and sizes. people communicate with one another. in order for social media marketers to effectively interact with members of a group on certain product and service offers, it is their responsibility to utilize these communities in the appropriate manner. social media marketing is what companies do to make, talk about, and give online marketing products and services through social media sites, as explained by yadav and rahman (2017). the goal of this process is to create and keep relationships with stakeholders that increase the value of customers by making it easier for them to interact, share information, make personalised purchase suggestions, and spread the word about existing goods or services. influencer marketing influencer marketing involves collaborating with popular individuals on social media who have a large following. these influencers promote a product, service, or idea to their audience, encouraging them to try or believe in it. being a person who has a huge number of followers on social media is not the same thing as being an influencer on social media. it is possible that well-known actors, singers, and athletes in the entertainment industry have a sizable following on social media, but they might not engage in any form of influencer marketing. it is possible to characterize a social media influencer as a content producer who builds a following by posting information that is entertaining, informative, and inspirational while simultaneously interacting with their followers. according to harvard business review (2018), individuals who behave in this manner have the ability to establish trends and create engagement, thereby positioning themselves to collaborate with businesses and brands through the dissemination of sponsored or compensated content. according to sammis, lincoln, pomponi, ng, gassmann, & zhou (2016), influencer marketing is both an art and a science. it involves reaching out to influential people on the internet and encouraging them to share brand messaging with their own audiences. educative contents these are informative materials shared through media (like videos, articles, or posts) that aim to teach people something new, for example, a video explaining how different family planning methods mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 72 | p a g e work. they constitute instructional or informative contents of social media postings which can be defined as the extent to which they provide readers with knowledge that is both clever and useful (laryea, 2017). mosconi, korn, reuter, tolmie, teli, and pipek (2017) state that posts in which members inform, notify, or alert other individuals about particular issues are considered informational material. informational material is created for the purpose of sharing and disseminating useful information with other users and for the purpose of influencing information that can either modify or confirm a person's perspective or position on a specific issue. simply said, it is all the many kinds of data that are available on social media sites. egger (2013) argues that the primary motivation behind creating informational material is the desire to facilitate knowledge exchange and dissemination. according to gedik (2020), educational content is a compilation of ideas, knowledge on a certain topic, and messages that are disseminated in textual, visual, or audio format and are intended for consumption and further dissemination via the internet. it is important for businesses to create compelling tales in order to connect with their customers, capture their attention, and convert them into listeners. nevertheless, there are instances when simply telling a fantastic narrative is not enough. it is essential to keep in mind that these narratives are exactly what the audience, which is the target audience, desires to hear and possibly even requires. social media engagement this refers to the interactions between media content and the audience. it includes likes, comments, shares, and any other form of response that shows people are paying attention to the content. according to kumar and pansari (2016), who define customer engagement as the degree to which a customer is attached to a firm, a higher level of customer engagement is associated with an increase in a company's competitiveness. this is the conclusion that can be drawn from their research. the description that was stated earlier is elaborated upon by vivek, beatty, and morgan (2012), who explain that customer engagement encompass "events and activities engaged in by the customer that are not directly related to search, alternative evaluation, and decision making involving brand choice." this definition allows for a more comprehensive understanding of customer engagement. the alignment between a company's value proposition and the activities that it engages in to offer a great customer experience is the most important component that contributes to increased customer engagement, according to roberts and alpert (2010). this is the most essential factor that leads to higher customer engagement. consumer perception individuals are able to select, organize, and interpret sensations through the process of perception, as stated by hanna and wozniak (2013). perception can be thought of as a process. the context in which an individual perceives the world around him has an effect on the way that person interprets mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 73 | p a g e that environment. the fact that two consumers can never have the same view about a specific product is something that should be taken into consideration. this is typically due to the fact that their requirements, desires, and preferences are unlike one another. customers' impressions are extremely significant to business owners since they are the primary factor in determining the level of success, growth, and sustainability that a company enjoys. the term "consumer perception" refers to the awareness that consumers have regarding a brand, their impressions or opinions regarding the brand, as well as the products and services that the brand offers. consumer perception does more than influence an individual's purchase; it also shapes the long-term relationship between consumers and brands. as a result, every touch point between a company and its consumers should strive to affect the consumer perception in a positive way in order to result in higher customer retention rates. this is because consumer perception shapes the longterm relationship between consumers and brands. women’s perception of family planning refers to how women view or understand family planning methods. it includes their beliefs, attitudes, and feelings about the use and importance of these methods in controlling when and how many children to have. family planning methods according to the world health organization (who, 2018), family planning involves determining the number of children one wants to have and the timing of when they want to have them (the timing of pregnancies and the spacing between births). in order to lessen the dangers that are posed to both the mother and the child, it is recommended that a minimum of twenty-four months (2 years) pass before attempting to conceive another child. there is a possibility that a woman could become pregnant within a few weeks of giving birth if she engages in sexual activity and if she is not exclusively breastfeeding her child. family planning incorporates all the information, resources, and procedures that enable individuals to determine whether or not to have children and when they should have them. a wide variety of contraceptives, such as tablets, implants, intrauterine devices, surgical treatments that limit fertility, and barrier techniques like condoms, non-invasive methods, such as the calendar method and abstinence, are included in this category. in addition, family planning encompasses the provision of information regarding the treatment of infertility as well as the way to become pregnant when it is desirable, as well as treatment of infertility (unfpa, 2022). according to the united nations population fund (unfpa), two major categories of family planning methods are, the reversible (temporary) methods and irreversible (permanent) methods (dibaba, 2010; tsui, mcdonald-mosley, & burke 2015; olaitan, 2011). reversible methods are temporary, whereas irreversible methods are permanent. the reversible (temporary) methods are also known as the spacing methods. the irreversible methods are referred to as sterilization. the decision to go with mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 74 | p a g e them requires serious consideration and deliberation. the most suitable candidates for this form of family planning are individuals who have previously finished having children. in addition to being referred to as periodic abstinence, natural methods of family planning include a collection of techniques that are founded on the principle of avoiding sexual activity during the fertile period, which is the time when a woman is able to conceive. the natural signs and symptoms that are linked with a woman's menstrual cycle can be observed, recorded, and interpreted in order to determine whenever a woman is most likely to get pregnant. the normal day's approach, the calendar (rhythm) method, the cervical mucus (or ovulation) method, and the basal body temperature method are all examples of these procedures. the withdrawal (coitus interruptus) method is a technique in which sexual activity is halted and the penis is removed from the vaginal canal prior to the ejaculatory process. there is also the lactational amenorrhea (lam) which has breast-feeding as its foundation and is also a temporary type of contraception. as a kind of protection against pregnancy, sucking during breastfeeding causes the production of natural hormones that delay ovulation and prevent pregnancy from occurring (dibaba, 2010; tsui et al., 2015; olaitan, 2011). theoretical framework health belief model the health belief model was propounded by hochbaum in 1950. the model is a conceptual framework that is utilized for the purpose of comprehending and explaining health-related behaviors. perceived susceptibility, perceived severity, perceived benefits, perceived barriers, cues to action, and self-efficacy are some of the important constructs that are included in this concept. the health belief model can provide a more in-depth knowledge of how individuals make decisions regarding their reproductive health based on their beliefs and perceptions, particularly in the context of social media marketing and women's conceptions of family planning. regarding perceived susceptibility and severity, it is clear that social media platforms have the potential to be utilized in order to promote awareness about the risks of unintended pregnancies and the significance of family planning, using engaging material and educational content to bring attention to the risks and potential health repercussions, with the goal of changing women's views of the severity and susceptibility of the situation. by perceived benefits, it is implied that social media campaigns have the potential to bring attention to the good effects of family planning, such as improved health for mothers and children, economic stability, and personal well-being. reiterating the perceived benefits of family planning can be accomplished through the use of success stories or testimonials from women who have benefited from the practice. by perceived barriers, it is implied that misconceptions about various techniques of family planning can be addressed and dispelled with the use of social media. it is possible to offer educational mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 75 | p a g e contents and participation in order to lessen the perception of obstacles and to provide correct information regarding the various contraceptive alternatives, their adverse effects, and their effectiveness. cues to action comes into play when social media marketing serves as a potent signal to action by encouraging women to seek additional information, speak with healthcare professionals, or take measures toward family planning. users can be encouraged to think and take action regarding their reproductive health through the use of timely and tailored messaging. self-efficacy suggests that social media platforms have the potential to empower women by providing them with knowledge that boosts their confidence in their ability to make well-informed decisions on decisions regarding family planning. a higher sense of self-efficacy can be achieved through the utilization of educational content, interactive features, and community support. the two-step flow theory the two-step flow theory, which was introduced by lazarsfeld and katz in 1948, implies that certain individuals within a social group are not directly influenced by the ideas that are communicated through the media. opinion leaders or influencers, on the other hand, first take in and make sense of the content that is presented in the media, and then they exert their influence over others within their social network. it is possible to use the theory in the context of social media marketing and women's perceptions of family planning in order to gain an understanding of the role that influencers play in the dissemination of information and the creation of opinions. it is necessary to identify and work together with influential individuals who are opinion leaders and have a well-established trust and credibility in the field of family planning. as a result of their dissemination of knowledge, personal experiences, and suggestions concerning various techniques of family planning, these influencers have the potential to exert a considerable influence on the impressions that women hold. by utilizing a variety of social media channels, such as instagram, youtube, twitter, or tiktok, where influencers are active, one can effectively communicate with a wide range of consumers through the provision of contents that are both entertaining and informative. it is important to encourage influencers to have conversations with their audience about various subjects related to family planning. within the realm of reproductive health, this communication in both directions enables the sharing of ideas, the addressing of issues, and the formation of a community that is providing support. review of empirical literature the influence of social networks on the utilization of family planning among married men and women was the subject of a study that was carried out by mtae (2021), and focused on the mvomero district in tanzania. the research was conducted using a cross-sectional study design, with a total of 128 married men and women participating. the sampling process consisted of multiple stages, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 76 | p a g e including both basic random and purposive sampling methods. for the collection of quantitative data, a semi-structured questionnaire was used, and for the collection of qualitative data, interviews and focus group discussions were conducted. according to the data, the majority of married men and women in mvomero were still young, had completed at least one primary school level of education, and were in monogamous marriages. a little less than one third of them did not make use of any form of family planning, and among the methods that were utilized, the most common ones were tablets and injectable techniques. the majority of married men and women had social networks that included both males and females; however, the majority of married women had a greater number of females in their networks, while married men had a greater number of males. as a result, it was suggested that interventions should be planned and implemented with the intention of increasing family planning information and, consequently, utilization among married men and women through social networks. these interventions should target both males and females. given that males are the ones who make decisions in tanzania, it is essential that they be encouraged to take an active role in family planning, reproductive health, and health-related concerns. a research project was conducted by taiwo, (2017) to investigate the impact of social media on family planning among nursing mothers. the research was conducted at lautech teaching hospital in oshogbo. utilizing data obtained from social media platforms, the objective of the study was to investigate the level of understanding and utilization of family planning methods of contraception among moms living in the oshogbo metropolitan area. using instruments such as other-administered structured interview schedules, in-depth interviews, and informal talk, a crosssectional study of one hundred and twenty nursing moms was conducted in order to obtain qualitative and quantitative data. according to the findings, the situation is not different in nigeria, where a considerable proportion of young people who engage in premarital family planning or contraceptives either lack fundamental information about contraception or are uneducated about the practices of contraception. by utilizing a variety of contraceptive techniques, it was suggested that it is possible to avoid unintended pregnancies that are then followed by abortions that are not safe. in addition, information regarding the knowledge, attitude, and practice of contraceptives among young people is of utmost significance due to the high rates of unintended births as well as the rising prevalence of sexually transmitted infections and hiv/aids. among partnered women in northern nigeria, okunlola, alawode, awoleye, and ilesanmi (2023) conducted research on the use of the internet, exposure to digital family planning messaging, and sexual agency. among partnered women, the purpose of the study was to investigate the relationships between internet use, exposure to digital family planning messages through text messages or social media, and sexual agency. sexual agency was defined as the capacity to refuse sexual activity and to request that a male partner use a condom. the study also aimed to investigate mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 77 | p a g e the differences between rural and urban areas on this front. both descriptive and multinomial logistic regression analyses were performed on the data collected from the 2018 nigeria demographic and health survey to examine the data of partnered women, which totaled 18,205 individuals. according to the findings, 44.6% of women are able to deny sexual activity, and 31.4% are able to request that a male partner use a condom as requested. in the northern region and metropolitan regions, women's ability to deny sexual activity was positively connected with their usage of the internet. across the region, women were more likely to ask their male partners to use a condom. additionally, it was found to have a positive correlation with women's nervousness about approaching a male partner with the request to use a condom. it was shown that women's ability to ask a male partner to use a condom was positively associated with their exposure to digital family planning messages across the region, in both urban and rural locations. the exposure of women in metropolitan areas to digital family planning messaging, on the other hand, was found to be negatively associated with their confusion regarding their ability to resist sexual activity. the findings of this study have implications for the implementation of digital family planning interventions zinke-allmang, hassan, amiya, krittika, amy, ogolla, shirly, kees, and cislaghi (2022) conducted a qualitative study in peri-urban nairobi to investigate the ways in which women and their social networks in kenya use digital media to obtain information about family planning. within the context of their paper, social norms theory was utilized to investigate the manner in which young women and their social networks receive information regarding family planning through digital media platforms such as whatsapp and websites. forty participants, including young women, their spouses, and significant influencers, were interviewed over the phone using qualitative methods. the interviews were performed in seven different peri-urban wards in nairobi, kenya. thematic analysis was utilized in the study of the data. based on the findings, it was determined that young women, their partners, and key influencers primarily accessed family planning information online through their informal networks. however, healthcare workers were regarded as the most trusted sources of family planning information. in digital environments, participants reported feeling more at ease when it came to sharing information about family planning. this was due to the fact that digital spaces provided for greater privacy and lessened the discomforts associated with openly discussing family planning. during the covid 19 pandemic, attya and aboualhuda (2022) conducted a study to investigate the impact of media exposure on women's utilization of family planning methods and their attitude toward planning their families. within the context of covid 19, the purpose of this study was to investigate the impact that exposure to the media has on women's utilization of family planning methods and their attitude towards those methods. an investigation that was descriptive and crosssectional was carried out on a total of 334 married women. the method of sampling known as the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 78 | p a g e snowball was utilized. the findings indicated that 53.3% of women have a low desire to avoid pregnancy during the covid-19 pandemic. furthermore, 64.7% of the women who were studied reported that they did not use family planning methods after being exposed to a family planning message in the mass media. the majority of women (76.6%) highlighted holding positive attitudes towards the utilization of family planning methods after being exposed to media. furthermore, there was a weak positive correlation found between the mass media and the use of family planning for traditional media messages. it was shown that women who were exposed to various forms of media had a good impact on their attitude, despite the fact that they did not use family planning methods throughout the covid-19 study because they had a low desire to avoid becoming pregnant. as a result, it was suggested that additional quantitative research should be carried out. methodology research design the research design adopted for this study was the survey design and in-depth interview. the method used questionnaire as instrument for collecting data. population of the study for the purpose of the study, the population consisted of women of reproductive age and nursing mothers who went to general hospital ikot ekpene, uniuyo teaching hospital, uyo, and general hospital, eket for either antenatal, neonatal, or postnatal care. it was anticipated that there were around 247,353.50 women of reproductive age who are now utilizing the modern technique of family planning, as stated by the nigeria demographic and health survey (ndhs) in the year 2022. sampling and sample size determination due to the fact that it was not possible to cover the entire population, a sample size was determined using the taro yamene method as shown below; n = 𝑁 1+𝑁(𝑒)2 where: n = required sample size n = total population e = acceptable tolerance level of error, which is 5% or 0.05 thus; n = 247,353.50 1+247,353.50(0.05)2 = 247,353.50 1+247,353.50(0.0025) n = 247,353.50 1+618.38375 = 247,353.50 619.38375 n = 399.60 n = 400 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 79 | p a g e sampling technique for the purpose of gathering information from respondents, a non-probability sampling methodology known as the handy sampling technique was utilized on the basis that it allowed the researchers to simply select individuals who were handy. copies of the questionnaire were given to the respondents with the assistance of two trained nurses during their visit to the various hospitals in the selected local government areas for prenatal, neonatal, or postnatal care. these copies were retrieved nearly soon after the visit. research instrument the instrument that was utilized for the research was a survey questionnaire, which was divided into two sections: section a comprising the demographic information of the respondents, and section b comprising twelve items that were based on a four-point likert scale that ranged from strongly agree to strongly disagree. reliability of the instrument in order to determine the degree of dependability that the research instrument possessed, it was put through the cronbach alpha reliability test. the outcome was significantly high enough to warrant the utilization of the study instrument, as shown below; table.1: cronbach alpha pre-test result s/n variables no of items coefficient 1 influencer marketing 3 0.734 2 educative contents 3 0.677 3 engagement 3 0.799 4 perception 3 0.801 total 12 0.752 source: the researchers’ computation (2024). the cronbach coefficients that were calculated for each item were found to be 0.6 or higher, which served as an indication of the reliability or internal consistency of the items that were examined. method of data analysis frequency and percentile analyses were done on the data. analyses, tabulations, and reports were prepared in accordance with the data. decision rule the decision rule that applied was; reject the null hypotheses if the probability value (p-value) is less than 0.05 (p<0.05). alternatively, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 80 | p a g e accept the null hypotheses if the probability value (pvalue) is greater than 0.05 (p>0.05). data presentation and analysis table 2 shows the questionnaire administration and response rate table 2: questionnaire administration and response rate local govt. areas questionnaire administered questionnaire returned response rate (%) uyo 159 148 41.7 ikotekpene 128 105 29.6 eket 113 102 28.7 total 400 355 100 source: field survey, 2024 out of the 400 copies of the questionnaire administered, 355 (88.75%) copies were returned and ascertained to be in usable form. table 3: demographic characteristics of the respondents variables no of respondents percentage (%) age 18-24 years 125 35.2 25-34 years 150 42.3 35-44 years 51 14.3 45-above years 29 8.2 total 355 100 marital status single 100 28.2 married 240 67.6 divorced 15 4.2 total 355 100 educational qualification no formal education 10 2.8 fslc 100 28.2 wasce/neco 65 18.3 hnd/bsc 30 8.4 msc and above 150 42.3 total 355 100 occupation employed 250 70.4 not employed 105 29.6 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 81 | p a g e total 355 100 source: field survey data (2024). as shown on table 3, 125 (35.2%) women were between the ages of 18 and 24; 150 (42.3%) women were between the ages of 25 and 34; 51 (14.3%) women were between the ages of 35 and 44 while 29 (8.2%) women were beyond the age of 45. this analysis indicates that more women of reproductive age were included in the sample, implying that they were mature enough to comprehend the requirements of the study and could give valid responses. as regards marital status, the percentages of people who were single, married, and divorced were as follows: 100 (28.2%), 240 (67.6%), and 15 (4.2%) respectively. this analysis shows that a greater percentage of the women were married and suited for the requirements of the study. in terms of educational qualifications, 150 (42.3%) women, had msc and higher qualifications; 100 (28.2%) were fslc holders; those with wasce/neco were 65 (18.3%); bsc/hnd holders were 30 (8.4%); while 10 (2.8%) had no formal education. this shows that the majority of the women had formal education which indicates that they could understand and address the issues raised in the questionnaire they filled. the vast majority of the women (250; 70.4%) did have jobs while 105 (29.6%) were not employed indicating that the majority of the respondents were engaged and financially independent to go for what they wanted. analysis of research statements and responses table 4: summary of response on influencer marketing as a social media marketing variables/statements strongly agree (%) agree (%) disagree (%) strongly disagree (%) total (%) influencer marketing i find influencer recommendations on family planning methods to be credible. 203 57.2% 97 27.3% 22 6.2% 33 9.3% 355 100% influencers play a significant role in shaping my decisions related to family planning 34 9.6% .68 19.2% 126 35.5% 127 35.8% 355 100% i trust information about family planning methods if it comes from a social media influencer. 198 55.8% 95 26.8% 37 10.4% 25 7.0% 355 100% educative contents mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 82 | p a g e educative content on social media platforms has enhanced my knowledge about various family planning methods. 112 31.5% 58 16.3% 88 24.8% 97 27.4% 355 100% i find educational posts or videos on family planning methods informative and helpful. 206 58.0% 70 19.7% 46 13.0% 33 9.3% 355 100% social media platforms are effective channels for disseminating accurate information about family planning. 113 31.8% 116 32.7% 43 12.1% 83 23.5% 355 100% engagement i actively engage with posts or discussions related to family planning methods 191 53.8% 117 32.9% 30 8.5% 17 4.8% 355 100% social media platforms provide me with opportunities to interact with healthcare professionals or experts regarding family planning 116 32.7% 135 38.0% 83 23.4% 21 5.9% 355 100% i feel empowered to ask questions and seek advice about family planning topics through social media channels 81 22.8% 61 17.2% 128 36.1% 85 23.9% 355 100% women’s perception of family planning social media platforms have influenced my perception of different family planning methods. 198 55.8% 109 30.7% 37 10.4% 11 3.1% 355 100% i find social media content about family planning 185 52.1% 116 32.7% 20 5.6% 34 9.6% 355 100% mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 83 | p a g e methods to be informative and useful. social media marketing has played a significant role in raising awareness about various family planning options. 166 46.8% 102 28.7% 46 13.0% 41 11.5% 355 100% source: the researchers’ compilation (2024). when presented with the statement as to whether respondents believe that recommendations from influencers were credible, 203 (57.2%) had a strong agreement; 97 (27.3%) had an agreement; 22 (6.2%) disagreed; while 33 (9.3%) strongly disagreed. regarding whether the influencers played a significant role in shaping respondents’ decisions on family planning, 34 (9.6%) and 68 (19.2%) of respondents strongly agreed and agreed respectively, while 126 (35.5%) and 127 (35.3%) of respondents disagreed and strongly disagreed respectively. despite the fact that the majority of women, 198 (55.8%) and 95 (26.8%) trusted information about family planning methods if it came from a social media influencer, 37 (10.4%) and 25 (7.0%) of the women did not trust influencers. responding to the statement whether educative contents on social media platforms enhanced their knowledge about various family planning methods, 112 (31.5%) and 58 (16.3%) strongly agreed and agreed respectively with the statement, while 88 (24.8%) and 97 (27.4%) disagreed and strongly disagreed respectively. on whether they found educational posts or videos on family planning methods informative and helpful, 206 (58.0%) and 70 (19.7%) strongly agreed and agreed respectively, while 46 (13.0%) and 33 (9.3%) disagreed and strongly disagreed respectively. on the statement whether social media platforms are effective channels for disseminating accurate information about family planning, 113 (31%) and 116 (32.7%) of the women strongly agreed and agreed respectively whereas 43 (12.1%) and 83 (23.5%) disagreed and strongly disagreed respectively. the majority of the women, 191 (53.8%) and 117 (32.9%), indicated that they actively engaged with posts or discussions related to family planning methods while 30 (8.5%) and 17 (4.8%) disagreed and strongly disagreed respectively to the statement. one hundred and sixteen (32.7%) and 135 (38.0%) of the women strongly agreed and agreed respectively, with the statement that social media platforms provided them with opportunities to interact with healthcare professionals or experts regarding family planning while 83 (23.4%) and 21 (5.9%) thought otherwise. the women that felt empowered to ask questions and seek advice about family planning topics through social media channels were 81 (22.8%) and 61 (17.2%) while 128 (36.1%) and 85 (23.9%), felt otherwise. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 84 | p a g e three hundred and seven (86.5%) of respondents agreed with the statement that social media platforms have influenced their perception of the various methods of family planning, while 48 (13.5%) of respondents disagreed with the statement. there were 301 (84.8%) women who agreed that they found the social media contents about family planning methods to be informative and useful, whereas 54 (15.2%) women disagreed with this statement. the majority of women, 268 (75.5%), were in agreement that social media marketing has played a significant role in raising awareness about various family planning options. however, 87 (24.5%) of women were not in agreement with this statement. test of hypotheses hypothesis one ho1: social media influencer marketing has no significant effect on women’s perception of family planning methods in akwa ibom state. table 5: summary of simple linear regression showing the effect of influencer marketing on women’s perception of family planning methods in akwa ibom state. b1 se b2 tvalue significant (2 tailed) content 0.837 0.278 0.006 0.003 influencer marketing 0.929 0.024 0.933 38.998 0.000 dependent variablewomen’s perception r= 0.933 r2= 0.870 adjusted r-square 0.870 std error of estimate= 0.83859 f-statistics= 520.813 probability (significance p-value= 0.000 *significantly related at 5% (p<0.05). b1= unstandardized beta, b2= standardized beta, se= standard error source: the researchers’ computation (2024). a regression coefficient of r2 = 0.870 is displayed on table 5. this indicates that the independent variable, influencer marketing (x1), was responsible for 87% of the variation in the dependent variable, which was women's perception of family planning methods. furthermore, the significant fratio, which was calculated to be 520.813, and the p-value, which was calculated to be 0.000, indicate that the outcomes of the regression model could not have been the result of random chance. furthermore, the results of the study indicate that influencer marketing, which is an indicator of mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 85 | p a g e social media marketing, significantly predicted women's perceptions of family planning methods in akwa ibom state. the values of the βeta coefficients for influencer marketing had a statistically significant unstandardized coefficient of βx1= 0.929 and a p-value of 0.000, indicating a positive significant relationship with women's perception of family planning methods. this was done in order to evaluate the degree of change that occurred between the independent variable and the dependent variable. one possible interpretation of this result is that for every unit change in influencer marketing, there will be a 0.929 percent increase in the overall perception that women have regarding family planning. thus, following the decision rule, the null hypothesis was rejected due to the fact that the p-value that was obtained, which was 0.000, is less than 0.05 (p-value =0.000<0.05). as a result, there is a considerable favorable influence between influencer marketing and the perception that women in akwa ibom state, nigeria, have of the many various techniques of family planning. hypothesis two ho2: social media educative contents have no significant effect on women’s perception of family planning methods in akwa ibom state, nigeria table 6 summary of simple linear regression showing the effect of social media educative contents on women’s perception of family planning methods in akwa ibom state. b1 se b2 tvalue significant(2tailed) constant 4.145 0.324 12.776 0.000 educative contents 0.664 0.028 0.841 23.377 0.000 dependent variablewomen’s perception r= 0.841 r2= 0.707 adjusted r-square= 0.705 std error of estimate= 1.26060 f-statistics= 546.466 probability( significance p-value= 0.000 *significantly related at 5% (p<0.05). b1= unstandardized beta, b2= standardized beta, se= standard error. source: the researchers’ computation (2024). the regression coefficient for the independent variable, educational contents (x2), is shown to be 0.707 on table 6. this indicates that the independent variable was responsible for roughly 71% of the variation in the dependent variable, which was women's impression of family planning policies. also, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 86 | p a g e the fact that the f-ratio was significant at f = 546.466 and the p-value was 0.000 indicates that the outcomes of the regression model could not have been the result of random chance. furthermore, the findings of the study indicate that educational contents, which are an indicator of social media marketing, substantially influenced women's perceptions of family planning. in order to assess the extent of change between the independent variable and the dependent variables, the βeta coefficients for educational contents were found to have a statistically significant unstandardized coefficient of βx2= 0.664 and a p-value of 0.000. this indicates that there is a positive and significant relationship between women's perception of family planning and the βeta coefficients. the implication of this result is that for every unit change in social media educative contents, there will be a 66.4% increase in the sense that women have regarding family planning. therefore, is a rejection of the null hypothesis due to the fact that the p-value that was obtained, which was 0.000, is less than 0.05 (p-value =0.000<0.05). thus, social media educative contents have a major positive influence on the way that women in akwa ibom state, nigeria, perceive family planning. hypothesis three h03: social media engagement has no significant effect on women’s perception of family planning methods in akwa ibom state, nigeria. table 7: summary of simple linear regression showing the effect of customer engagement on women’s perception of family planning methods in akwa ibom state. b1 se b2 tvalue significant(2 tailed) content 4.736 0.371 12.772 0.000 customer engagement 0.604 0.032 0.781 18.821 0.000 dependent variablewomen’s perception r= 0.781 r2= 0.609 adjusted r-square= 0.608 std error of estimate= 1.45421 f-statistics= 354.215 probability(significancep-value)= 0.000 *significantly related at 5% (p<0.05). b1= unstandardized beta, b2= standardized beta, se= standarderror. source: the researchers’ computation (2024). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 87 | p a g e a regression coefficient of r2 = 0.609 is displayed in table 7. this indicates that the independent variable, engagement (x3), was responsible for roughly 61% of the variation in the dependent variable, which was women's impression of family planning. in addition, the fact that the f-ratio was found to be significant at f = 354.215 and the p-value was found to be 0.000 indicates that the outcomes of the regression model could not have been the result of random chance. furthermore, the results of the study demonstrated that engagement as an indicator of social media marketing significantly predicted women's awareness of various methods of family planning. for the purpose of assessing the extent of change between the independent variable and the dependent variable, the beta coefficients for engagement exhibited a statistically significant unstandardized coefficient of βx3= 0.604 and a p-value of 0.000. this indicates that there is a positive and significant relationship between women's perception of family planning and the value of the beta coefficients. therefore, for every unit change in engagement, there will be a 0.604 increase in the overall perception that women have regarding family planning. there is a rejection of the null hypothesis due to the fact that the p-value that was obtained, which was 0.000, is less than 0.05 (pvalue =0.000<0.05). thus, engagement has a major positive influence on the way that women in akwa ibom state, nigeria, see family planning. discussion of findings the findings of the study indicated that there is a substantial relationship between each of the three aspects of social media marketing (influencer marketing, educational material, and customer engagement) and the way in which women in akwa ibom perceive family planning. the first hypothesis was tested, and the results showed that influencer marketing has an effect on women's perceptions of family planning in akwa ibom state. the regression coefficient for this hypothesis was 0.929, which indicated a high and positive effect. this result is supported by the findings of zinkeallmang et al. (2022), who determined that key influencers are the most reliable sources of information for family planning. the second hypothesis also had a regression coefficient of 0.664, which indicates that there is a strong positive relationship between educational contents and women's perceptions of family planning in akwa ibom state. this association is significant since it indicates that there is a substantial correlation between the two. this result is supported by attya and aboualhuda (2022), who also found out that there is a favorable association between educational contents and women's perceptions of family planning. a regression coefficient of 0.604 indicates that there is a significant positive association between customer engagement and women's opinion of family planning in akwa ibom state. this finding is supported by the work of okunlola et al. (2023), who discovered that there is a connection between mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 88 | p a g e customer involvement and women's perceptions of family planning methods in the state of akwa ibom. conclusion based on the discussion of findings, the following conclusions were made: i that there is a positive and significant effect of influencer marketing women’s perception of the methods of family planning in alwa ibom state.. ii that, social media educative contents have a significant effect on women’s perception of family planning methods in akwa ibom state, nigeria. iii that, social media engagement has a significant effect on women’s perception of family planning methods in akwa ibom state, nigeria. recommendations based on the findings, the researchers made the following recommendations: i. it would be beneficial for the government and other stakeholders to collaborate with influential individuals in order to establish trust and credibility among women regarding family planning methods on social media platforms. ii. educational posts, videos, and articles should be created by government and nongovernmental groups. these should be visually appealing, easy to understand, and be customized to a wide variety of family planning difficulties. iii. stakeholders could establish online forums or fora on social media platforms, where women may share their experiences, seek advice, and provide support to one another in the area of family planning methods. this would benefit all parties involved. references aaker, d., &joachimsthaler, e. 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(2013). consumer behavior: an applied approach. new york:kendull hunt publishing mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 90 | p a g e harvard business review. may –june, (2018). hochbaum, g. m. (1958). public participation in medical screening programs: a socio-psychological study (no. 572). washington, dc: us government press. ifediora, c. u., ugwuanyi, c. c., &ifediora, r. i. (2017). perception and patronage of foreign products by consumers in enugu, nigeria. international journal of economics, commerce and management united kingdom, 12(5): 56-67. kaplan, a. m., & heinlein, m. (2010). users of the world, unite! the challenges and opportunities of social media. business horizon, 53(1): 59-68. kumar, v., &pansari, a. (2016). competitive advantage through engagement. journal of marketing research, 53(3): 497-514. laryea, r. (2017). drivers and outcomes of social media advertising engagement: a survey of university of ghana student. lazarsfeld, p. f., & katz, e. (1955). personal influence: the part played by people in the flow of mass communications. glencoe, il: free press. macaulay, i. j., & mfon, a. a. (2023). e-marketing tools and marketing performance of selected small and medium scale enterprises in south east, nigeria. iconic research and engineering journals, 7(1): 455-474. mfon, a. a. 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(2017). from facebook to the neighborhood: infrastructure of hybrid community engagement. in computer sup-ported cooperative work: cscw. an international journal, 26 (3): 959–1003. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 91 | p a g e mtae, h. (2021). influence of social networks on family planning use among married men and women: a case of mvomero district, tanzania. east african journal of education and social sciences,34(8):23-56. muhamad, m., &shahrom, m. (2020). the effects of the elements in social media content on social media engagement behaviour among youths. romania journal of information technology and automatic control, 30(4): 63-72. national population commission (npc). (2022). nigeria demographic and health survey. okunlola, a. d., alawode, a. o., awoleye, f. a., &ilesanmi, b. (2023). internet use, exposure to digital family planning messages, and sexual agency among partnered women in northern nigeria: implications for digital family planning intervention. sexual and reproductive health matters 31(4): 23-45. olaitan, o. l. (2011). factors influencing the choice of family planning among couples in south-west nigeria. international journal of medical science, 7(3): 227–23. ravi, b., &sujaya, s. (2021). social media marketing: a conceptual study. international journal of research and analytical reviews, 8(1): 63-71. roberts, c. & alpert, f. (2010). total customer engagement: designing and aligning key strategic elements to achieve growth. journal of product brand management, 19 (20): 198-209. sammis, k., lincoln, c., pomponi, s., ng, j., gassmann, e., & zhou, j. (2016). influencer marketing for dummies. hoboken, new jersey: john wiley and sons, inc. sulaiman, s. (2022). the impact of social media on consumer behavior. baltic journal of lawand politics, 15 (4): 1107-1115. taiwo, v. a. (2017). effect of social media on family planning among nursing mother: a study of lautech teaching hospital, oshogbo, oyo state. tolon, m. & khadija, j. (2022). the effect of content marketing in social media on brand loyalty and purchase intention. journal of business management and economic research, 6 (4): 160‐184. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 3, july-september 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 92 | p a g e tsui, o., mcdonald-mosley, r. &burke, a. (2015). family planning and the burden of unintended pregnancies. epidemiology revolution, 32(1): 152–174. united nation population fund (unfpa, 2022). definition of family planning. vivek, d., beatty, s & morgan, r. (2012). customer engagement: exploring customer relationships beyond purchase. journal of marketing theory practice, 20 (2): 122-146. williams, r. l., &cothrel, j. (2000). four smart ways to run online communities. mit sloan management review, 41(4): 81-95. world health statistics, (2018). monitoring health for the sdgs, sustainable development goals. yadav, m., & rahman, z. (2018). the influence of social media marketing activities on customer loyalty: a study of e-commerce.benchmarking:an international journal, 25 (9):3882-3905. zinke-allmang, a, hassan, r., amiya, b., krittika, g., amy, s., ogolla, c., shirley, s., kees, k. &cislaghi, b. (2022). use of digital media for family planning information by women and their social networks in kenya: a qualitative study in peri-urban nairobi. gender, sex and sexualities, (7) 4: 50-80. ziyadin, s., doszhan, r., borodin, a., omarova, a., &ilyas, a. (2019). the role of social media marketing in consumer behaviour. paper presented at the e3s web of conferences. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 24 | p a g e internal control and operational risk of quoted banks in the nigerian stock exchange ozuomba chidinma n. department of accounting, university of agriculture and environmental sciences umuagwo, imo state, nigeria. email: chidinmaozuomba@gmail.com; chidinma.ozuomba@uaes.edu.ng doi: https://doi.org/10.5281/zenodo.14863271 abstract: banks are more likely to fail from operational risk than from credit risk, and internal control at banks create operational risk losses. this study investigates the effect of internal control on operational risk of quoted banks in nigeria. 16 quoted banks were studied based on the 2012 banking reform on corporate governance by the then cbn governor sanusi lamido sanusi’s “project alpha initiative” (pai). the analysis carried out included pooled ols regression, fixed and random effect and hausman tests utilizing e-view 9 software. the findings shows that internal control activities have a negative correlation and internal control risk assessment has positive significant effect on operational risk. we recommend that internal check staff at banks should be sustained as there was an inverse relationship between internal check and operational risk at banks. penalties should be spelt out for banking staff who are non-compliant with bank policies and guidelines especially in the area of breech in software codes. banks should ensure that internal control unit personnel are qualified and adequately trained especially it staff. keyword: internal control, control activities, risk assessment, operational risk introduction one of the main reasons for banking failures which results in major financial loss and even bankruptcy is high risks taken by bank management on an excessive scale and inability of controlling them. the lack of an internal control system which duty is to keep the risks or major breakdowns within an existing internal control system under control pose a threat against the success of the banking sector. this operational risk has risen drastically in recent times. according to moosa, (2007) banks are more likely to fail from operational risk than from credit risk, it is believed that internal control at banks create operational risk losses, and many institutions with such losses are repeat offenders (chernobai, deumes and knechel 2011). due to recent financial scandals and economic crisis, banking sector all across the globe has become vulnerable to fraudulent actions, rising uncertainties and development of more instruments have mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:chidinma.ozuomba@uaes.edu.ng american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 25 | p a g e pressurized the banking organizations to look for the appropriate internal measures to transform their business organization as risk and uncertainty proof. the banking sector consolidation exercise of 2004/2005 had some salutary impact on the nigerian economy and led to the emergence of bigger banks which, before the global financial crisis, created a general belief that the banking sector was sound and growth would be encouraged. however, this sentiment proved misplaced following the outbreak of the global financial and economic crises of 2008/2009 and some interdependent factors that led to the manifestation of an extremely fragile financial system. this was because the main downside effect of the consolidation programme on the system was the near total neglect of adherence to good corporate governance practice. corporate governance in many banks failed because their boards ignored best practices for various reasons, ranging from being misled by executive management and participating in obtaining unsecured loans at the expense of depositors, to lack of capacity to enforce good governance on bank management. there were also the problems of the overbearing influence on the boards by the chairmen/ceos, lack of independence of some boards, failure to make meaningful contributions to safeguard the growth and development of the banks, weak ethical standards, inadequate training for employees, failure to adhere to well established policies and procedures and ineffective board committees. these internal control weaknesses are revealed in operational losses in banks. consequently, a lot of scholars, accounting institutes, investors, standard setters and other stakeholders clamor for disclosure of corporate risk in financial reports across the globe as inherited risk from contemporary business environment is on the increase. this risk has claimed the lives and property of stakeholders especially shareholders and creditors just like the case of savannah bank in nigeria during the 25-billion-naira capital base for banks automaton by the central bank of nigeria in 2005. this obstacle has also tempered with investors’ confidence in the business world. cabedo and tirado (2004) are of the view that current practice of companies’ external reporting is considered insufficient because it is lacking an adequate disclosure on corporate risk and uncertainties. corporate organizations owe a duty to fully disclose matters concerning their operations so as to aid investors in making investment decisions. methodology the ex-post factor design type was used in this research work because it deals with historical facts and is designed to test an event that has already taken place. (asika 2006; agbadudu, 2002 cited in ordu, enekwe and anyanwaokoro, 2014; onwumere 2009). secondary data was used in this work. the data machinery adopted for secondary data was panel data set from banks published annual reports, ndic report, cbn statistical bulletin, cbn fact books and banks’ pillar iii disclosure report was utilized for this study. the panel covers a time frame of 5 years from 2013-2017 and a cross section of 16 banks from the population of 23 commercial banks quoted in the nigerian stock exchange as at 28 september 2018. however, heritage bank, savannah bank, sky bank, keystone bank, enterprise bank, rand bank and jaiz bank were eliminated based on availability of data, commencement of operation and islamic mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 26 | p a g e bank with different characteristics from commercial banks. the sample size is justified based on the theory of mugenda and mugenda, (2003), that a good sample covers at least 10%-30% of the representative population. thus, at 67% coverage the sample is a fair representation of the population and sufficient for this study. multiple regression analysis technique was used in this study. panel data regression model was adopted in order to control for individual unobserved heterogeneity, obtain more accurate results because it provides more observations and information to work with, it allows a follow up on individual dynamics and before and after effect can be easily estimated (temple, 1999; woodridge, 2002; and hsiao, 2003 as cited in alajekwu, 2018). cross-sectional and time series data are pooled in the regression to overcome the problem of insufficient degree of freedom. the fixed effects model (fem) can be used to control the unobserved characteristics. random effects model (rem) assumes that firm specific characteristics are not constant and the time effects are absent. the hausman’s specification test in panel data models was conducted for fixed and random effects test of individual characteristics or time effect. table 1: operational definition of variables variables proxy variables dependent operational risk: 3 years gross income @ 15% divided by 3 opr independent control environment: internal and external internal environment: bank strength income diversification liquidity employee size bs id ld es external environment: technology socio-environmental factors economic factor legal factors tec sef ecf lgf risk assessment employee turnover personnel quality et pq control activities internal check compliance and prudence internal auditors ick clp iad monitoring board size board independence board internal audit size board with expertise in finance bds bdi ias bef information and communication feedback feedforward time lag fdb fdf tlg control variables bank size bs leverage lev mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 27 | p a g e source: author’s conception, 2019 we indicate that there are bank-specific and other variables which could affect the dependent variable in one way or the other and must be controlled. these variables are bank size and leverage. table2: showing definition of proxy variable proxy variables derivation source aproprari expectations opr 3 years gross income @ 15% divided by 3 model 1 bs id ld es capital adequacy ratio = total equity/total assets non interest income/total operating income (ebit) total loans/total customers’ deposit yearly no of bank staff adapted from afia 2015 positive model 2 tec seg ecf lgf total amount in it losses in the year total amount of loss in fraud and forgeries reported by ndic non-performing loans in the year litigation losses in the year adapted from afia 2015 positive model 3 ick clp iad no of internal check staff in the year non adherence to accounting principles in the year no of internal audit department members positive model 4 et pq %no of employee who have left %employees at the beginning of the year + employee at year end/2 no of errors and bugs in software codes positive model 5 fdb fdf tlg dummy 1 after 48 hrs and 0 at 48 hrs. dummy 1 after 72 hrs and 0 at 72 hrs. duration of deviation in compliance positive model 6 bds ias bdi bef no of board members internal audit size no of independent board members no of board members with expertise in finance adapted from sadiq 2013, ellis and jordi 2006, almazari 2014 positive mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 28 | p a g e model 7 bks lev total no of bank in the year debt to total assets ellis and jordi 2006; king’oo 2015 negative source: author’s conception, 2019 3.9 model specification and justification model 1: opr = (bs, id, ld, es, bks, lev) -------------------------------------------------------------------1 opr!t = ao!t +b1+bs!t, b2+id!t,+ b3+ld!t,+ b4+es!t, + b5+bks!t, + b6+lev!t, + εr!t ---------------------2 opr!t = ao!t +bs!t *id!t *ld!t *es!t *bks!t *lev!t + εr!t ------------------------------------------------------3 β0, β1, β2, β3, β4, β5, β6= coefficients εi = error terms. model 2: opr = (tec, sef, ecf, lgf, bks, lev) --------------------------------------------------------------1 opr!t = ao!t +b1+tec!t, b2+sef!t,+ b3+ecf!t,+ b4+lgf!t, + b5+bks!t, + b6+lev!t, + εr!t ----------------2 opr!t = ao!t +tec!t *sef!t *ecf!t *lgf!t *bks!t *lev!t + εr!t ------------------------------------------------3 β0, β1, β2, β3, β4, β5, β6= coefficients εi = error terms. model 3: opr = (ick, clp, iad, bks, lev) -----------------------------------------------------------------1 opr!t = ao!t +b1+ick!t,+ b2+clp!t, + b3+iad!t + b4+bks!t,+ b5+lev!t,+ εr!t ----------------------------2 opr!t = ao!t +ick!t *clp!t *iad!t *bks!t *lev!t + εr!t --------------------------------------------------------3 β0, β1, β2, β3, β4, β5= coefficients εi = error terms. model 4: opr = (et, pq, bks, lev) -------------------------------------------------------------------------1 opr!t = ao!t +b1+et!t, b2+pq!t, + b3+bks!t, + b4+lev!t,+ εr!t ------------------------------------------2 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 29 | p a g e opr!t = ao!t +et!t *pq!t *bks!t *lev!t + εr!t -------------------------------------------------------3 β0, β1, β2, β3, β4= coefficients εi = error terms. model 5: opr = (fdb, fdf, tlg, bks, lev) ------------------------------------------------------------------1 opr!t = ao!t +b1+fdb!t, b2+fdf!t,+ b3+tlg!t, + b4+bks!t, + b5+lev!t, + εr!t -----------------------------2 opr!t = ao!t +fdb!t *fdf!t *tlg!t*bks!t *lev!t + εr!t --------------------------------------------------------3 β0, β1, β2, β3, β4, β5= coefficients εi = error terms. model 6: opr = (bds, ias, bdi bef) --------------------------------------------------------------1 opr!t = ao!t +b1+bds!t, b2+ias!t,+ b3+bdi!t,+ b4+bef!t + εr!t ----------------------------------2 opr!t = ao!t +bds!t *ias!t *bdi!t *bef!t *bks!t *lev!t + εr!t ---------------------------------------3 β0, β1, β2, β3, β4= coefficients εi = error terms. the model is expected to be β0 > 0, β1 >0, β2> 0 β3 >0, β4 >0, β5 >0, β6 >0. these variables which cover all the five broad domains of internal controls found in the conceptual framework constitute the independent variables for the study. we indicate that there are bank-specific and other variables which could affect the dependent variable in one way or the other and must be controlled. these variables are bank size and leverage. 4.1 descriptive statistics the summary statistics provided information about the means, standard deviation, minimum and maximum of all the employed variables. mean is the average value of the series; the maximum and minimum values of the series are the highest and the lowest values of the series, while the standard deviation measures dispersion in the series. the descriptive statistics for the core variables are explained to give insight into the nature and activities of the selected quoted banks. 4.1.1 internal control and operational risk mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 30 | p a g e the dependent variable: operational risk (opr) is measured as three (3) years gross income at 15% divided by 3. of the 80 observations, it can be seen that opr was 5.38; with the highest value, lowest value and standard deviation of 6.87, 4.30 and 30.09 respectively. the independent variable: internal controls with it five (5) domain(1) control environment, (2) control activities, (3) risk assessment, (4) information and communications and (5) monitoring are described as follows: 1. control environment was sub divided into (a) internal environment with proxy variables(i) bank strength measured with capital adequacy ratio which demonstrates the internal strength of the bank to support losses during crisis periods. high of this ratio shows high profitability and lower ratio indicates the decrease of the profitability. capital adequacy is computed as a ratio of total equity to total asset. it showed a maximum value of 223.00, minimum of 12.50 and standard deviation of 4252.00. (ii) income diversification derived from non-interest income as a ratio of operating income (measured as earnings before interest and taxebit) with an average value of 2.21, maximum value of 92.00, minimum of 0.84 and standard deviation of 8175.40. (iii) liquidity measured as cash to asset ratio showed an average value of 19.48, maximum value of 86.29, minimum value of 1.65 and standard deviation of 2842.7 and (iv) employee size measured as the total number of banking staff showing a mean value of 3.48, maximum value of 4.97, minimum of 2.74 and a standard deviation of 13.74. (b) external environment with proxy variables(i) technology measured with total amount in it losses which showed a mean value of 4.07, maximum value of 5.41, and minimum of 3.09 and standard deviation of 24.54. (ii) socio-economic factor derived from total amount in fraud and forgeries reported by ndic with an average value of 3.59, maximum value of 143.00, minimum of 6.00 and standard deviation of 3956.90. (iii) economic factor measured as non-performing loan in the year showed an average value of 3.59, maximum value of 8.45, minimum value of 3.10 and standard deviation of 7.49 and (iv) legal factor measured as litigation losses in the year showing a mean value of 7.40, maximum value of 112.00, minimum of 6.08 and a standard deviation of 27.45. (2) control activities is represented by three (3) proxy variables ick, clp and iad explained as follows: (i) internal check measured as no of internal check staff showed a mean of 56.54, maximum value of 6.00, minimum of 23.00 and standard deviation of 40147.89. (ii) compliance with accounting principles measured by number of times there was a deviation from accounting principles. it showed an average value of 0.99, maximum value of 776.00, minimum of 0.00 and standard deviation of 124.99. (iii) internal audit members measured by total number of audit staff showing an average value of 382.64, maximum value of 137.00, minimum value of 147.00 and standard deviation of 2428.09. (3) risk assessment is represented by two (2) proxy variables et and pq explained as follows: (i) employee turnover measured percentage number of employee who have left dived by the percentage mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 31 | p a g e number of employee at the beginning of the year plus percentage number of employee at the end of the year divided by two showed a mean of 68.85, maximum value of 14.10, minimum of 29.00 and standard deviation of 47670.20. (ii) personnel quality measured by number of errors and bugs in software codes showing an average value of 7.55, maximum value of 14.10, minimum of 4.40 and standard deviation of 314.10. (4) information and communications are represented by three (3) proxy variables fdb, fdf and tlg explained as follows: (i) feedback measured by 0 and 1. 0 is used when it takes more than 48hrs for board decision to be communicated to management and more than two weeks to be implemented and 1 when information is timely. this showed a mean of 0.69, maximum value of 1.00, minimum of 0.00 and standard deviation of 17.19. (ii) feedforward measured by 0 and 1. 0 is used when it takes more than 48hrs for management decision to be communicated to the board and more than two weeks for board decision. this showed a mean of 0.61, maximum value of 1.00, minimum of 0.00 and standard deviation of 18.84. (iii) time lag measured by 0 and 1. 0 is used when there is no delay in feedback and feedforward and 1 when there is delay. this showed a mean of 0.67, maximum value of 1.00, minimum of 0.00 and standard deviation of 17.44. (5) monitoring with proxy variables(i) board size measured with number of board members showed a mean value of 11.50, maximum value of 20.00, and minimum of 8.00 and standard deviation of 342.00. (ii) board independence with an average value of 3.38, maximum value of 10.00, minimum of 2.00 and standard deviation of 108.75. (iii) board internal audit staff showed an average value of 6.53, maximum value of 9.00, minimum value of 4.00 and standard deviation of 165.95 and (iv) board expertise in finance showing a mean value of 6.44, maximum value of 9.00, minimum of 6.99 and a standard deviation of 181.69. (6) control variables with proxy variables(i) bank size showed a mean value of 9.16, maximum value of 16.03, and minimum of 5.56 and standard deviation of 156.42. (ii) leverage with an average value of 66.12, maximum value of 93.01, minimum of 5.56 and standard deviation of 89567.04. table 3: descriptive analysis for internal control variables and operational risk variable from 2013-2017 variables commercial banks mean max min std. dev. dependent variable operational risk 5.38 6.87 4.30 30.09 control environment : internal and external internal environment : bank strength (bs) (ratio) income diversification (id)(ratio) liquidity (ld) (ratio) employee size 23.58 2.21 19.48 3.48 223.00 92.00 86.29 4.97 12.50 0.84 1.65 2.74 4252.00 8175.40 2842.7 13.74 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 32 | p a g e (es) external environment : technology (tec) socioenvironmental factors (sef) economic factor (ecf) legal factors (lgf) 4.07 32.10 3.59 7.40 5.41 143.00 8.45 112.00 3.09 6.00 3.10 6.08 24.54 3956.90 7.49 27.45 control activities internal check (ick) compliance and prudence (clp) internal auditors (iad) 56.54 0.99 382.64 6.00 776.00 137.00 23.00 0.00 147.00 40147.89 124.99 2428.09 risk assessment employee turnover (et) (%) personnel quality (pq) 68.85 7.55 14.10 14.10 29.00 4.40 47670.20 314.20 information and communicati on feedback (fdb) feedforward (fdf) time lag (tlg) 0.69 0.61 0.67 1.00 1.00 1.00 0.00 0.00 0.00 17.19 18.84 17.44 monitoring board size (bds) board independence (bdi) board internal audit (bias) board with expertise in finance (bef) 11.50 3.38 6.53 6.44 20.00 10.00 9.00 9.00 8.00 2.00 4.00 6.99 342.00 108.75 165.95 181.69 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 33 | p a g e source: output generated using eviews 7 4.2 normality test jargue-bera test of normality was used to identify the normality of error term. it is tested at 0.05 level of significance. the decision rule is to reject the null hypothesis, when p. value is less than 0.05 level of significance, otherwise, do not reject. the null hypothesis that error terms are normally distributed is rejected at 5% level of significance for all the variables. thus, error term is not normally distributed. the variable used in the study lacks normality for selected commercial banks quoted in the nigerian stock exchange. table 4: result of jarguebera satistics for the test of normality control variables bank size (bks) leverage (lev) (ratio) 9.16 66.12 16.03 93.01 5.56 5.56 156.42 89567.04 variables commercial banks jarque-bera prob. dependent variable operational risk 1.59 0.35 control environment: internal and external internal environment: bank strength (bs) (ratio) income diversification (id)(tobin’s q) liquidity (ld) (ratio) employee size (es) 15828.36 19681.30 215.47 29.47 0.00 0.00 0.00 0.00 external environment: technology (it) socio-environmental factors (sef) economic factor (ecf) legal factors (lgf) 1.90 264.01 4.58 3.66 0.39 0.00 0.10 0.16 control activities internal check (ick) compliance and prudence (clp) internal auditors (iad) 8.09 57.48 6.38 0.01 0.00 0.04 risk assessment employee turnover (et) (%) personnel quality (pq) 3.94 61.33 0.13 0.00 information and communication feedback (fdb) feedforward (fdf) time lag (tlg) 14.76 13.29 14.08 0.00 0.01 0.00 monitoring board size (bds) board independence (bdi) board internal audit (bias) board with expertise in finance (bef) 122.36 2.80 454.70 3.50 0.00 0.00 0.24 0.17 control variables bank size (bks) 469.96 0.00 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 34 | p a g e source: output generated using eviews 7 4.3 test for multicollinearity the test is conducted to check for suitability of the of the control variables in each of the model. model 1 to 6 are the theoretical model of the relationship between operational risk and internal controls. bank size and leverage being control variables were tested for the existence of multicollinearity between variable using correlation matrix as shown on table 8.the existence of collinearity shows that the regression cannot precisely intercept the influence of independent variable towards dependent variable (gujarati and porter, 2009). high pair wise correlation between two variables means there is a serious multicollinearity problem in the regression model. the level of high multicollinearity exists when the correlation between two variables exceed 0.8 (gujarati and porter, 2009). the result on table 8 showed correlation matrix for quoted banks. the highest pair wise correlation is 0.79 and the lowest is -0.21. since it is not more than 0.8, the researcher conclude that the two variables do not suffer from serious multicollinearity and that the six model in which the five objectives are anchored are suitable for regression analyses. table 5: correlation matrix for test for multicollinearity in operational risk (opr) and control variables (bks and lev) of the study. opr bks lev opr 0.729393 bks 0.065918 0.798290 lev -0.218296 -0.345518 0.747946 4.4 goodness of fit test this is a measure of how well the observed moments fit which is the covariance between all pairs of relationship. when all variables in the model are observed, there may not be a need for goodness –ofleverage (lev) (ratio) 18.08 0.00 number of banks number of observation 16 80 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 35 | p a g e fit statistcs but in order to account for the overly influence of sample size and correlation to the model and multivariant non-normality (kline, 2011). since the incremental fit indices are less than 0.05% level of significance, we reject the null hypothesis and accept the alternate hypothesis that the baseline and hypothesis in the model have a good fit. table 6: showing goodness of fit goodness-of-fit summary factor: untitled date: 07/14/19 time: 23:09 model independence saturated parameters 3 3 6 degrees-of-freedom 3 3 -- parsimony ratio 1.000000 1.000000 -- absolute fit indices model independence saturated discrepancy 0.373011 0.373011 0.000000 chi-square statistic 29.46791 29.46791 -- chi-square probability 0.0000 0.0000 -- bartlett chi-square statistic 28.78405 28.78405 -- bartlett probability 0.0000 0.0000 -- root mean sq. resid. (rmsr) 0.296842 0.296842 0.000000 akaike criterion 0.293349 0.293349 0.000000 schwarz criterion 0.204023 0.204023 0.000000 hannan-quinn criterion 0.257535 0.257535 0.000000 expected cross-validation (ecvi) 0.448961 0.448961 0.151899 generalized fit index (gfi) 0.850174 0.850174 1.000000 adjusted gfi 0.700347 0.700347 -- non-centrality parameter 26.46791 26.46791 -- gamma hat 0.000000 0.000000 -- mcdonald noncentralilty 0.845761 0.845761 -- root mse approximation 0.334184 0.334184 -- incremental fit indices model bollen relative (rfi) 0.000000 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 36 | p a g e bentler-bonnet normed (nfi) 0.000000 tucker-lewis non-normed (nnfi) 0.000000 bollen incremental (ifi) 0.000000 bentler comparative (cfi) 0.000000 4.5 test of hypotheses the five objectives of the study were estimated for the effect of internal control on operational risk. the analyses were conducted for pooled ols, fixed effect and random effect model. the results are shown on table 8-13 for internal and external control environment, control activities, risk assessment, information and communications and monitoring. the analyses involved commercial 16 banks quoted in the nigerian stock exchange for a period of five years (2013-2017) and consisting of 80 observations. they are presented as follows; 4.5.1 h01: internal control environment system does not have significant effect on operational risk. four variables representing model 1 on the effect of internal control environment on operational risk were employed to test the hypotheses of this study. from the regression analysis result as shown on table 8, it is observed that r2 for pooled ols, fixed effect and random effect are 0.20 and 0.21 respectively and that of random effect is 0.90 that is, for each model used 20%, 21% and 90% of the dependent variable (opr) is explained by the independent variables: bs, id, ld and es and control variable bks and lev. the coefficient value of the independent proxy variables: bs, id, ld, and es are positively correlated with the dependent variable opr. this implies that any decrease in the independent variables will result in a decrease in the dependent variable. from the further test conducted, the fixed effect model showed a value of 166.954077 with a probability of 0.0000 and the random effect model showed a value of 4.125385 and a probability of 0.6597. the fixed effect is preferred because the probability of the chi. square is less than 0.05% level of significance. from the result obtained, we accept the alternate hypotheses which states that internal control environment has a significantly positive effect on operational risk of quoted banks in nigeria and reject the null hypothesis. the variables employed showed positive value that is, any increase/decrease in any of the independent variables will lead to an increase in the dependent value except for bank size that does not have a positively significant effect on operational risk. durbin watson is close to 2.0 as such the variables are highly significant. probability values of the coefficient at 0.1 – 0.7 implies that the regression parameters are significantly different from zero and the probability for the variables reveal a normal curve. the f-statistics is 1.766192 to show that the coefficient of explanatory variables has a significant effect on operational risk in the annual financial reports of quoted companies in nigeria. from the result obtained, we accept the alternate hypothesis mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 37 | p a g e which states that internal control environment has a significantly positive effect on operational risk of quoted banks in nigeria and reject the null hypothesis. table 7: result of the effect of internal control environment on operational risk of quoted banks in nigeria 4.5.2 h01: external control environment does not have significant effect on operational risk. four variables representing model 2 on the effect of external control environment on operational risk were employed to test the hypotheses of this study. from the regression analysis result as shown on table 9, it is observed that r2 for pooled ols, fixed effect and random effect are 0.25 and 0.26 respectively and that of random effect is 0.92 that is, for each model used 25%, 26% and 92% of the dependent variable (opr) is explained by the independent variables: tec, sef, ecl and lgf and control variable bks and lev. the coefficient value of the independent proxy variables: sef, bks and independent variables pooled ols fixed effect (preferred model) random effect constant (c) bank strength (bs) income diversification (id) liquidity (ld) employee size (es) bank size (bks) leverage (lev) 3.599612* (4.695850) 0.002450* (0.848119) 0.130211* (0.695367) 0.009810* (2.670924) 0.403149* (2.421923) -0.060530* (-1.115413) 0.008291* (3.455690) 3.545422* (4.380025) 0.002862* (0.936542) 0.150099* (0.748953) 0.009888* (2.619871) 0.403026* (2.307828) -0.058434* (-1.032348) 0.008335* (3.371851) 4.763952* (5.480358) 0.001704* (1.232416) 0.045398* (0.448589) -0.005624* (-1.282022) 0.072616* (0.515052) -0.055025* (-1.280855) 0.013468* (1.508671) r-squared f-statistics (prob.) durbin watson (dw) hausman test (prob.) 0.201216* 0.010817 0.285333 0.206182* 1.766192(0.083838) 0.278861 166.954077(0.000000) ** 0.901387* 24.81041(0.000000) 1.636648 4.125385 (0.6597) ** mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 38 | p a g e lev are positively correlated with the dependent variable opr. while tec, ecf and lgf are negatively correlated with the dependent variable opr. this implies that any increase/decrease in the independent variables will result in an increase/decrease in the dependent variable. from the further test conducted, the redundant (hausman) fixed effect model showed a value of 188.907070 with a probability of 0.0000 and the hausman random effect model showed a value of 23.374523 and a probability of 0.0007. the fixed effect is preferred because the probability of the chi. square is less than 0.05% level of significance. from the result obtained, we accept the alternate hypotheses which states that external control environment has a significantly positive effect on operational risk of quoted banks in nigeria and reject the null hypothesis. the variables employed showed positive value that is, any increase/decrease in any of the independent variables will lead to an increase in the dependent value except for tec, ecf and lgf that does not have a positively significant effect on operational risk. durbin watson is close to 2.0 as such the variables are highly significant. probability values of the coefficient at 0.1 – 0.7 implies that the regression parameters are significantly different from zero and the probability for the variables reveal a normal curve. the f-statistics is 2.474900 to show that the coefficient of explanatory variables has a significant effect on operational risk in the annual financial reports of quoted companies in nigeria. from the result obtained, we accept the alternate hypothesis which states that external control environment has a significantly positive effect on operational risk of quoted banks in nigeria and reject the null hypothesis. table 8: showing the effect of external control environment on operational risk independent variables pooled ols fixed effect (preferred model) random effect constant (c) technology (tec) socio-economic factor (sef) economic factor (ecf) legal factor(lgf) bank size (bks) leverage (lev) 10.24404* (7.457786) -0.013726* (-0.085779) 0.003575* (0.875275) -0919117* (-3.291574) -0.291641* (-2.492607) 0.001713* (0.030498) 0.007905* (2.493555) 10.48535* (7.364314) -0.001410* (-0.008421) 0.004563* (1.034498) -0.974016* (-3.313844) -0.314992* (-2.586460) 0.003191* (0.055190) 0.008405* (2.503374) -4.088791* (-1.850001) -0.117646* (-1.330116) 0.000784* (0.399997) 2.429391* (4.187763) 0.192742* (2.445534) -0.058757* (-1.646174) 0.004791* (0.688127) r-squared f-statistics (prob.) durbin watson (dw) hausman test 0.252342* 0.001321 0.309938 0.263992* 2.474900(0.013521) 0.313080 188.907070 (0.0000) ** 0.928226* 35.71892(0.000000) 1.962402 23.374523(0.0007) ** mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 39 | p a g e 4.5.3 h02: control activities does not have significant effect on operational risk. three proxy variables representing model 3 on the effect of control activities on operational risk were employed to test the hypotheses of this study. from the regression analysis result as shown on table 10, it is observed that r2 for pooled ols, fixed effect and random effect are 0.29 and 0.29 respectively and that of random effect is 0.89 that is, for each model used 29%, 29% and 89% of the dependent variable (opr) is explained by the independent variables: ick, clp and iad and control variable bks and lev. the coefficient value of the independent proxy variables: clp, iad and lev are positively correlated with the dependent variable opr. while ick and bks are negatively correlated with the dependent variable opr. this implies that any increase/decrease in the independent variables will result in an increase/decrease in the dependent variable. from the further test conducted, the redundant (hausman) fixed effect model showed a value of 157.193595 with a probability of 0.0000 and the hausman random effect model showed a value of 2.o42970 and a probability of 0.8432. the fixed effect is preferred because the probability of the chi. square is less than 0.05% level of significance. from the result obtained, we accept the alternate hypotheses which states that control activities has a significantly positive effect on operational risk of quoted banks in nigeria and reject the null hypothesis. the variables employed showed positive value that is, any increase/decrease in any of the independent variables will lead to an increase in the dependent value except for internal check and bank size that does not have a positively significant effect on operational risk. durbin watson is close to 2.0 as such the variables are highly significant. probability values of the coefficient at 0.1 – 0.7 implies that the regression parameters are significantly different from zero and the probability for the variables reveal a normal curve. the f-statistics is 2.474900 to show that the coefficient of explanatory variables has a significant effect on operational risk in the annual financial reports of quoted companies in nigeria. from the result obtained, we accept the alternate hypothesis which states that control activities have a significantly positive effect on operational risk of quoted banks in nigeria and reject the null hypotheses. table 9: showing the effect of control activities on operational risk independent variables pooled ols fixed effect (preferred model) random effect constant (c) internal check (ick) compliance principle (clp) internal audit dept. (iad) bank size (bks) leverage (lev) 5.612601* (12.99178) -0.009437* (-2.806589) -0.052043* (-1.033823) 0.002038* (0.0000) -0.097963* (0.0570) 0.007169* (3.499688) 5.615702* (12.50482) -0.009480* (-2.739738) -0.053243* (-1.017637) 0.002037* (4.490175) -0.097874* (-1.854999) 0.007167* (3.391316) 4.870071* (6.234542) -0.002051* (-0.354322) -0.005497* (-0.234809) 0.000942* (0.737127) -0.052716* (-1.269378) 0.011460* (1.449637) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 40 | p a g e references abdullah, a., khan, a. q., & nazir, n. 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(2008). influence of disclosure and governance on risk of us financial services firms following sarbanes-oxley. journal of banking and finance, 32, 2124-2135. akhigbe, a., & whyte, a. m. (2003). changes in market assessments of bank risk following the riegleneal act of 1994. journal of banking and finance, 27, 87-102. akhtar, m. f., ali, k., & sadaqat, s. (2011). liquidity risk management: a comparative study between conventional and islamic banks of pakistan. interdisciplinary journal of research in business, 1(1), 35-44. archambault, j. j., & archambault, m. e. (2003). a multinational test of determinants of corporate disclosure. the international journal of accounting, 38, 173-194. asika, n. (2006). research methodology in behavioural sciences (2nd ed.). longman nigeria plc. r-squared f-statistics (prob.) durbin watson (dw) hausman test 0.290638* (0.000093) 0.252821 0.292507* 3.215653(0.002575) 0.248353 157.193595(0.0000) ** 0.899063* 26.27619(0.000000) 1.577831 2.042970(0.8432) ** mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 41 | p a g e basel committee on banking supervision. (2010). principles for enhancing corporate governance. retrieved from www.bis.org barron, o. e., kile, c. o., & keefe, t. b. 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(1951). coefficient alpha and the internal structure of tests. psychometrika, 16, 297– 334. delis, m. d., & karavias, y. (2014). optimal versus realized bank credit risk and monetary policy. journal of financial stability, 16, 13-30. ewa, e. u., & udoayang, j. o. (2012). the impact of internal control design on banks' ability to investigate staff fraud, and lifestyle and fraud detection in nigeria. international journal of research in economics & social sciences, 2(2), 32-43. hossain, m. (2008). the extent of disclosure in annual reports of banking companies: the case of india. european journal of scientific research, 23(4), 659-680. iatridis, g. (2008). accounting disclosure and firms' financial attributes: evidence from the uk stock market. international review of financial analysis, 17(2), 219-241. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 42 | p a g e idowu, a. (2009). an assessment of fraud and its management in nigeria commercial banks. european journal of social sciences, 10(4), 628-640. jones, m. j. (2008). internal control, accountability and corporate governance: medieval and modern britain compared. accounting, auditing & accountability journal, 7, 1052–1075. kantarelis, d. (2007). theories of the firm. kenya financial sector stability report, 2010. khan, t., & ahmed, h. (2001). risk management: an analysis of issues in islamic financial industry. irti/idb occasional paper, no. 5. leng, l., & ding, y. (2011). internal control disclosure and corporate governance: empirical research from chinese listed companies. technology and investment, 2(4), 286-294. https://doi.org/10.4236/ti.2011.24029 manthos, d. d., & yiannis, k. (2015). optimal versus realized bank credit risk and monetary policy. journal of financial stability, 16, 13-30. mohammed, h. a. (2013). internal auditing practices and internal control system in somali remittance firms. international journal of business and science, 4(4). moosa, i. a. (2007). operational risk: a survey. financial markets, institutions, and instruments, 16, 167-194. munene. (2013). effect of internal control on financial performance of technical training institute in kenya (unpublished master's thesis). nejeri, k. (2014). effect of internal controls on the financial performance of manufacturing firms in kenya (unpublished master's thesis). nyakundi, d. o., nyamita, m. o., & tinega, t. m. (2014). effect of internal control systems on financial performance of small and medium-scale business enterprises in kisumu city, kenya. international journal of social sciences and entrepreneurship, 1(11), 719-739. ofoegbu, g., & okoye, e. (2006). the relevance of accounting and auditing standards in corporate financial reporting in nigeria: emphasis on compliance. the nigerian accountant, 39(4), 45-53. ogwuma, p. a. (1998). the efforts of the central bank of nigeria in the fight against advance fee fraud. the bullion, 22(2), 21–24. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 43 | p a g e olaoye, c. (2009). impact of internal control system in banking sector. pakistan journal of social sciences, 6(4), 181-187. oyerogba, e. o. (2014). risk disclosure in the published financial statements and firm performance: evidence from the nigeria listed companies. journal of economics and sustainable development, 5(8), 86-96. pathan, s. (2009). strong boards, ceo power and bank risk-taking. journal of banking and finance, 33(7), 1340-1350. https://doi.org/10.1016/j.jbankfin.2009.02.001 verrecchia, r. e. (1999). disclosure and the cost of capital: a discussion. journal of accounting and economics, 26, 271–283. vithessonthi, c. (2014). the effect of financial market development on bank risk: evidence from southeast asian countries. international review of financial analysis, 35, 249-260. wallace, r. s. o. (1988). corporate financial reporting in nigeria. accounting and business research, 18(72), 352-362. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 60 | p a g e empirical analysis of selected determinants of capital flow in nigeria 1dr. saviour sebastian udo and 1dr. endurance g. udo 1department of economics, akwa ibom state college of education, afaha nsit, akwa ibom state, nigeria. sasedo2016@gmail.com doi: https://doi.org/10.5281/zenodo.14871051 abstract: this study evaluates how selected factors have influenced capital inflow in nigeria. this study observes the fact that capital inflow may be unstable and threatening to the nigerian economy if an in-depth study of selected determinants of the flow in nigeria is not investigated. by this observation, the study uses annual time series data collected from the central bank of nigeria to cover 1986 to 2025. this study uses a multiple regression to analysis the variables in the model and such includes cointegration and error correction method of analysis. the study in the cause of the investigation finds out that external factors like external debt, foreign exchange reserve, and foreign interest rate are the major factors influencing capital flows in nigeria and this flow is grouped into foreign direct investments and foreign portfolio investments. the results further reveal that, domestic macro-economic variables such as inflation rate, real gross domestic products and external debts, are the major factors influencing capital flows on the long run in nigeria. based on the results of the findings, the study makes the following recommendations and these include: policy measures designed to direct long run capital inflows and changing the short run patterns of the capital flow into the nigerian economy. the study also recommends that clumsy inflow of portfolio investment should be lessened by using appropriate policies. it further recommends that agents of government and its authorities should put in place machineries that will make the domestic mailto:sasedo2016@gmail.com https://doi.org/10.5281/zenodo.14870639 american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 61 | p a g e capital market more attractive to foreign investors to invest in nigeria. the study also recommends that appropriate portfolio management policies which will influence currency composition and choice of investment instruments that will reflect a country's precise policy settings and conditions should be put in place by the government. further, it is equally recommended that sound reserve management policies and practices to improve the flow should be used by the government. above all, the study recommends a healthy macroeconomic and financial system that will attract quality foreign investors into nigeria for profitable investment. keywords: exchange rate, foreign direct investment, inflation, foreign portfolio investment, and capital flow. introduction 1.0 background to the study capital flow refers to the movement of capital, such as money, investments, or assets, from one country, region, or economic entity to another. this movement can occur through various channels, including, foreign direct investment (fdi): direct investment in a foreign country, such as building a factory or acquiring a company, portfolio investment etc. this investment can be in foreign financial assets, such as stocks, bonds, or mutual funds. the fdi can be in form of bank loans which include: cross-border lending between banks or financial institutions. the movement can also be in form of remittances: transfers of money by individuals working abroad to their home countries. capital flows can be classified into several types, including: inward capital flow: capital entering a country, such as foreign investment or loans and outward capital flow: capital leaving a country, such as domestic investment abroad or repayment of foreign loan (net capital flow which means the difference between inward and outward capital flows). capital flows play a crucial role in the global economy such as: facilitating economic growth and providing access to foreign capital. countries can finance development projects, american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 62 | p a g e improve infrastructure, and increase economic growth with the help of foreign aid. nations can also promote economic integration which include capital flows that help integrate economies globally, fostering trade, helping in investment, and economic cooperation. overall, capital flows are essential aspect of the global economy, and understanding their dynamics is crucial for policy makers, investors, and businesses. we can see foreign direct investment (fdi) as an investment which is fix near directing possession in a business enterprise in local country by an entity based in external country. it is one of the key sources of capital inflows to less developed economies. this is from the technological advanced economies to developing countries themselves. this has been broadly taken to be significant in leading to growth in productivity from advanced nations of the world. foreign direct investment is important to any nation. sub-saharan african (ssa) nations in general, and particularly nigeria has been the main beneficiary of high-tech spill overs, job creation, improved managerial skills, high educational advancement, competitive markets and other benefits from these inflows to the nation. according to literatures, the flow of goods, services, and capital in and out of the nation are influenced by political and legal atmosphere of the host nation. physical and social infrastructure, indigenous technology, inflationary pressure, domestic savings, fiscal and monetary policy, among other macroeconomic factors influence the variables. worthy of addition to the above assertions are, two very vital factors that foreign investors consider before letting their goods move to any nation and these are risks related to exchange rate and its volatility in any of the countries. exchange rate in this study is seen as the price of one country’s currency in terms of another. exchange rate and is a vital macroeconomic variable viewed as a pointer to competitiveness of the currency of any country. exchange rate, as one of the most vital prices in an open economy, is influenced by foreign flow of goods, services, and capital among nations of the world. this flow therefore leads to a strong pressure on balance of payments, inflation and other macroeconomic variables. it should be noted that, instability in exchange rate is likely going to lead to currency devaluation or evaluation in the country. this means as exchange rate appreciates, cost of production will rise in an economy. this rise will lead american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 63 | p a g e to low and unstable fdi and vice versa. this means poverty will lead to high inequality and underdevelopment also and this will result in vast deficit domestic balance of trade and of payment in a domestic economy. again, depreciation in exchange rate will lead to competitive advantages in foreign trade. this will make domestic goods cheaper and will lead to increase in the demand for export goods and this will cause an increase in international demand for domestic goods and decrease in import within the nation. all these trends will impact positively on fdi inflow into the domestic economy. studies also revealed that, equilibrium foreign exchange will help decision makers to cut the uncertainty caused by volatility in exchange rate and hence growth and development in the country. the instability in exchange rate as noticed in past studies will lead to indecision, which has a negative effect on flow of trade in the country. consequently, this study needs to stabilize the factor needed to influence the factors affecting the flow of foreign capital and review the variables use in this study in a bid to reduce risk from redirecting market activity to other lower risk market that occupies a critical aspect of economic management of any country. a closer observation of the economy in terms of capital movements globally also reveals in most cases a capital flow from resource-rich economies to resourcescarce economies as opined by smadi, 2018. however, in another study by lucas (1990), it was observed that the direction of capital flows is hampered by macroeconomic instability induced by insufficient human capital, imperfection in the capital market, and political risk in developing countries. other study again showed that capital flows to developing nations could be mired owing to distortions in major macroeconomic variables among global economic imbalances and divergences in monetary policy across nations of the world, (lucas 1990). capital flows are in some countries assisting in the proper allocation of global resources which will increase the availability of capital and thus higher investment and growth in an economy. the aim of any investor to invest in any country is a function, to a large extent, of the stability of exchange rate of the country. therefore, a closer look at nigeria shows that, the nigerian economy is in serious need of adequate and effective management of foreign exchange rate that will boost the inflow of fdi and diversification of the nigerian economy. literatures show that nigeria’s abolition of certain american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 64 | p a g e laws and successive entrenchment of laws that encouraged investment and introduction of structural reforms to enable a considerable flow of capital was affected by external advice and policies by international financial institutions in 1982. the trend continued until 1986, where nigeria did not record any figure on portfolio investment in her balance of payment (bop) accounts as a result of noninternationalization of the nation’s money and capital markets and also the non-disclosure of information on the portfolio investments of nigerian investors in foreign capital and money markets which has affected the nigerian economy negatively in terms of capital flo, (cbn 2009). however, past administrations in nigeria have adopted several policies to boost fdi but despite these efforts by the government to stabilize the exchange rate in the country, much successes have not been achieved in terms of fdi inflow in the country. based on the above, this study is carried out to examine selected determinants of capital flow in nigeria and how this has affected the nigerian economy as a whole. 2.1 theoretical literature factors affecting capital flows in any economy have been broadly evaluated by many studies like: ekpo (1997) when he verified the determinants of foreign direct investment in nigeria and found out that inflation rate, government policies and market players have actually affected foreign direct investment. in another literature by hau, and rey, (2006) when they reviewed how exchange rates and equity prices have affected capital flows. they found out that exchange rate and equity price have significant effect on foreign direct investment. calvo, leiderman and reinhart (1993) in their study examined the determinants of capital flows from developed countries to developing and emerging market economies in the context of push and pull factors found out both positive and negative contributions to fdi. again, according to theories of imperfect competition and market failure by dunning's (1979) using "eclectic approach". the approach aimed at explaining the reasons for transnational production, and thus capital flows as it related to the ownership merits of multinational firms. the devise to "internalize" merits, and the locational merits of the recipient countries mostly the ldcs from international flow of capital was assessed and found out to favour mostly the developed nations of the world, (saviour, 2022). the american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 65 | p a g e standard portfolio theory by bleaney, mizen and senatla, 1999; and devereux, 2006 suggested that agents should allot their asset holdings according to their preferred trade-off between risk and expected return in any investment. there are several economic theories concerning foreign direct investment. among them are: two gap model, overshooting exchange rate theory, production flexibility and risk version hypothesis, and the neo-classical theory to mention but a few. 2.1.1 two gaps model the two gaps model also known as investment theory, argued that there are two gaps that must be closed for developing countries to develop and this according to the theory are the disparity between domestic savings and the capital outlay required for take-off, and the difference between export earnings and the imports requisite for growth. the theory sued that developing countries should search for foreign investment that will boost growth since they have inadequate saving capacities. 2.1.2 overshooting of exchange rates theory the overshooting of exchange rates theory also known as the sticky-price monetary model, was put forward by dornbush in 1976. the theory provided an animated retort to the exchange rate instability observed among less developed countries. this trend according to the theory proved that such instability appears to be uniform with the evolution of rational expectation hypothesis. the theory also assumes that price levels would react to these instabilities over time rather than immediately adjusting to short-term changes in equilibrium level. in addition, the theory also assumed that price stickiness is compensated for by lags in economic time-series data, including rates of interest and exchange rates of nations. considering this, the sticky-price economic model permits the short-run fluctuation of nominal currency rates over their long-term equilibrium point in the domestic economy. 2.1.3 production flexibility and risk aversion hypothesis this hypothesis had argued, that for the reason that businesses can adjust the use of one of numerous variable factors in response to nominal or real disturbances, advocates of production flexibility maintain that exchange rate instability excites foreign investment in the domestic economy. the american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 66 | p a g e assumption about this argument is that, it may not hold if variables were static since it is grounded on the idea that businesses may adjust elements of the variables. this is for the reason that companies are unlikely to be able to adjust parameters in the near term. the hypothesis further argued that, fdi declines when exchange rate instability rises. this is because more instability reduces the predicted exchange rate's inevitability equivalent. the theory pointed out that, certainty equivalent levels are used in the anticipated profit functions of firms that make decisions about investments so as to generate future returns. 2.1.4 the neoclassical investment theory the neoclassical investment theory had in their argument opined that one of the ultimate features of poorer countries, is fact that their labour and land resources are generally underused this situation, according to the theory is the cause of low savings rates among the poor countries of the world. thus, their capital's productive efficiency been lower than that of manufacturing nations. this school of thought contends that interdependence among nations of the world benefits less developed countries more than the developed nations. this argument according to the theory is built on the vital evidence that, in a steady state, fund will flow from industrialized, established countries, to less developed nations, where according to the theory, investment returns will be high in the long run, which will transform the less developed nations into developed nations 2.2 empirical review saviour, ekpe & salamat (2023) examined the impact of monetary policy on real exchange rate volatility in nigeria which influenced fdi in the long run. the study used time series data obtained from cbn and world bank 2021 and ordinary least square (ols) statistical technique was used to assess the degree of influence which the variables have on each other. augmented dickey-fuller (adf) test was adopted to test for unit root and johansen’s co-integration test was also conducted to establish long run association. the study also incorporated one co-integrating equation, vector error correction model (vecm), granger causality test and cusum test for further analysis. the study reveals that real exchange rate volatility has a negative and insignificant effect on fdi and hence on real gdp in nigeria. american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 67 | p a g e it also shows that monetary policy has a positive and insignificant influence in the nigeria economy. the study shows (among others) that there is no long run or short run relationship from real effective exchange rate volatility, domestic interest rate, government spending and net export running to fdi and then real gdp. this study therefore suggests that the government should implement an expansionary monetary policy, through increase in money supply by reducing the domestic interest rate. the government should implement an exchange rate system that is market-determined and should step in only at crucial times to ensure stability in the exchange rate that will also at the end attract foreign investors in the country. saviour, ferdinand and jacob (2022) investigated the effects of selected macroeconomic variables on stock market performance in nigeria. the study employed time-series data obtained from the central bank of nigeria's statistical bulletin and world development indicators. stock market performance was measured using the all-shares index while the identified macroeconomic variables included gdp growth, broad money supply, exchange rate, savings interest rate, and inflation rate. an autoregressive distributive lag (ardl) estimation technique was used to establish the long run relationship among the variables, and it was revealed that a long run relationship existed among the variables in the estimated model. the result shows that macroeconomic variables such as gross domestic product, broad money supply, exchange rate, and savings interest rate have a positive effect on stock market performance and hence in the fdi in nigeria. on the other hand, the results showed that the inflation rate has a negative effect on stock market performance thus fdi in nigeria. predicated on the result, the study recommended that policies to increase gross domestic product, exchange rate, interest rate, and money supply should be implemented because they can lead to an improvement in the performance of the stock market and hence fdi, while the inflation rate should be maintained at a single digit to prevent its negative effect on the performance of the stock market and fdi in nigeria. ekine, dennis, and charity (2019) studied the impact of foreign investment somewhat on performance of the nigerian economic growth. the result of the study showed a strong association between the performance of the nigerian economy and the inflow of foreign direct investment, which was american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 68 | p a g e statistically significant at the 5% level. the study further revealed that in one way or another a strong economy is deeply dependent on the inflow of these vital determinants. they had found out that fdi is attracted or improved by economic factors like gdp market size, interest rates, inflation, currency rates and their volatility, and market size. mokuolu's (2018) investigated the relationship between fdi and economic growth in the nigerian economy. the study used the yearly time series data for a period of 48 years. the study used autoregressive distributed lag model (ardl) method. the result of the study showed a strong positive correlation between fdi inflows and the gdp-based economic growth indicator in nigeria. the macroeconomic variables that were used in the study was according to the apriori expectation of the study. the apriori expected had indicated that, if the rate of interest moves in the opposite direction, fdi will shrink in nigeria. this is shown by the negative interest rate seen during the period. the outcome of the country's a priori postulated positive exchange rate condition in the country. the study then concluded that irrespective of how we observed fdi to be negatively related with variables, it is still vital for the economic growth of less developed countries of the world, and as such the study then recommended that government should ensure machineries are put in place to encourage foreign investors coming into the country for investment. arawomo and apanisile (2018) examined the strategic drivers of fdi in the nigerian communications industry while examining determinants of fdi in nigeria. the study collected data from central bank of nigeria's statistical report. the variables used in the study include: the number of telecom users, interest rate, foreign currency rate, and inflation. graphs, the t-test, and the autoregressive distributed lag were used to analyse the data (ardl). the study comes to the conclusion that market size, trade openness, government spending, inflation, and interest rate are the major factors influencing flow of fdi into the nigerian telecom sector. the study also found out that found that the historical foreign investment, market size, exchange rate, and gdp growth have become the main drivers of foreign investment inflows to nigeria and that these macroeconomic factors have a positive and significant impact on fdi inflows in nigeria american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 69 | p a g e odili (2015) examined the impact of stock market performance and exchange rate volatility on the inflow of foreign direct investment into nigeria. the study used time series data sourced from secondary source and covered the years 1980 to 2013. the study used the ordinary least square method in its estimation. the study's findings verified that exchange rate volatility has both a long-term and short-term negative and considerable impact on the flow of foreign direct investment into nigeria. according to reports, nigeria would undoubtedly draw direct foreign investment if its capital market is strong and stable. in order to improve domestic production of export goods, the research recommends the implementation of appropriate exchange rate management systems and regulations. amassoma (2014) in another study had investigated the influence of exchange rate on capital inflows (foreign direct investment and foreign portfolio investment) in nigeria between 1986 and 2011. the study used time series secondary data collected from central bank of nigeria of various years. the study used granger causality and the error correction modeling (ecm) techniques in the investigation. the result of the causality estimations revealed that there was no significant correlation between the exchange rate and capital inflows that is, foreign direct investment and foreign portfolio investment during the period of investigation. the result of the long-term regression also showed that, foreign direct investment had a negative influence on exchange rates, but portfolio investments had a positive effect. the fact that the short-term result was the same as the causation finding shows that neither foreign direct investment nor foreign portfolio investment had a significant impact on the exchange rate. the study came to the conclusion that there is a long-term link between fdi and the currency level in nigeria and therefore recommended that government should ensure a functional and regulated capital market that will lead to a stable economy. omorokunwa and ikponmwosa (2014) had investigated the dynamic relationship between currency rate volatility and foreign private investment in nigeria. the study covered the period 1980 to 2011. the study used the augmented dickey fuller (adf) test to find out the stationarity of the data used in the study. error correction model (ecm) was also used to analyze the data and the engle and granger twostep method was used to do the co-integration method. the result of the study that, exchange rate american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 70 | p a g e volatility has moderate and little impact on the flow of foreign direct investment (fdi) into nigerian economy, and this happened both in the short run and in the long run. the result of the study revealed that, in the short run, currency rate volatility has a trifling effect on foreign portfolio investments, but also that, in the long run, it has a substantial beneficial impact on the economy. based on the results of the study, the following recommendations were made: government should put policies in place to encourage private investors to produce quality goods that will complement foreign investors. the study also recommended that policymakers should create a reliable mechanism for managing the country's currency rates to boost investment and thus development. soumyananda (2014) examined the factors that affected foreign direct investment in nigeria between 1970 and 2006. the result of the study showed that, market size was not a vital factor in attracting longterm foreign investment to nigeria. the study then found out that, the majority of fdi to nigeria is resource-seeking meaning they come take what they want and give nigeria very small gain. the study also found out that there is a considerable stimulus on nigeria's natural resource where the trading partners like uk and china come to drain nigeria ntim and emilia (2014) investigated the connection between various macroeconomic factors influencing foreign direct investment. they used the vector error correcting model (vecm) in analysis and obtained data from the central bank of nigeria statistical bulletin 2013. the results of the study revealed that, political stability and corruption have a significant role in determining fdi inflows to nigeria. the study also found out that, human capital and economic openness are equally major determinants of fdi. from the findings in the study, they recommended upgrading of nigeria’s political and economic institutions for nigeria to gain in any international investment. rasaq (2013) had examined the impact of exchange rate volatility on important macroeconomic indicators. the study had collected secondary data from cbn statistical bulletin of 2011. the study used granger causality test, the ordinary least square (ols), and the correlation matrix in the analysis. the result of the study showed that, though exchange rate volatility was observed to have a negative american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 71 | p a g e impact on the nation's inflation rate, it was equally observed that exchange rate volatility had a beneficial impact on the gross domestic product, foreign direct investment, and trade openness. the study therefore recommended that, in order to encourage a favourable terms of trade in the country, the country needed to develop its exports and reduce its over-dependence on the oil industry in order to increase its revenue. the study also recommended an increase in local manufacturing which according to the study will reduce the problem brought on by exchange rate volatility. edo (2011) in a study to investigate factors affecting fdi had collected secondary data from cbn statistical bulletin for the analysis. the study analyzes how institutional quality affected fdi flows into nigeria from 1980 to 2011. the study found out that institutional instability, extreme levels of corruption, insecurity, and macroeconomic instability hamper fdi from entering a nation. osinubi and amaghionyeodiwe (2009) in their study examining influence of exchange rate volatility on foreign direct investment (fdi) in nigeria adopted a standard deviation model to analyze how exchange rate volatility has influenced fdi in nigeria. the study tried to determine how exchange rate volatility had affected the entrance of fdi to the nigerian economy within the period under study. the study adopted both the ols method of estimate and the error correction model. the results of the study found out that, foreign investors should not fear extremely about exchange rate volatility trend. the results further showed that actual inward fdi and exchange rate have a substantial positive relationship. by this result it showed that devaluation of the naira boost actual inbound fdi in the study. again, the results showed that the world bank suggested policy of structural adjustment program which was implemented in nigeria in 1986, had a damaging effect on real inward foreign direct investment in nigeria, which may have been triggered by the deregulation of naira that was followed by exchange rate volatility in the country. 3.0 methodology the design adopted in this study was an ex post facto (after the fact) design. this is because the events had already taken place before the investigation was carried out. the choice of this design was made because the researchers had no control of the independent variables and inferences about the american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 72 | p a g e relationship among the variables are made without the current interaction between the regress and regressors. the design is predicated on various econometric techniques such as the augmented dickeyfuller (adf) unit root test and the autoregressive distributive lag model, as well as the trend analysis of stylized facts on some of the indicators of variables of concern. the dependent variable for this study is the capital flows define in this study as foreign direct investment (fdi) and foreign portfolio investment (fpi), while the independent variables are lib london inter-bank offered rate use as to measure the foreign interest rate, rate of inflation, total external debt, market size of the economy measured by real gross domestic product in this study, gross foreign exchange reserves, openness calculated as exports + imports divided by gdp at current market prices, human capital proxied by secondary school enrolment in the country. 3.1 model specification according to the theoretical underpinning in this study, the factors influencing capital flows in the world depend on if the researcher is investigating aggregates and disaggregate flows and if the latter are investigated what type of disaggregate flows is investigated. in this study, the disaggregate flow is a function of both shortand long-term flows. looking at equation (1) below, foreign capital flows is projected to hinge on the factors selected in this study in the model. therefore, considering the theoretical framework as the theories opined above, the model is then presented as: cap = f (lib, opn, exdt, inf, hc, fxr, rgdp)…………………………….…………..(1) cap: capital flows divided into foreign direct investment (fdi) and foreign portfolio investment (fpi). lib = london inter-bank offered rate use as a measure of foreign interest rate opn = level of openness exdt = total external debt inf = rate of inflation hc = human capital (measured as secondary school enrolment) fxr = gross foreign exchange reserves american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 73 | p a g e rgdp = real gross domestic product use as a measure of nigerian market size cap= β0 +β1lib +β2opn +β3exdt +β4 inf +β5hct +β6fxr+β7 rgdp +u…………..... (2) a priori signs are: β1, β3, β4, < 0; β2, β5, β6, β7 > 0 this study uses london interbank offered rate as one of the independent variables and this is anticipated to negatively impact on fdi and fpi in the country. this means that an increase in international interest rates will likely lead to low capital flow to nigeria. according to the a priori expectation, rate of inflation is expected to have negative influence on international capital flows. this is because inflation leads to uncertainty in the domestic market and thus the nigerian economy. it was equally expected that external debt has a tendency to inhibit the level of investment and this will have a negative influence on capital flows in the economy. the a priori expectation of real gdp is expected to be positively related with capital flows. the study expectation of foreign reserves and openness are to have positive impacts on international capital flows in the country. 3.2 method of estimation and data the design adopted in this study was an ex post facto (after the fact) design. this is because the events had already taken place before the investigation was carried out. the choice of this design was made because the researchers had no control of the independent variables and inferences about the relationship among the variables are made without the current interaction between the regress and regressors. the design is predicated on various econometric techniques such as the cointegration and error correction mechanism (ecm) which provides a dynamic structure for the analysis. the study also uses the augmented dickey-fuller (adf) unit root test. the study also investigates the time series and long run characteristics of the data collected and used in the analysis. to enables us carry out the investigation, equation two is again specified thus: fpit=β0 +β1lib +β2opn +β3exdt +β4 inf +β5hct +β6fxr+β7 rgdp+ϒecmt-1 + ε1t...(3) and fdit=β0 +β1lib +β2opn +β3exdt +β4 inf +β5hct +β6fxr+β7 rgdp+ϒecmt-1 + ε2t..(4) american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 74 | p a g e where ϒ is the error correction term in this study. the study collected 1986 to 2024 annual data from the central bank of nigeria statistical bulletin various years and world bank development indicators. 4.0 empirical analysis 4.1 unit root analysis table 4.1 unit root test variable adf test at levels adf test at first difference 95% critical adf value remark fdi 0.419 -8.287 -2.960 stationary at first difference fpi -6.635 -2.960 stationary at levels fxr 2.422 -4.561 -2.960 stationary at first difference infl -2.802 -5.586 -2.960 stationary at first difference hc -1.684 -3.131 -2.960 stationary at first difference exdt -1.892 -4.129 -2.960 stationary at first difference rgdp 3.715 -2.960 stationary at levels libor -2.573 -3.648 -2.960 stationary at first difference opn -1.521 -3.089 -2.960 stationary at first difference source: result extracted by authors from the e-views 9 american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 75 | p a g e the study uses augmented dickey fuller (adf) unit root test to test for stationarity of the data and the result from the table above shows that apart from fpi and rgdp all the other variables possess adf values that are less than the 95 percent critical adf value. this means that the time series are nonstationary at levels. however, the variables fpi and rgdp are stationary at levels, indicating that these variables are not time-dependent as seen in the table. 4.2 co-integration test table 4.2: engle and granger residual cointegration tests results model adf lag calculated adf critical adf value (95%) remark 1 1 -7.249 -2.957 stationary 2 1 -5.817 -2.986 stationary source: result extracted by authors from the e-views 9 looking at table 4.2 above, it reveals that by using the engle and granger co-integration procedure, two of the models have adf test statistic values that are more than the 95 percent critical adf value as seen in the table. therefore, it shows that the null hypothesis of no co-integration among the variables at 5 percent level of significant is rejected. this means that the variables are stationary and this shows that the time series data use in this study is cointegrated at the 5% level of significant. this then means that, there is a long run relationship existing between the dependent variable and selected independent variables in this study. from the results above which shows that some variables are not stationary at levels gives us the impetus investigate further if the variables are co-integrated in the study. for us to carry out this test we have to rely on the engle and granger hypothesis of 1987 which opined that, when time series data pt and qt use in analysis are not stationary at levels i(0) but otherwise at first-difference, i(1), they opined then that there could be a linear combination of pt and qt, which is stationary at first difference. this means that, the two time series variables that placate this condition are considered to be cointegrated. the fact that there is an existence of cointegration among the variables shows that the two cointegrated variables must be american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 76 | p a g e moving together at the same degree. according to the theory by engle and granger, a necessary condition for cointegration is that the data should be co-integrated at the same order. to further ascertain the state of cointegration in this study we employ the engle and granger two-step method. by this method we regress the dependent variable on all the independent variables. the value of the residuals confirms the results, that is, if the variables are cointegrated, the residual from the cointegrating equation must be integrated to order zero in the study. considering the analysis in this study, the cointegration tests are done on the foundation of the specific models that were shown in the table above. 4.3 the long run results table 4.3: the long run relationship variables fpi fdi c 9479.7 35926.5 fxr -0.154*** -0.005 infl -7.401 16.17* hc 69.80 80.52 exdt -0.109** -0.074* rgdp 0.037* 0.053*** libor 150.4 92.05 opn -176.3 -693.2 r2 = 0.369 f = 1.59 r2 = 0.931 f = 47.9 source: result extracted by authors from the e-views 9 * shows significance at 10 percent level; ** shows significance at 5 percent level; *** shows significance at 1 percent level. considering table 4.3 above, the result of the long run determinants of capital flows in nigeria is shown. the result of the study shows that the foreign portfolio investment model has a poor relationship with rgdp. this is as seen by the small r2 value of 0.369 in the table. this means that the long run foreign american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 77 | p a g e portfolio investment in nigeria is externally influenced by variables not included in the models use in the study in the short run. this result agrees with the theoretical underpinning of this study which opines that foreign portfolio investment is a short run capital rather than a long-term factor. the results further show that, the foreign direct investment with the r2 value of 0.931 is high and this reveals that the flow of capital into the nigerian economy is explain by variables captured in the models. again, the f statistics value of 47.9 indicates a strong relationship existing between foreign direct investment inflows and all the determinant variables put together in the study. despite the weak performance of the foreign portfolio investment model, it is equally still seen that rgdp, fxr, and exdt are significant in the result, and this means that foreign reserves and external debt have a continuous impact on foreign portfolio investment flows on nigerian economy. the result further shows that, in the long run, the growth of the economy becomes a robust influence for portfolio investment to consider in its flows in the study. considering the foreign direct investment result, it shows that inflation, external debts and real gross domestic product are the significant variables in the study. this means that, domestic influences are very vital in the determination of foreign direct investment on nigerian economy in the long run. this means, inflation and level of economic performance exercise strong influences on the performance of foreign direct investment inflows in the long run in the country. consequently, for nigeria to enhance workable and continuous inflow of foreign direct investment, emphasis must be on the economic environments of nigeria. 4.4 dynamic analysis table 4.4: short run model for determinants international capital market variables fpi fdi c -51.16 111.2 fdi(-1) 0.282* δfxr -0.138*** -0.075** δinfl 4.497 6.703 american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 78 | p a g e δhc -94.31 174.6** δexdt -0.111** -0.022 δrgdp 0.051 0.026 δlib 117.7 116.6* δopn 298.9 -204.0 ecmt-1 -1.198*** -1.869*** r2 = 0.756 f = 6.58 r2 = 0.827 f = 31.14 source: result extracted by authors from the e-views 9 * indicates significance at 10 percent level; ** indicates significance at 5 percent level; *** indicates significance at 1 percent level. the values from table 4.4 discusses the short term changes in the determinants of flow of capital in nigeria. this study uses an autoregressive distributed lags (ardl) method and focusses on the ecm. the use of error correction mechanism for the selected ardl model is as seen in table 4.4 above. this study use the r2 criterion to select the parsimonious equation as seen in the study. the study shows the fpi results of the error correction mechanism on the second column of table 4.4 above and this shows the presence of very high diagnostic statistics in the model. the r2 value of 0.756 shows the goodness of fit of the model and this means that over 75 percent of the systematic changes in fpi inflows in nigeria is explained by the variable’s presence in the explanatory variables and the ecm. looking at the r2 value for the foreign direct investment in the model, it is also notice that the r2 of 0.827 is high and this means that 82 percent of the systematic changes in fdi flows in nigeria is explained by the variables in the model. the overall performance of the models is also high. the table further shows that the f-statistic values of 6.35 for the fpi model and 31.1 for the fdi model have passed 1% level of significance test. this is because the calculated values of the f statistics are greater than the 1 % critical f-value of 5.01 in this study. arising from the above, we cannot reject the hypothesis of a significant linear relationship between foreign capital and all the independent variables combined in the short run in nigeria. american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 79 | p a g e considering the above results, it is observed that, the contribution of each of the variables to foreign capital flow in nigeria is influenced the coefficients of the explanatory variables in terms of sign and significance in this study. the results also show that the coefficients of the variables in the fpi model that is the foreign reserves and human capital do not agree with the a priori expectation. the notice of high value foreign reserves variable shows that reserves position of the country has a very strong negative impact on fpi flows in the country. looking also at the results of this study, it is seen that, external debt in nigeria limit the amount of fpi inflows to country mostly in the short run. hence the failure of all the other variables at the 10 percent level means that external factors have affected fpi flows in nigeria in the short run than domestic factors. the results further show that the coefficient of foreign exchange does not agree with the a priori expectation of positive sign in the fdi model. this means external reserves accumulation in nigeria has significantly affected foreign capital flow in the country. the results also reveal a positive significant relationship between human capital (hc) and capital flow at 5 percent level of significant in nigeria. this means that strong human capital base is a one of the main factors influencing fdi flows in nigeria. again, it is obvious that foreign direct investment according to the result, appears to be vital in the growth of an economy and thus human capital development is the panacea for this flow in the country. the result also reveals that interest rate has positively influenced fdi flows in the country and this means that changes in the rate of interest has an effect on the inflow of fdi in nigerian economy. looking at the results of this study closely, it is seen that other variables in the model have not positively influenced capital flow except inflation and human capital. above all, the failure of the real gdp and openness coefficients in both the fpi and fdi results is a thing of worry as the refuse to agree with the a priori expectations. therefore, it can be deduced that the market size or the rate of openness does not have much impact on the fdi inflows in the short run in nigeria. this means, the adjusting macroeconomic factors in this study does not have serious impacts in the short term on foreign capital inflows into the country. the scenario sorts for the error correction terms in the both equations and this then have the correct negative sign as seen on the table above. this trend therefore reveals that any short run change in foreign capital in nigeria will be american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 80 | p a g e restored in the long run. this is because, the high values of the error correction term that is more than one means that adjustment to equilibrium in the long run will move backward. this means the adjustments appear to move from negative to positive over time as seen in this study and this may be as result of the compositions of the market in nigeria. the implications of the results show that, international market factors have a tendency to have continuous impacts on capital flows in the nigerian economy. this means the impacts of external reserves and external debt on foreign direct and portfolio investments are weighty in nigerian economy. the non-significant relationship of the macroeconomic variables in the short run but being significant in the long run as observed in the ecm and long run estimates tables in this study means that the management of local macroeconomic factors have not attracted foreign investment, particularly the portfolio investment that will lead to growth and development of the nigerian economy. again, as seen in the result, the human capital development is one of the key domestic factors that stimulate capital flows in nigeria in the short and long run. 5.0 summary, recommendations and conclusion 5.1 summary of findings the main aim of this study is to examine the factors influencing the inflows of foreign capital into nigeria. the study further examines how the external capital flow has influenced the development of nigeria. the results of this study reveal that the expected benefits to factors influencing foreign capital flow into nigeria are mostly gotten from external than internal sectors. the study specifically found out that: domestic factors wield more impact on the factors influencing long run capital flow. it is also found out that portfolio investment has significant influence in the short run than in the long run in nigeria. a closer look at the result shows external factors are likely to influence the flow of fpi in the long term. this can be affirmed considering r2 values of 76% and 37% as seen in the table above. again, it is revealing in the study that in the short run outside factors play more roles in encouraging capital inflows to the nigerian economy. 5.2 recommendations in view of the above findings, the following policy recommendations are proffered: american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 81 | p a g e i. government authorities should put machineries in place to expand and promote domestic capital market that will attract more foreign investors to increase productivity and development. ii. the authorities should create a healthy macroeconomic environment and affordable and accessible financial system that will encourage and attract foreign investors into the country. iii. government should put policies and machineries in place to reduce uncontrolled inflow of portfolio investment in nigeria as this will reduce the level of equity bubbles in the capital market. iv. we also recommend that government authorities should pay attention to appropriate management of the vast external reserves of nigeria so as to obtain short term stability of foreign capital flows that will aid economic growth and development. this can be done by putting correct policy in place that will focus on stringent management of the external sector through appropriate reserves policy and debt management that will likely improve the nigerian economy. v. this study also recommends that, proper portfolio management policies relating to the currency structure, selection of the type of investment instruments, and satisfactory period of the reserves portfolio to ensure that assets are protected and made available to enable the market expansion in nigeria. vi. the result reveals a veritable difference between short run and long run factors influencing foreign capital inflows to nigeria. hence, we recommend that policy measures designed to direct long term capital inflows should not be the same as those designed to control the short-term capital flows. this can be done by enhancing a policy is fashioned to consider the time horizon of capital flows. vii. no country of the world can strive in an unregulated capital market and unreserve management structure and as such we recommend the government to provide a sound reserve management policies and practices that will promote sound and regulated macroeconomic management system. 5.3 conclusion this study concludes that, managing capital flows the world over and nigeria in particular is a difficult development that requires suitable choice of policies that will aid a country to grow and some of the policies include yet not limited to: enhancing a good financial market conditions that will aid financial american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 82 | p a g e stability of a country, suitable level of capital reserves locally and internationally, and adequate monetary policy objectives that will aid liquidity management. we therefore conclude that, huge capital inflows frequently are connected with inflationary pressures that retard growth and development. literatures opined that huge capital inflows may also lead to stock market bubbles and this in turn leads to an extreme expansion in internal credit which will again jeopardize the stability of the financial system. the capital inflows in nigeria in the short term intensify the problems of the financial market. therefore, for the capital flows to be effectively strengthened and enhanced key and sound macroeconomic policies as stated in the models should be promoted. nations with sound macroeconomic policies and quality institutions are the countries benefiting from this capital flow. the reason for this study is to investigate the factors that influence capital flows in nigeria and the study reveals that foreign capital inflow in nigeria is distinguished between short run and long run bases. the result further reveals that portfolio capital flow in nigeria is more of short term than direct investment capital as seen in the result where foreign portfolio investment have a tendency to produce volatile effects on short term financial market development in the nigerian economy. we therefore can conclude that, the combination of foreign portfolio investment and that of direct investment shows a means of guaranteeing more valuable operation of foreign capital inflows into the nigerian economy that will enhance a desirable economy. references amassoma (2014), foreign direct investment in nigeria, proceedings of the 12th annual conference of the regional research units of the central bank of nigeria, september 1–5, 2014 pp. 227 – 236. arawomo and apanisile (2018), an overview of foreign private investment in nigeria‖ paper presented at the cbn twelfth annual conference of the regional research units on foreign private investment in nigeria organized by research department cbn 1st5th september 2017 bleaney, m., mizen p and senatla l (1999) “portfolio capital flows to emerging markets” credit research paper (99)12. american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 83 | p a g e central bank of nigeria (2009): perspectives on foreign direct investment in nigeria annual report and statement of account, december 2008. devereux, m.b. (2006), “a portfolio theory of international capital flows.” discussion paper no. 24, march. dornbush (1976), what factors appear to drive private capital flows to developing countries? and how does official lending respond? the world bank, policy research working papers, no. 2392. edo (2011), foreign private investment: issues, determinants and performance. paper presented at a workshop on foreign investment policy and practice, nigeria institute of advanced legal studies, lagos. ekine, dennis, and charity (2019), direct foreign investment in nigeria: an empirical analysis, african studies review 30 (1), march. ekpo, a.h. (1997). determinants of foreign direct investment in nigeria: evidence from time series data. cbn economic and financial review, .35 (1): 59-78. engle, r.f., and c.w.j. granger, (1987) “co-integration and error correction: representation, estimation and testing”, econometrica, 1987, 55, pp.251-276. hau, h. and h. rey, (2006), exchange rates, equity prices and capital flows. review of financial studies, 19 (1), pp. 273-317. kim, y. (2000). causes of capital flows in developing countries. journal of international money and finance: (1)9. leiderman and reinhart (1993), the procyclicality of capital flows to developing countries. harvard university. harvard american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 84 | p a g e mody a. and murshid, a (2005), growing up with capital flows. journal of international economics, 65, pp. 249-266. mokuolu's (2018), increasing private capital flows to developing countries: ‘the role of physical and financial infrastructure in 58 countries. journal of applied econometrics and international development (10)2 pp. 57-72 ntim and emilia (2014), foreign capital flows and external debt: perspective on nigeria and the ldcs groups. lagos, broadway press ltd. odili (2015), exchange rate volatility and foreign direct investment inflows in selected sub-saharan countries. university of ibadan, 7th dissertation. omorokunwa and ikponmwosa (2014) “investment in the growth process: a measure of economists‟ ignorance in africa” nigerian economic society annual conference osinubi and amaghionyeodiwe (2009), nigeria’s financial system strategy 2020 plan‖ paper by the governor, central bank of nigeria at the fss international conference, abujanigeria. rasaq (2013), an econometric investigation of the determinants of foreign investment for economic development in nigeria by nigerian economic society, ibadan: 219-241 saviour, ekpe & salamat (2023), impact of monetary policy on real exchange rate volatility in nigeria. social sciences and management international journal (4) 3, eleviv publishing group, us saviour, ferdinand and jacob (2022), effects of selected macroeconomic variables on stock market performance in nigeria. malaysian e commerce journal (mecj) 6(2) (2022) 29-33 smadi, 2018, financial centers and the geography of capital flows. international finance, 6, pp. 27-59. soumyananda (2014), portfolio investment flows to asia and latin america: pull, push or market sentiment? journal of asian economics, 17, pp. 363-373 world bank (2021) world development report, washington, d. c american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 53 | p a g e the effect of foreign direct investment on economic growth in nigeria, 1999 2023 1ogbonna obinna bright and 2prof. mike anyanwaokoro 1department of banking and finance, esut business school, enugu, enugu state. 2department of banking and finance, enugu state university of science and technology, enugu state. *corresponding author: brightogbos@hotmail.com doi: https://doi.org/10.5281/zenodo.14626833 abstract: this study assessed effect of foreign direct investment (fdi) on economic growth in nigeria using a 24-year annual time series data ranging from 1999-2022, and obtained from world development indicators (wdi). the specific objectives examined effect of fdi and foreign exchange rate (fexr) on economic growth (measured by gdp growth rate). ex-post facto design was adopted because our data were secondary in nature. data stationarity was achieved after series were subjected to stationarity (unit root) test. though the variables became stationary at level and after first differencing, they (variables) could not be integrated of same order (which revealed absence of long-run relationship among the variables); hence autoregressive distribute lag (ardl) estimations were used to analyze our modified models. findings revealed: i) fdi had a negative (approximately, -0.22) and non-significant (p-value, 0.4052 > 0.05) effect on gdp growth rate, and ii) fexr had a negative (approximately, -0.86), but significant (0000 < 0.05) impact on gdp growth rate in nigeria over the period of study. the economic implication being that fdi and fexr could not lead to economic growth owing to corruption, poor infrastructures, insecurity and devaluation, fluctuation in value of naira. fdi can be a significant contributor to economic growth in nigeria and have a positive impact, if government vigorously addresses infrastructural bottlenecks and create a policy direction that fosters effective technology transfer and knowledge sharing, and make nigeria business environment more appealing to investors. conducted in nigeria, this research using ardl model affirmed works of nguyen (2024) in south east asia; okello and badj (2023) in kenya, and mazenda (2024) in south africa, whilst it contradicted studies of mwitta (2022) in tanzania and alabi (2019) in nigeria, thus contributed to knowledge. keywords: foreign direct investment (fdi), economic growth, foreign exchange rate (fexr), autoregressive distributed lag (ardl), nigeria mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:brightogbos@hotmail.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 54 | p a g e 1. introduction in most developing countries, foreign direct investment (fdi) serves as a means of earning foreign reserves via investments, businesses and foreign aids from advanced countries. fdi is considered a valuable source of finance and capital formation, technology-transfer and know-how, as well as a viable medium for trade among countries. nigeria is among the major recipients of fdi in africa. primary investors are coming from china, india, canada, united kingdom, and kenya to mention a few. mining, oil and gas and primary agriculture are among the key sectors which draw most fdi. according to the requirement for accelerated growth in association with the sustainable development goals is not completely clear, however, for economies to experience sustainable and inclusive development, cross-border trade is paramount (unctad, 2019). fdi is highlighted as type of capital and means through which technology and knowledge can be transferred and diffused from advanced country to another. in other words, foreign direct investment (fdi) is direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. foreign direct investment is done for many reasons including to take advantage of cheaper wages or for special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region. foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. in this aspect, fdi inflows could help the nation's economy thrive (mwitta, 2022). theoretically, fdi has the potential to be a major driver of economic growth in nigeria in numerous ways: i) brings in much-needed capital for businesses and infrastructure development, which can lead to creation of new jobs, expansion of existing ones, and overall economic activity; ii) transfer of technology and skills can benefit nigerian businesses through knowledge sharing and training, leading to a more skilled workforce and increased productivity; and iii) transfer of technology and skills fdi can help develop export-oriented industries, bringing in foreign currency and improving nigeria's trade balance. nigeria’s foreign investment can be traced back to the colonial era when the colonial masters had intention of exploiting her resources for the development of their economy. there was little investment by these colonial masters. with the end of oil boom in 1982, nigeria found herself in a quagmire of economic problems. these problems include unsustainable balance of payment deficits, a rapid escalating debt stock and a crushing debt service burden internally, ojo and alege (2014) state that the economic problems include unsustainable fiscal deficit, rising unemployment and galloping inflation. above all, investment has collapsed and this contributed strongly to a reduction in real output and per capita real income level. mailto:contact@americaserial.com mailto:contact@americaserial.com http://en.wikipedia.org/wiki/tax_exemption http://en.wikipedia.org/wiki/portfolio_investment http://en.wikipedia.org/wiki/portfolio_investment http://en.wikipedia.org/wiki/stock_(finance) http://en.wikipedia.org/wiki/bond_(finance) american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 55 | p a g e since the enthronement of democracy in 1999, the government of nigeria has taken a number of measures necessary to lure foreign investors into nigeria. these measures include the repeal of laws that are inimical to foreign investment development, promulgation of investment laws, various overseas trips for image laundry by the president among others presently, nigeria is the first host economy of fdi in sub-saharan africa, and the third in the continent (oyegoke & aras 2021). recently, nigeria has witnessed several trade policies which aim at diversifying the economy away from oil revenue. these policies are focused on improving the industrial sector, and of course, results in austerity. in 2018, the total fdi inflow to the country was around usd 1.9 billion, while in 2017, fdi inflow was around usd 3.5 billion, showing a decrease due to the consequence of the austerity measures imposed in 2018. at the third quarter of 2019, the fdi was only 3.37% (usd 200.08 million) of the total capital inflow for the period. traditionally, fdi is designed to improve the recipient economies thereby enhancing economic growth and development, it is in this view that many developing countries attract foreign investors with the hope of strengthening their economy by increasing the foreign investment portfolio. however, most empirical analysis of the impact of fdi on economic growth advises otherwise, hence, a controversy. according to the existing literature, some empirical results found a negative relationship between fdi and economic growth, while others opined that as fdi increases, it results in a boost of output productivity, hence a positive relationship between the variables. therefore, this study contributes to the existing literature by investigating the effects of fdi both on the owner, and the host country, using nigeria as a case study. the effect of fdi on growth of various economies has been the subject of numerous studies, all of which have highlighted different findings. for instance, de mello (1999) using ordinary least square (ols) discovered an increase in fdi led to an increase in economic growth in organization for economic cooperation and development (oecd) countries. in the same vein, ofori & asongu (2022) via generalized method of moment (gmm) revealed an increase in fdi brought about an increase in economic growth in sub-saharan african countries. however, wiredu et al. (2020) applying ols found that fdi had a negative effect in cote d'ivoire, ghana, nigeria and senegal. the implications of fdi on many economic sectors, including gross domestic product, employment, trade, education, technology, and so forth, have been discussed in some literature. against all these backgrounds of both theoretical and empirical justifications about the contributions of fdi in promoting economic growth in sub saharan countries like nigeria, it is noteworthy that there is no conclusive study on fdigrowth nexus in host countries since several other empirical evidences show mixed positive, negative results. therefore, given the inconsistency with which fdi relates to economic growth in various countries. consequently, this study sought to assess whether fdi had a positive or negative long run effect on nigeria’s economy over the period, 1999-2022 by applying various econometrics techniques. this study tends to examine effect of foreign direct investment on gdp growth rate in nigeria and also ascertain impact of foreign exchange rate on gdp growth rate in nigeria. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 56 | p a g e the following distinct groups would significantly benefit from this study: academic world the outcome of this work will serve as reference materials for further research activity in this or related areas in future, thereby adding to the limited literature on nigeria's fdi issues. this could be to the extent of providing new empirical evidence to the body of knowledge, or by validating or invalidating the findings extant studies. it is therefore expected that the entire academics: researchers, lecturers and students would benefit from the empirical and methodological postulations of this seminar paper. government/policymakers since this seminar seems to be one of the latest efforts dealing on fdi phenomenon in nigeria, it is expected that findings of this study could help shape the policy direction of the federal government of nigeria, as far as formulating and implementing robust economic policies and programmes are concerned. this study would further provide direction required to tackle persistent naughty fdi challenges in order to witness desired economic improvement in nigeria. it is worthy of mention that the dwindling revenue profile of the federal government may remain a nightmare to our political leaders, thereby making fdi the only saving grace in funding myriads of government projects. monetary authorities the outcome of this research in form of new empirical outcomes may bring about further research activities such as conferences, workshops, and the likes. position papers arising from such brainstorming exercises would assist the monetary authorities such as the central bank of nigeria, national bureau of statistics and federal ministry of finance, etc while counselling the government on the state of the economy. the empirical evidence from the research may be useful to the international monetary fund and the world bank in making inferences between nigeria and other jurisdictions. general public the results of this seminar if published may not be useful only for academic purposes, but may provide everyone with specific pieces of information about fdi underlying forces. fdi can be a veritable funding option if the underlying principles are strictly followed. this study focused on effect of fdi on economic growth iin nigeria. to properly analyze the variables and address the time scope, annualized time series data extending up to 24 years were generated from the world bank indicators for the period, 1999 to 2022. the choice of 1999 is nigeria returned to civil rule, and thus more robust trade relations was commenced with global economy. regarded as the lower limit or base year of study was based on data. on the content scope, this work covered five variables: foreign direct investment (fdi), foreign exchange rate (fexr) as major independent variable; together with inflation rate (ifr) and trade openness (topn) as control variable. the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 57 | p a g e gross domestic product growth rate (gdpgr) served as dependent variables. on the geography scope, this study was conducted in nigeria, being the largest economy, and mostly populated in subsaharan african (ssa) countries. on the methodology scope, this work adopted autoregressive distributed lag (ardl) methods for variable estimations because the entire dataset were integrated of mixed order, that is 1(0) and i(1). this study was kept within limits by non-availability of desired secondary data linked to our study objectives up to 2023. admittedly, the data obtained mainly from the world developmental indicators as published by the world bank for 24 years (1999-2022) could contain some measurement errors that would likely compromise the correctness or acceptability of our research outcomes. 2. literature review 2.1 conceptual review 2.1.1 foreign direct investment (fdi) unctad (2016) defines fdi as an investment by entity which belongs to one country which aims to undertake business investment in another country for more than a year. fdi is a crucial mechanism to foster economic development of the growing economies as it boosts exports and trade balance (hailu, 2010). most empirical literature reports that fdi is an important source of capital that complements domestic private investment, generates new employment opportunities and stimulates technology transfer and spillovers (naftaly, 2024). types of foreign direct investment fdi is generally alienated in two categories: horizontal fdi and vertical fdi. further distinctions are made between vertical fdi's backward and forward versions. horizontal fdi allows mncs to expand their production abroad such that producing equivalent products to domestically available ones in the fdi receiving country. lim (2001) highlights that horizontal fdi seeks to penetrate a new market; however, it may be affected by various factors, including openness to trade and gdp growth rate. horizontal fdi takes a large part in global fdi (campos & kinoshita, 2003). in vertical fdi, mncs takes advantages of geographical position and low costs to launch production process in receiving state and to produce for both the domestic and international markets. vertical fdi is sometimes mentioned as the resource seeking fdi as investors tend to seek the low cost and efficient resources in the foreign country compared to the home country (campos & kinoshita, 2003). in backward fdi, the established enterprises in foreign country 9 provide inputs to the parent enterprise while in forward fdi, which is less popular, enterprises in the host country sells products from parent enterprises. moreover, fdi can be classified into target, direction and motive as means for fdi to effect growth of the host nation (khaing, 2009). target effect ways include investment, horizontal and vertical fdi, and mergers and acquisitions. the direction effect can be divided into inward and outward fdi, whereas market seeking, resource seeking, strategic asset and efficient seeking are means of motive effect. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 58 | p a g e it is debatable whether impact of fdi can vary subject to sector; investment in good infrastructure (transportation, power, communication), and a stable and attractive business environment with clear regulations is crucial to attract and retain foreign investors. 2.1.2 foreign exchange rate in finance, an exchange rate (also known as a foreign exchange rate, forex rate, fx between two currencies is the rate at which once currency will be exchanged for another. it is also regarded as the value of one country's currency in terms of another currency foreign exchange rates. according to the cbn (2024), n1,481.17 as at 8th june, 2024 exchanges for usd at official market, whereas the same dollar amount exchanges for n1,500 at the black market as at 6th june, 2024. stating succinctly, naira/us dollar exchange rate fluctuations negatively impact nigeria's economic growth. a rise in the value of naira relative to us dollar will enhance nigeria's economic growth and vice-versa. the net effect of our study establishes that excessive volatility is detrimental to growth. since gdp is based how much money an economy's output is worth, it is subject to inflation. to put it another way, gdp fluctuates when the value of a currency changes. it is normal for the cost of goods and services in a country to go up over time, and those gradual cost increases are reflected in the nation's gdp. 2.1.3 gdp growth rate (gdpgr) the gdp growth rate (gdpgr) refers to the percentage increase in a country's gross domestic product (gdp) over a specified period, usually measured annually or quarterly. it is used as an indicator of economic growth and is commonly expressed as a percentage (adepoju, et al., 2017). the gdp growth rate for nigeria has varied over the years. in 2020, nigeria experienced a contraction in its economy due the impact of the covid -19 pandemic and declining oil prices. the gdp growth rate for that year was -1.92%. the growth of the real gdp in nigeria was forecasted to decrease between 2023 and 2028 by total 0.2% points. real gdp increased at an annual rate of 1.3% in the first quarter of 2024, according to the second estimate. in the fourth quarter of 2023 real gdp increased 3.4%. factors considered affecting economic growth and development in nigeria include: infrastructure development, human capital development, financial development, political stability, and the impact of terrorism. 2.1.4 conceptual framework independent variable dependent variable foreign direct investment gd gdp growth rate mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 59 | p a g e source: author’s design (2024) fig. 1: interplay of foreign direct investment, foreign exchange rate versus gdp growth rate in nigeria 2.2 theoretical review according to asongu, et al. (2021), the main theories of fdi are classical and dependency theories. 2.2.1 classical theory the classical theory argues that fdi can be beneficial to the host country's economy in many ways: stimulate the development of domestic infrastructure, improve transfer of payment, transfer of capital skills, increase foreign earnings, technology spillover and expansion of tax revenue for the government (benetrix, et al., 2023). this theory actually underpins our study. 2.2.2 dependency theory in contrast, advocates of dependence theory maintain fdi can slow growth. the dependence theory is built on a marxist foundation that perceives globalization via exploitation of cheap labour, expansion of foreign markets, the introduction of the capitalist system, the introduction of obsolete technology and exploitation of primary resources from developing countries will slow growth (asongu et al., 2021). the advocates of dependence theory hold that fdi can negatively influence economic growth through local political and economic elites collaborating with foreign investors to exploit citizens of host countries; multinationals can distort domestic investment by using capital-intensive technology to cause unemployment increase, income inequality and change taste and preferences; finally, most foreign investors will send back profits generated to their motherland and thus crowd out local assets and harm domestic investment (taylor & thrift, 2013). 2.3 empirical review many substantial empirical studies have explored the effect of fdi on economic growth. a good number of them were captured by this study as follows: garang and thiery (2018) analyzed effect of foreign direct investment, unemployment on economic growth in uganda using autoregressive distributed lag (ardl) bounds approach and gdp data series obtained from the world bank from 1993 to 2015. findings showed no sufficient statistical evidence to suggest fdi played significant roles in reducing unemployment and boosting economic growth. the short-run and long-run dynamics of the model did not point to any statistically significant relationships. trang, et al., (2019) analyzed both the short and long run impact of fdi on economic growth in developing countries (lower-middle) income group for the period 2000-2014 using vector error foreign exchange rate mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 60 | p a g e correction model (vecm) and fully modified ols (fmols). findings revealed that fdi stimulated growth in the long run, although it exhibited a negative impact on economic growth in the short run in some selected developing countries under review. alabi (2019) explored impact of foreign direct investment on economic growth in nigeria. secondary source of data was employed in this study from 1986 to 2017 sourced from central bank of nigeria statistical bulletin and world development indicator. regression was used as estimation techniques. findings of the study revealed fdi was positive and significant to economic growth of nigeria within the period of study. abdillahi and mohd (2021) explored impact of foreign direct investment inflows on ethiopia’s economic growth using 36 years’ time series data. vector auto regression (var) model found fdi to have a positive and significant effect on gdp advancement. ofori and asongu (2022) conducted a panel data estimation in sub-saharan africa for the period, 1990-2020 based on a generalized method of moments (gmm) estimator. from the result, fdi was able to generate economic growth in both the long-run and short-run. however, the study noted most of the positive effect results depended on the country's governance dynamics. the study concluded that a country with strong institutional and governance quality would gain more from fdi inflow and thus grow its economy. mwitta (2022) examined impact of foreign direct investment on economic growth in tanzania spanning from 1990 to 2020 using vector error correction model (vecm). results of the study showed a statistically significant positive association between real gdp growth rate and fdi inflow to gdp ratio. on the other hand, the study revealed a negative correlation between gross fixed capital formation to gdp ratio and real gdp growth rate which might be caused by current situation of public investment. bashir ((2022) analyzed effect of foreign direct investment on economic growth in nigeria for the period, 1986-2020 taking into cognizance effect of exchange rate in relationship between fdi and economic growth using annual time series data sourced from databases of world development indicator (wdi) of world bank and central bank of nigeria (cbn) statistical bulletin. autoregressive distributed lag (ardl) model was employed for analysis. findings showed fdi had a positive and significant effect on economic growth. exchange rate also had a positive and significant effect on economic growth. the implied growth effect of fdi was enhanced in presence of a stable exchange rate. ntamwiza and masengesho (2022) studied impact of gross capital formation and foreign direct investment on economic growth in rwanda using time series data for the period 1990 to 2017. the error correction model technique for estimation indicated a short-run and long-run positive relationship between capital formation, foreign direct investment and economic growth in rwanda mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 61 | p a g e during the research period thus confirming that gross capital formation and foreign direct investment were the main determinants of economic growth in rwanda for the period under study. keita and baorong (2022) examined foreign direct investment and economic growth nexus in guinea for the period, 1990 to 2017. the findings showed fdi in the long run positively affected economic growth in guinea during the research period. okello and badj okello (2023) using the ordinary least squares method for the period from 1970 to 2019 studied the relationship between oreign direct investment and economic growth in kenya. the findings showed that the association between fdi and economic growth was negative. the negative result was attributed to the fact that kenya's history as an import-substituting country and the counter effect of the implemented trade policies to spur economic growth in asian countries. dang, et al. (2023). examined impact of foreign direct investment on economic development, considering the role of institutional quality in 63 provinces/cities in vietnam in the period 2005– 2022. applying various regression methods, such as pooled ols, the results confirm fdi foreign direct investment and institutional quality had a positive impact on economic development. findings also provided evidence institutional quality is an important factor in attracting fdi, determining both the quality and quantity of inflows from other countries into vietnam. nguyen (2024) using autoregressive distributed lag (ardl) model assessed the influence of key economic globalization factors on economic growth and environmental quality in southeast asian countries. results indicated that fdi had a negative effect on economic growth in southeast asian countries within the review period. naftaly and kipchirchir (2024) examined relationship between fdi and economic growth in kenya using an autoregressive distributed lag (ardl) regression approach and causality tests. secondary time series data from 1990 to 2021 were used for analysis. findings indicated that increasing fdi inflow would lead to an increase in economic growth. also, the result indicates trade openness and climate changed matter from a growth perspective. notably, the results showed short-run to long-run fdi kindled economic growth in kenya. mazenda, a. (2024) assessed effect of foreign direct investment (fdi) on economic growth in south africa from 1980 to 2010. johansen co-integration and vector error correction modeling (vecm) framework were utilized as estimation techniques. variables specified in the methodology include real gdp, foreign fdi, domestic investment (inve), real exchange rate (rexch) and foreign marketable debt (debt). the long run results showed fdi, rexch and debt had a negative impact on growth. inve had a positive impact on growth. 2.4.1 gap in empirical literature in light of above review, several empirical studies have established a positive and negative relationship between fdi and economic growth as shown in table 2.1. the study filled this empirical mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 62 | p a g e gap by assessing the dynamics behind the mixed results and trend between fdi and growth as observed below: (i) the unit gap of this study related to its specific objective effect of fdi and foreign exchange rate dynamics on economic growth (measured by gdp growth rate). (ii) regarding gap occasioned by timing, this study ranged from 1999 to 2022. the choice of 1999 was premised on historical fact that civil rule was restored in nigeria in 1999, when the country became, once more, disposed to global trading system. the upper time limit (2023) made this study more current compared to other existing studies. (iii) the content gap of this study is on the proxies of the dependent and independent variables. the dependent variable is gdp growth rate, while the independent variables are fdi, foreign exchange rate. trade openness and inflation rate were introduced as control variables. (iv) the geographical gap of this study stems from the fact this study concentrated primarily and interrogated majorly studies conducted in other jurisdictions other than nigeria. hence this study was conducted in nigeria to fill geographical gap. 3. methodology 3.1 model specification we employed the autoregressive distributed lag (ardl) estimation model used by mathebula, et al., (2024) to explore the effect of foreign direct investment on economic growth in south africa. this is consistent with trinh and nguyen (2015), who maintained that neoclassical and endogenous growth models provided the foundation for most empirical works on the fdi-growth nexus the econometrics model is specified thus: 𝐺𝐷𝑃𝑡 = 𝛽0 + 𝛽1𝐹𝐷𝐼𝑡 + 𝛽2𝑅𝐼𝑅𝑡 + 𝛽3𝐼𝑁𝐹𝑡 + 𝛽4𝑆𝑅𝑡 + 𝜀𝑡 -------- (1) where: gdp = growth domestic product (economic growth) in period t fdi = foreign direct investment in period t rir = real interest rate in period t inf = inflation rate in period t sr = saving rate in period t 𝛽0−𝛽4 = coefficient parameters 𝜀𝑡 = error term. the prior expectations are: 𝛽1>0; 𝛽2<0; 𝛽3<0 , and 𝛽4 > 0. however, general ardl model is modified to reflect our hypotheses thus: δlngdpgrt = α01 + ∑ α11∆lngdpgrt−1 p t=1 + ∑ α2∆lnfdit−1 p t=1 + ∑ α3∆lnexrt−1 p t=1 + ∑ α2∆lnct−1 p t=1 + β11lnyt−1+β21lnexrt−1+β31lnct−1+μ1t _ _ _ _ (2) where; gdpgr𝑡 -gross domestic product growth rate mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 63 | p a g e 𝐹di𝑡 – foreign direct investment; 𝐶𝑡 – matrix of control variables; 𝑡 – time dimension; 𝜇𝑡 – stochastic term; 𝑙𝑛 – natural log; 𝛼0 – constant term; 𝛼1 𝑎𝑛𝑑 𝛼2– coefficients are associated with the logarithms of fdi and control variables, respectively. the variables were transformed into logarithms to reduce the serial correlation problem (gisore, 2021). to investigate the long-run relationship equation 3 was applied as shown below. lngdpgrt = α0 + σ α1ilngdpgrt−i p i=1 + σ α2ilnfdit−i w i=0 + σ α3ilnct−i w i=0 + μit __ (3) further, since the variables are cointegrated, the causality test was obtained using an error correction model derived from ardl equation 4 specification: δ𝑙𝑛gdpgrt = 𝛼0 + σ 𝛼1𝑖δ𝑙𝑛gdpgrt-i 𝑝 𝑖=1 + σ 𝛼2𝑖δ𝑙𝑛𝐹di𝑡−𝑖 𝑤 𝑖=0 + σ 𝛼3𝑖δ𝑙𝑛𝐶𝑡−𝑖 𝑤 𝑖=0 + ∅1𝐸𝐶𝑇𝑡−1 + 𝜀1𝑡 _ _ _ _ _ _ _ _ _ (4) the lagged error correction term 𝐸𝐶𝑇𝑡−1, in equation 4 measures the speed of adjustment to the longrun equilibrium and also the long-run causality relationship. 3.2 description of variables in the model variables in our models are described table 3.1 as follows: table 3.1: summary of model variable description variable abbreviation measurement data source expected sign dependent variable economic growth gdpgr gross domestic product growth rate world development indicators dependent variable independent variables foreign direct investment fdi fdi, net inflow world development indicators positive (ofori & asongu, 2022) foreign exchange rate fexr value of naira to usd world development indicators negative (nyoni, et al., 2021) control variables trade openness topn total trade per gdp world development indicators positive (malefane & odhiambo, 2018) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 64 | p a g e inflation rate nominal inflation rate consumer price index world development indicators negative source: author's compilations, 2024 3.3 methods of data analysis autoregressive distributed lag (ardl) estimation technique was employed to examine the effect of fdi on economic growth in nigeria for the period, 1999 to 2023. ardl estimation model was preferred as it was correct for both potential endogeneity and serial correlation problems (pesaran, et al., 2001). before ardl estimation, it is necessary to scrutinize the stationarity and cointegration statistics of the sample data, ardl approach rejects any series integrated of order 2 or higher. phillips-perron (pp) was used to test for a unit root in the series based on a 5 per cent level of significance. a bounds co-integration test was deployed to check for the presence of long-run relationships in the series based on a 5 per cent level of significance. the use of bound test allows the co-integration link to be ascertained by ols after the lag order of the model is identified. before estimation, the lag length was identified and the best model estimation criterion was chosen. 4. results and discussion 4.1 data analysis 4.1.1 unit root test phillips-perron (pp) unit root test was conducted to check whether a time series variable is stationary or contains a unit root. table 4.2 displays the unit root results of the sample data. table 4.1: summary of pp unit root test results variable t-stat. critical values @5% p-value order of integration inference lngdpgr -3.245 -2.951 0.0259 i (0) stationary lnfdi -5.086 -3.548 0.0012 i (0) stationary dlnfexr -7.232 -2.954 0.0000 i (1) stationary dlntopn dlnifr -7.153 -12.213 -3.553 -3.552 0.000 0.0000 i (1) i (1) stationary stationary source: author’s extract from e-views table 4.1 outcomes are confirmed by the pp test which also found gdp and fdi stationary at level of form as revealed by the -3.245 for gdpgr and -5.086 for fdi, which are both less than their critical values of -2.951 and -3.548. fexr, topn and ifr are non-stationary at level form; they, however become stationary after first differencing with all three variables (fexr, topn, ifr) having a common p–value of 0.0000, which is below 0.05, leading to the conclusion that there is no unit root after first differencing. gdp and fdi, therefore, are integrated to order zero i(0), whilst fexr, topn and ifr are integrated to order one i(1). this makes the ardl method applicable to estimate the growth model since the variables are integrated of orders zero and one, that is, i(0) and i(1). 4.2 ardl model regression results 4.2.1 ardl model regression results long–run estimates table 4.2: ardl model results variable coefficient standard error t-statistic probability mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 65 | p a g e fdi -0.2193 0.2584 -0.8488 0.4052 fexr -0.8596 0.1583 -5.4312 0.0000 topn -0.3145 0.1387 -2.2674 0.0335 ifr 0.2503 0.3458 0.7239 0.4768 source: author (compiled from e-views) gdpgr = -0.2193fdi 0.8596fexr 0.3145topn + 0.2503ifr the effect of major independent variables (based on our specific objectives): foreign direct investment (fdi) and foreign exchange rate (fexr)) on gdpgr in the long run, as reported in table 4.2 is stated in the equation above. decision clearly, table 4.2 shows that the coefficient for fdi has a negative (approximately, -0.22) and nonsignificant (p-value, 0.4052 > 0.05) long-run effect on gdp growth rate in nigeria within the review period. similarly, the coefficient for fexr has a negative (approximately, -0.86), but significant (approximately 0000 < 0.05) long-run impact on gdp growth rate in nigeria over the period of study. 4.2.2 short–run estimates table 4.3: short–run estimates cointeq (-1) d(fdi) d(fexr) d(topn) d(ifr) coefficient -0.7782 0.0128 0.505531 -0.3174 p-value 0.0000 0.8834 0.0095 0.0003 source: author (compiled from e-views) the cointeq (-1) coefficient is an error correction component that displays the rate at which equilibrium in the growth model is regained. in other words, it represents the rate at which a previous period's disequilibrium is resolved. a negative coefficient indicates convergence, whereas a positive coefficient indicates divergence; thus, the cointeq (-1) is said to be significant when its value is negative and less than one, and its probability value is less than the chosen 5% significance level (nkoro & uko, 2016). table 6 results show a large cointeq (-1) value of -0.7782, indicating that the speed of adjustment is around 77.8 percent. this means that anytime there is a disturbance in the model, the adjustment from the short run deviation to the long run equilibrium happens quickly. fexr and topn were seen to be favourably associated to short-term growth, whereas ifr was discovered to be negatively related to short-term gdpgr and fdi and fexr were discovered to be unimportant in explaining short-term growth. according to the study, only ifr and topn have a substantial impact on growth in the short run. 4.3 discussion of findings based on ardl model results presented in table 4.2 shows that the coefficient for fdi has a negative (approximately, -0.22) and non-significant (p-value, 0.4052 > 0.05) long-run effect on gdp growth rate in nigeria within the review period. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 66 | p a g e as a result of the findings, a 1% increase in fdi resulted in approximately a 22 percent decrease in gdp. in the long run. the negative relationship between fdi and gdp contradicted the modernization theory, which states that an increase in fdi should eventually lead to an increase in gdp, indicating a positive link between the two macroeconomic variables. these findings, however, support the dependency theory, which holds that foreign direct investment has a detrimental impact on the host country's economic growth. nguyen (2024) support the dependency theory and empirically discovered that fdi had a negative impact on south east asian's economic growth if multinational corporations return large profits to their parent countries. okello and badj (2023) discovered in a similar study that fdi had a negative influence on economic growth in kenya applying ols to examine the datasets for the period, 1970 to 2019 furthermore, mazenda (2024) also affirmed our findings that fdi had a negative effect on economic growth in south africa using vecm estimation to analyze data from 1980 to 2010. in nigeria, factors such as corruption, weak institutions, poor or decaying infrastructures, inconsistencies in government policies, as well as security concerns may have contributed to a negative association between fdi and economic growth. this is contrary to our prior expectation of a positive relationship between fdi and economic growth, indicating that this relationship is bidirectional because other studies support the hypothesis that there is a positive relationship between fdi and economic growth. for instance, the study of mwitta (2022) who used vecm to analyze datasets from 1990 to 2020 confirmed that there was a positive relationship between fdi and economic growth in tanzania. similarly, trang, et al., (2029) applying vecm to analyze datasets for the period, 2000 to 2014 affirmed that fdi had a positive and significant effect on economic growth in lower-middle income developing countries. given the ardl model results shown in table 4.2, the coefficient for foreign exchange rate (fexr), which is our second major independent variable had a negative (approximately, -0.86), but significant (0000 < 0.05) long-run impact on gdp growth rate in nigeria over the period of study. this result implies that a 1% increase in fexr resulted in approximately 86 percent decrease in gdp in nigeria during the review period. our finding was affirmed by the study of mazenda (2024) in south africa. this confirms theoretical suggestions, which propose that depreciation in the exchange rate discourages investment, which translates into low levels of economic growth. 5. conclusion and recommendation in view of our findings, this study contrary to a priori expectations concludes that foreign direct investment did not bring about reliable effect on economic growth in nigeria. this was after taking consideration of the long-run results. in the short-run, foreign direct investment caused a positive impact on economic growth, whilst crowding-out domestic investment. on the other hand, consistent devaluation, floatation and fluctuation in the value of the naira discourage investment according to theoretical assumptions. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 67 | p a g e fdi can be a significant contributor to economic growth in nigeria and have a lasting positive impact, if the government vigorously addresses infrastructural bottlenecks and create a policy environment that fosters effective technology transfer and knowledge sharing, as well as make nigeria business environment more appealing to investors. government should make exchange rate stable so that more foreign investment can be attracted for desired economic growth and development in nigeria. references abdillahi, m. n., & mohd, s. 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(2003). why does fdi go where it goes? new evidence from the transition economies. imf working paper 03/228. international monetary fund. dang, t. t., oanh, t. t. k., thanh, h. l., & nguyen, t. n. (2023). impact of foreign direct investment on economic development: does institutional quality matter? emerging science journal, 7(6), 1924-1936. de mello, l. (1999). foreign direct investment-led growth: evidence from time series and panel data. oxford economic papers, 51(1), 91-102. garang, a., yacouba, k., & thiery, k. (2018). time series bounds approach to foreign direct investment, unemployment, and economic growth in uganda. modern economy, 9(1), 87-96. https://doi.org/10.4236/me.2018.91006 gisore, m. 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(2005). an overview of foreign investment in nigeria 1960–1995. occasional paper no. 11. central bank of nigeria. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 4, october-december 2024 issn: 2836-9416 impact factor: 4.85 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 69 | p a g e ofori, k., & asongu, a. (2022). repackaging fdi for inclusive growth: nullifying effects and policy relevant thresholds of governance. zbw–leibniz information centre for economics. http://hdl.handle.net/10419/248546 ojo, a. t., & alege, p. o. (2014). exchange rate fluctuations and macroeconomic performance in subsaharan africa: a dynamic panel cointegration analysis. asian economic and financial review, 4(11), 1573-1591. okello, a., & badj, k. (2023). foreign direct investment and economic growth in kenya. [research project, jonkoping university]. pesaran, m., shin, y., & smith, r. (2001). bounds testing approaches to the analysis of level relationships. journal of applied econometrics, 16(3), 289-326. sarker, b., & khan, f. (2020). nexus between foreign direct investment and economic growth in bangladesh: an augmented autoregressive distributed lag bounds testing approach. financial innovation, 6(10), 2-18. taylor, m., & thrift, n. (2013). the geography of multinationals: studies in the spatial development and economic consequences of multinational corporations. routledge. trang, d. t. h., duc, v. h., anh, v. t., & thang, n. c. (2019). foreign direct investment and economic growth in the short run and long run: empirical evidence from developing countries. journal of risk and financial management, 12(176), 1-11. trinh, n. h., & nguyen, q. a. m. (2015). impact of foreign direct investment on economic growth: evidence from vietnam. developing country studies, 5(20), 1-9. united nations conference on trade and development (unctad). (2019). world investment report, 2019. united nations publications. wiredu, j., nketiah, e., & adjei, m. (2020). relationship between trade openness, foreign direct investment, and economic growth in west africa: static panel data model. journal of human resource and sustainability studies, 8(1), 18-34. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 117 | p a g e forensic accounting and forensic litigation in emerging economy, nigerian deposit money banks 1femi joshua f. phd, 2omowumi olanike oshatimi phd and 3igbozulike blessing onyinye 1,3department of accountancy, nnamdi azikiwe university, awka 2department of accounting, federal university, oye-ekiti email: fj.falope@unizik.edu.ng; omowumi.oshatimi@fuye.edu.ng; bo.igbozuluike@unizik.edu.ng doi: https://doi.org/10.5281/zenodo.16684644 abstract: the study ascertained the forensic accounting and forensic litigation in nigerian deposit money banks. ex post facto research design was employed. data were generated from annual reports and accounts of the sampled banks in nigeria. cross sectional data were sourced from audited financial reports of quoted banks spanning from 2020-2024. ordinary least square method was used to determine the extent to which forensic accounting help to detect and prevent fraud in quoted banks in nigeria. after cross examination of the validity of the pooled effect, fixed effect and the random effect, the study accepts the fixed effect model. the study found that there is no significant effect of litigation support service on the value relevance of forensic accounting quoted banks in nigeria. the study thus recommended that the management ensures that the bank adapts to new technological changes taking place in the world to ensure that they have a wellstructured system to accommodate these changes. keywords: forensic accounting, forensic litigation and litigation support service introduction in the ever-evolving world of finance, fraud remains a constant threat, with global fraud losses reaching a record high of $1.03 trillion, (gasa, 2024). from asset misappropriation and embezzlement to accounting irregularities to manipulated financial statements, fraudulent activities cause significant damage to businesses of all sizes and types. fraud is a prevalent and persistent issue in the business world. li and mcmurray (2022) estimated that organizations lose 5% of their annual revenue to fraud, making it a significant concern for businesses and stakeholders. fraud can lead to severe consequences, such as financial loss, damage to reputation and even bankruptcy. while fraud is a significant concern for businesses worldwide, nigeria is no exception to this problem. the impact mailto:fj.falope@unizik.edu.ng mailto:omowumi.oshatimi@fuye.edu.ng mailto:bo.igbozuluike@unizik.edu.ng american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 118 | p a g e of fraud on the economy of nigeria is significant and far-reaching (sambo et al., 2023). fraudulent activities can result in substantial financial losses, undermine investor confidence and hinder economic growth and development. “in nigeria, the cases of cadbury nigeria plc, afribank nigeria plc, nampak, oceanic bank nigeria plc, and african petroleum plc were relatively caused by massive fraud” (bello et al., 2022). “the growing level of fraud in nigeria and the world at large creates the need for the use of forensic accounting skills in fraud management. there has also been an increase in financial misappropriation in government ministries, departments, and agencies (mda) in nigeria” (ahmed & emer takiah, 2020). banking sectors were not left out as the amount lost to fraud in 2024 grew by 350%, rising from n11.61 billion to n52.26 billion within the same period (nibss, 2024). the recent financial scandals that occurred in the niger delta development commission) for over n2.6 billion in school feeding scandals in federal government schools, the ministry of education scandals, and the chairman of the economic and financial crimes commission (efcc) scandals” (ismail, 2020). several alarming and scandalous cases of fraud have occurred in nigeria in the last ten years, including the 195 billion maina pension scam, the $6 billion fuel subsidy, and the $20 billion missing from the nnpc and cbn accounts” (agbata et al., 2023). “the growing trend of personnel manipulating financial statements to conceal their pathways in order to protect their infamous activities for personal or managerial gain is cause for concern, necessitating the implementation of necessary mechanisms or controls to stop this cancerous behavior in the system, as they will always try to compromise the accounting system. these motives are frequently carried out through a variety of methods or schemes, whether in revenue recognition or expense classification or recognition” (olaniyan & awe, 2021; ewa, 2022). “as a result of these criminal acts, nigeria's corruption perception ranking has suffered, resulting in a drop in investment in nigeria, which has a negative impact on economic growth” (okoye & gbegi, 2013; ewa, 2022). according to the 2022, “corruption perception index by the transparency international corruption index, nigeria ranked 150th out of 180 countries listed. as a result, “exposing and addressing these dishonest and illegal financial flows necessitates the establishment of relevant and effective control mechanisms. financial misappropriation, income leakages, budget padding, and money laundering are all components of fraud and other corrupt practices in government in nigerian banking industry, necessitating the use of forensic accounting skills” (olaniyan & awe, 2021). in recent years, a series of fraud have been committed both in the public sector and the private sector of the economy including the banking industry. these frauds in no doubt are perpetrated under the supervision of the internal auditors of the organisation. it suffices to say that the independence of the american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 119 | p a g e internal auditors is not guaranteed because he works as an employee of the organisation. then comes the ideal of external auditors, yet frauds are still being perpetrated daily. the above scenario indicates that as more and more development is recorded both in the information communication technology (ict) world and in other fields, fraudsters continue to groom their tactics towards fraudulent practices. it, therefore, becomes pertinent that forensic accounting be introduce, practiced and fully implemented since the external auditors do not or may not have the required training to tackle modern frauds like white collar crimes such as security fraud, embezzlement, bankruptcy, contract disputes and possibly criminal financial transactions including money laundering by organised syndicates. this study therefore sought to ascertain the ability of the forensic accountant to provide litigation support and investigative accounting. conceptual framework forensic investigation investigation is necessary for forensic accounting and auditing procedures; however, they are only employed in dubious situations. a forensic investigation is necessary when it becomes difficult to establish who is at fault, why the action was taken, and how much harm was done. olofinsola (2020) noted that forensic investigation is about the determination and establishment of fact in support of the legal case. that is, to use forensic techniques to detect and investigate a crime is to expose all its attending features and identify the culprits. to ascertain whether and why keeping the data produced a gap, as well as who is responsible for it, kasum (2012) stated that conducting a thorough search and analysis of documents in accordance with established rules is necessary for conducting a fraud investigation. an investigation is the process of obtaining testimony and supporting documentation in response to a claim of improper behaviour. fraud is proven to occur and is supported by evidence found during an investigation. fraud is thought to involve lying with the goal of deceiving. fraud is a serious and expensive issue in today's society that not only causes money loss but also catastrophic injuries and fatalities. most fraud investigations start with a meeting between the investigator and the client. the investigator collects all relevant evidence and gives the detectives an explanation of the factors that led to the suspicion of fraud. a competent fraud investigator will use these crucial details to find more evidence and facts. the fraud detector uses a range of methods to investigate a case, such as asset searches, background checks, personnel, business, and surveillance investigations. the forensic investigation is primarily focused on financial transactions rather than the rest of the entity's activities because the on going leakage of organizational resources is the existing system's problem. american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 120 | p a g e in an investigation, questioning, interviewing, and observation are the primary techniques used to extract information from the accused or suspect. it is important to keep in mind, nonetheless, that the investigator (observer, interviewer, or interrogator) does not have the power of the court with competent jurisdiction if they find the suspect or accused guilty. it is his or her obligation to find evidence to support or contradict the behaviour (oyedokun, 2014). the kinesic interview method looks at a person's behaviour to assess dishonesty. according to oyedokun (2014), an interview is not a fast process. even if the investigator has solid evidence that the suspect lied or committed the crime, he should not be charged if the investigator is unable to comprehend. fraud diverse academics have provided diverse definitions of fraud, forgeries, and errors. others characterized fraud as "false depiction, distorting someone's civil liberties for personal gain or exploitation of position." williams (2005) described incentives, favouritism, bribery, political donations, fake pricing, and frauds of all kinds as forms of fraud. the strategies mentioned here are just a few of the techniques related to fiscal malfeasance. fraud is described by enofe, agbonpolour, and edebiri (2015) as the use of dishonesty designed to enhance one's own interests or cause forfeiture to a third person. fraud is a broad category of felonies that includes information concealment, fraud, and manipulation. "fraudulent practice" describes an act or omission including falsification that desperately fools, or seeks to fool, a person in order to get financial advantage or escape a requirement. kasum (2012) documented that fraud is "false portrayal, misrepresenting someone, a fabrication of a statement or behaviour with the intention of obtaining financial benefit. this suggests that the act of creating or maintaining a false impression in order to persuade someone to sign a contract is fraud. safiyanu, et al (2019) described fraud as a deliberate act of deception intended to gain an advantage. fraud is an unethical practice that entails manipulating data and/or figures in order to benefit oneself. adding to this, olaoye and adebayo (2019) contended that scammers' ultimate objective is to gain an unfair financial advantage, even though the planned benefits might not be immediate cash in hand. chukwu (2011) offered evidence in favour of this definition, defining fraud as the intentional use of deceit to wrongfully acquire, abuse, or damage the assets of a business institution or organization. according to these definitions, deceit is criminal, and its only objective is to reduce an organization's earnings. as a result of dmbs continuing to produce financial products in tandem with technological advancement and the current difficult economic conditions, the number of attempted fraud and forgery cases recorded increased significantly to 80,658 incidents in 2023, which is a 4% less than 84,130 recorded in the previous year. american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 121 | p a g e empirical review otaru and david (2023) determined the effect of forensic accounting investigation techniques and fraud detection and mitigation of listed deposit money banks in nigeria. survey research design was adopted by the study, and it had a population of 140 respondents drawn from only operational staff of listed banks in nigeria while the sample size of 104 was arrived at scientifically using yaro yamani’s sample size determination technique. data was gathered using questionnaires administered to the respondents and it was analysed using multiple regression technique. the study revealed that application of interview technique had positive and insignificant effect while application of data mining analysis technique and technology technique had positive and significant effect on fraud detection and mitigation of listed banks in nigeria. ojo-agboju et al. (2022) determined the effect of forensic accounting influenced fraud detection on prevention in a few deposit money banks (dmbs) in nigeria. using their survey design, access bank, first bank, gt bank, union bank, uba, and zenith bank recruited 115 resident internal control officials, branch operation managers, and cash officers/head tellers as a sample for the study. the questionnaire was given to the participants using a straightforward, proportionate random sample approach. their investigation, which employed basic linear regression, revealed a strong correlation between forensic accounting and fraud detection even if it had no effect on fraud prevention in the dmbs they mentioned. aminian and tahriri (2021) assessed the impact of creating an interpretative structural model of the factors affecting the quality of forensic accounting in iran. the study found that the goals and missions of forensic accounting, forensic accounting standards and reviews, professional skills, academic training, enactment of forensic accounting, and the need for a forensic accountant in organisations improve the quality of forensic accounting. ojukwu, et al. (2020) also conducted a study titled on forensic accounting and fraud detection in nigerian universities of cross river university of technology. this study discovered a substantial association between forensic accounting and financial fraud detection, as well as a large relationship between forensic accounting and financial reporting quality. okoye and ndah (2019) ascertained the connection between forensic litigation support techniques and fraud detection in nigerian manufacturing firms. data was gathered from primary sources by sending fifty (50) standardized questionnaires to ten (10) accounting departments of the selected manufacturing firms. multiple regression tests were performed on the collected data using the ordinary least square method. the study revealed that fraud investigation activities and fraud prevention in manufacturing firms have a favourable and statistically relevant relationship. the results also revealed that fraud litigation activities and fraud prevention in manufacturing companies have a favourable and statistically relevant relationship. american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 122 | p a g e methodology in this study, survey was used. a survey is used to obtain information which can be analysed and pattern formed which lend themselves to interpretation and comparison. in most cases, a survey will aim to obtain facts and opinion from a representative selection of the population being researched. from that sample, the researcher will then be able to present findings as being representative of the study as a whole. there are twenty six (26) banks currently operating in nigeria as at 2025. out of these 26 deposit money banks in nigeria, a total of fifteen of (15) banks were listed on the nigerian exchange group, therefore, a sample of 6 banks was drawn from a population of 26. method of data collection this study adopted ex-post facto research design. data were collected from secondary (qualitative) sources. ex-post facto research design studies facts that have already occurred and collected but not necessarily amassed for research purposes. the population of the study are the banks whose shares are listed in the nigerian exchange group as of 2025. they consist namely, first holdco plc, eco bank transnational incorporated, united bank for africa plc, fidelity bank plc, union bank plc, stanbic ibtc holdings plc, access holding plc, zenith bank plc, fcmb group plc, guaranty trust holding company plc, wema bank plc, unity bank plc, sterling bank plc, and jaiz bank plc. the researcher employed convenient sampling technique to select ten (6) quoted banks on the nigerian exchange group that met the post consolidation requirements of cbn as of may 2025. convenient sampling technique is adopted where the population of the study is large as it is the case in this study. for the purpose of this study, secondary data were collected from publications of nigerian exchange group fact books and audited financial statements of the quoted banks. the data obtained were used to analyse the variables. reliability of the instrument the reliability of a research instrument concerns the extent to which the instrument yields the same results on repeated trials. although unreliability is always present to a certain extent, there exists a good deal of consistency in the results of a quality instrument gathered at different times. reliability of research instrument is the measure of the dependability and the internal consistency of the items of the instrument of data collection. in this research work, the researcher adopts cronbach’s alpha statistical test as it is the most popular internal consistency reliability estimate. the pilot test conducted using 40 questionnaires with cronbach’s alpha statistical test of 0.783 obtained (this exceeds the standard of 0.70) therefore was appropriate in achieving the research objectives. method of data analysis american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 123 | p a g e in this study, the data analysis method employed is panel data multiple linear regression using" ordinary least square (ols) method". multivariate analysis technique is an inferential method for analysing relationship between many variables. model specification fa=f (ls, vr); model i: forensic accounting and value relevance. the study adopts the panel data method of data analyses which involve the pool effect, fixed effect, the random effect and the hausman test. pooled effect model the functional relationship is expressed as vr=f (ls,) equation can be expressed in a linear form or mathematically as vr=β。+β, ls by turning equation (v) into econometric model, to include random term, is expressed as vrit = βo+βils+u. fixed effects the fixed effects focus on whether there are differences by using a fixed intercept for each of the different cross-sectional structures. data analysis the study adopts the panel data method of data analyses which involve the pool effect, fixed effect, the random effect and the hausman test. pooled effect model the functional relationship is expressed as vr=f (ls,) equation (iv) can be expressed in a linear form or mathematically as by turning equation (v) into econometric model, to include random term, is expressed as fixed effects the fixed effects focus on whether there are differences by using a fixed intercept for each of the different cross-sectional structures. if we assume that the dummy variable for a conglomerate company is 1 or 0, then which is the dummy variable for firm, can be expressed as: the regression of total samples can be expressed as: american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 124 | p a g e the dummy variables are expressed as follows: 计fj=i, then di=1; otherwise to further investigate the effect of forensic accounting and quality of financial reporting in quoted banks in nigeria, adebayo (2012) analyzed whether the independent variables affect the dependent variable, this regresses the effect of the independent variables on the dependent variables. because the fixed effects account for both cross-sectional and time-series data, the increased covariance caused by individual-firms’ differences is eliminated, thereby increasing estimation-result efficiency. random effects random effects focus on the relationship with the study sample as a whole; thus, the samples are randomly selected, as opposed to using the entire population. the total sample regression (a function of the random effect) can be expressed as: if this is represented with random variables, then , which indicates that the difference occurs randomly, and the expectation value of vr=value relevance ls=litigation support ut=error term discussion and results presentation of results table 1: presentation of fixed effect model variable coefficient std. error t-statistic prob. model 1: forensic accounting and value relevance ls 37.58611 35.32686 1.063953 0.2891 c 140.2249 210.7427 0.665384 0.5068 effects specification american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 125 | p a g e r-squared 0.616716 mean dependent var 0.652200 adjusted r-squared 0.481306 s.d. dependent var 0.453580 s.e. of regression 0.256059 akaike info criterion 0.225353 sum squared resid 5.769847 schwarz criterion 0.537973 log likelihood 0.732374 hannan-quinn critter. 0.351876 f-statistic 22.24021 durbin-watson stat 1.698267 prob(f-statistic) 0.000000 model 2: ls -0.155199 0.125126 -1.240344 0.2181 c 2.074683 0.205823 10.07996 0.0000 effects specification r-squared 0.592515 mean dependent var 1.838500 adjusted r-squared 0.220921 s.d. dependent var 0.434224 s.e. of regression 0.438742 akaike info criterion 1.302358 sum squared resid 16.93954 schwarz criterion 1.614978 log likelihood -53.11788 hannan-quinn critter. 1.428881 f-statistic 0.815574 durbin-watson stat 2.343672 prob(f-statistic) 0.624561 test of hypotheses decision rule: reject or discard null hypothesis when calculated t value is greater than t value in critical value table at 1.080 ho,: there is no significant effect of litigation support services on the value relevance of forensic accounting on quoted banks in nigeria. table 3: test of hypothesis one r2 61.6 adjusted r 48.1 t calculated 1.063953 t table 1.080 american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 126 | p a g e significant level 5%=0.025 (two tail) probability 0.2891 decision with computed t value of ±1.063953 less than the critical t value of 1.080 the researcher therefore rejects the alternate hypothesis and accepts the null which says there is no significant effect of litigation support service on the value relevance of forensic accounting quoted banks in nigeria. conclusion and recommendation the study concludes that forensic investigation and forensic litigation were statistically significant in explaining changes in financial performance of commercial banks in nigeria. the study found that there is no significant effect of litigation support service on the value relevance of forensic accounting quoted banks in nigeria, which has improved transparency in commercial banks hence it has curb financial fraud thus increasing profitability. the study thus recommended that the management ensures that the bank adapts to new technological changes taking place in the world to ensure that they have a well-structured system to accommodate these changes. references li l. and mcmurray a. 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(2019). the relevance of forensic accounting to financial crime in private and public sector of third world economies: a study from nigeria. the 1st international conference on governance fraud ethics and social responsibility. pp. 11-13. american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 128 | p a g e chukwu, n. & asaolu, c. (2019). the impact of basic forensic accounting skills in financial reporting credibility among listed firms in nigeria. iop conference series: earth and environment sciences. chukwu, e. m. (2011). survey of skills required by forensic accountants: evidence from a developing country. international journal of contemporary business studies, 4(2), 54-86. safiyanu, s., safiyanu, s. i. & armaya’u, a. s. (2019). the effect of forensic investigation in detecting financial fraud: a study in nigeria. international journal of academic research in business & social sciences, 9(2), 545-553. american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 1 | p a g e the effect of environmental, social and governance (esg) reporting on corporate reputation in nigeria 1ngwa, christian ugonna ph.d., 2ojeh augustine, ph.d., fca, 3ezema, kenneth okwudili ph.d., 4justina chioma agu ph.d. and 5edeh, ijeoma thelma 1,2,5department of accountancy, faculty of management sciences, enugu state university of science and technology esut, enugu state, nigeria. 3department of accountancy, imt, enugu state, nigeria 4department of business administration and management, imt, enugu state, nigeria doi: https://doi.org/10.5281/zenodo.14780328 abstract: this study examined the impact of environmental, social, and governance (esg) reporting on corporate reputation, stakeholder trust, and investment inflows in nigerian companies. using a survey methodology, data were collected from 222 respondents across various sectors in nigeria. the findings reveal that esg reporting is perceived to significantly enhance corporate reputation, with 38.3% of respondents indicating a strong improvement in their company’s reputation and 27.0% reporting a moderate improvement. despite these benefits, the study identifies key barriers to the adoption of esg reporting, including lack of expertise (31.5%), high implementation costs (27.0%), and insufficient regulatory support (22.5%). furthermore, esg reporting is seen as crucial in fostering stakeholder trust, with 36.0% of respondents believing it strongly increases trust and 31.5% viewing it as somewhat beneficial. the research also highlights the positive effect of esg reporting on investment inflows, with 33.8% of respondents noting a moderate positive impact. the study recommends that nigerian companies invest in capacity building and training, integrate esg reporting into their longterm strategic goals, and that the government introduce clear regulatory frameworks and incentives to encourage broader adoption of esg practices. therefore, the research underscores the growing importance of esg reporting in enhancing corporate sustainability and attracting long-term investment in nigeria. keywords: environmental, social, governance, esg reporting, corporate reputation 1. introduction in recent years, environmental, social and governance (esg) reporting has emerged as a critical tool for enhancing transparency, accountability, and sustainability in corporate practices. esg reporting mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.5281/zenodo.14779340 american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 2 | p a g e encompasses a company’s voluntary or mandatory disclosure of its performance in areas related to environmental stewardship, social responsibility, and governance ethics. it represents a shift in how businesses operate, moving beyond profit maximization to a model that integrates sustainability and ethical considerations into core strategies (obadina & alabi, 2022). this approach reflects the evolving expectations of stakeholders, including investors, customers, employees, and regulatory bodies, who increasingly demand that corporations adopt sustainable and socially responsible practices. globally, esg reporting is viewed as a driver of corporate reputation, as it demonstrates a firm’s commitment to addressing critical societal and environmental challenges. firms that adopt comprehensive esg practices often gain competitive advantages, including increased access to capital, enhanced customer loyalty, and greater trust among stakeholders. research suggests that organizations with strong esg credentials are better positioned to mitigate risks, adapt to regulatory changes, and attract sustainability-focused investors (okon et al., 2023). in the nigerian context, esg reporting is becoming an essential aspect of corporate governance and sustainability. nigeria’s economic landscape, characterized by resource dependency and environmental vulnerabilities, places an added responsibility on firms to adopt sustainable practices. industries such as oil and gas, manufacturing, and banking have faced growing pressure to disclose their esg performance due to their significant environmental and social footprints. despite this, esg adoption in nigeria has been hindered by challenges such as weak regulatory frameworks, limited public awareness, and inconsistent reporting standards across industries (uzochukwu & nwankwo, 2021). furthermore, corporate reputation in nigeria is intricately linked to the perception of transparency, ethical governance, and social impact. trust in corporate entities has been undermined by historical instances of corruption, environmental degradation, and corporate misconduct. as a result, nigerian firms are increasingly recognizing the strategic importance of esg reporting in rebuilding trust and improving public perception. by transparently addressing issues such as environmental conservation, employee welfare, and ethical governance, firms can enhance their reputational capital and foster stronger relationships with stakeholders (adegbite et al., 2020). the relationship between esg reporting and corporate reputation is particularly significant in nigeria due to the socio-economic challenges the country faces. as firms navigate issues such as climate change, social inequality, and governance inefficiencies, the adoption of esg practices offers a pathway to sustainable growth and improved stakeholder trust. consequently, understanding the impact of esg reporting on corporate reputation is critical for nigerian businesses aiming to thrive in an increasingly competitive and sustainability-driven global market. statement of the problem the ideal scenario for corporate governance and reputation management is one where companies prioritize transparency, ethical practices, and sustainability through comprehensive environmental, social, and governance (esg) reporting. globally, esg reporting has been recognized as a benchmark mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 3 | p a g e for corporate accountability, fostering trust among stakeholders, improving operational efficiency, and enhancing corporate reputation. ideally, nigerian companies should adopt esg practices as a standard for sustainability, ensuring that their operations positively impact the environment, society, and governance structures. this practice is expected to build long-term trust with stakeholders, enhance competitiveness, and support the nation’s sustainable development goals. however, the reality presents a stark contrast. despite the growing global emphasis on esg reporting, many nigerian companies lag in its adoption and implementation. challenges such as inadequate regulatory frameworks, limited awareness among stakeholders, and the absence of standardized reporting guidelines have contributed to inconsistent and often superficial esg practices. furthermore, some companies view esg reporting as a compliance burden rather than a strategic advantage, leading to minimal or inadequate disclosures. this failure to integrate esg principles into business operations not only undermines corporate reputation but also limits the ability of nigerian firms to attract sustainability-conscious investors and stakeholders. if these problems persist, the consequences could be far-reaching. companies that fail to adopt robust esg practices risk reputational damage, loss of stakeholder trust, and diminished competitiveness in both local and global markets. poor esg performance could also lead to regulatory penalties, reduced access to capital, and increased operational risks. on a broader scale, the lack of commitment to esg principles could exacerbate environmental degradation, social inequality, and governance inefficiencies in nigeria, undermining the nation’s efforts to achieve sustainable development and economic stability. addressing these challenges is, therefore, crucial for fostering a business environment that aligns with global sustainability trends and supports long-term corporate success. objectives of the study the main purpose of this study is to examine the effect of environmental, social, and governance (esg) reporting on corporate reputation in nigeria. the specific objectives of the study are to: i. to analyze the impact of environmental, social, and governance (esg) reporting on corporate reputation in nigeria. ii. to identify the barriers to the adoption and implementation of esg reporting by nigerian companies. iii. to assess the benefits of esg reporting on stakeholder trust, investment inflows, and competitive positioning. research questions the study provided answers to the following research questions. i. how does environmental, social, and governance (esg) reporting impact corporate reputation in nigeria? ii. what are the key challenges faced by nigerian companies in adopting and implementing esg reporting practices? mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 4 | p a g e iii. what are the benefits of esg reporting on stakeholder trust, investment opportunities, and competitive advantage for nigerian firms? statement of hypotheses the following hypotheses in null form (h0) guided this study i. environmental, social, and governance (esg) reporting has no significant impact on corporate reputation in nigeria. ii. there are no significant challenges hindering the adoption and implementation of esg reporting by nigerian companies. iii. esg reporting does not significantly influence stakeholder trust, investment opportunities, or competitive advantage for nigerian firms. significance of the study this study is significant for various individuals and institutions who will benefit from the findings related to environmental, social, and governance (esg) reporting and its impact on corporate reputation in nigeria. i. corporate managers and executives: the study will provide valuable insights into how effective esg reporting can enhance corporate reputation, foster trust among stakeholders, and improve competitiveness. it will guide business leaders in integrating esg practices into their strategies to strengthen their organizations' public image and attract sustainability-focused investors. ii. investors and financial institutions: investors, both local and international, will benefit from the study by gaining a deeper understanding of how esg reporting influences corporate performance, risk management, and reputation. financial institutions can use the findings to assess the esg credentials of companies, making informed investment decisions and supporting businesses with strong sustainability records. iii. government and regulatory bodies: the study will provide policymakers with insights into the challenges and opportunities in promoting esg reporting within the nigerian business landscape. this can inform the development of more effective regulations, policies, and frameworks that encourage transparency, corporate responsibility, and sustainable practices. iv. academics and researchers: scholars and researchers in the fields of business ethics, corporate governance, and sustainability will find the study useful in advancing the literature on esg reporting, particularly in the nigerian context. the study can serve as a basis for further research on the relationships between esg practices, corporate reputation, and organizational performance. v. consumers and the general public: consumers who are increasingly concerned with ethical practices, environmental sustainability, and social responsibility will benefit indirectly. as businesses improve their esg reporting, they will be better able to meet the growing demand for mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 5 | p a g e socially responsible products and services, contributing to the broader goal of sustainable development. vi. non-governmental organizations (ngos) and civil society: ngos and advocacy groups that focus on environmental and social issues can use the findings of this study to hold companies accountable for their esg disclosures. by highlighting the importance of transparent reporting, these organizations can encourage better corporate behavior and improve public awareness on the significance of sustainable business practices. definition of terms the following terms operationalized the study: i. environmental, social, and governance (esg) reporting: esg reporting is the practice by which companies disclose their performance and activities related to environmental sustainability, social responsibility, and governance structures. this includes information on how companies manage their environmental footprint, address social issues like labor practices and community relations, and ensure ethical governance practices such as transparency and accountability. ii. corporate reputation: corporate reputation refers to the public’s perception of a company, built over time through its actions, policies, and interactions with stakeholders. a strong reputation reflects trustworthiness, ethical conduct, and positive contributions to society, while a poor reputation can damage a company’s relationships with customers, investors, and other key groups. iii. sustainability: sustainability in business refers to the ability of a company to operate in a way that maintains long-term economic success while preserving environmental resources and promoting social well-being. it focuses on balancing economic, environmental, and social factors to ensure that the company’s operations do not harm future generations. iv. stakeholders: stakeholders are individuals or groups that have an interest in the activities and decisions of a company. these can include employees, shareholders, customers, suppliers, local communities, and government agencies, each of whom may be impacted by or influence the company’s operations. v. corporate governance: corporate governance refers to the systems and practices by which a company is directed and controlled. it includes the structures and processes for decision-making, accountability, and ensuring that a company is managed in the best interests of its stakeholders, with an emphasis on ethical behavior, transparency, and compliance with laws. vi. investment opportunities: investment opportunities refer to the potential for investors to invest in businesses with a high likelihood of return on investment. for esg, these opportunities are increasingly influenced by a company’s esg practices, as socially responsible investments are seen as offering long-term value while addressing environmental and social issues. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 6 | p a g e vii. social responsibility: social responsibility refers to a company’s commitment to acting ethically and contributing positively to society, including promoting fair labor practices, supporting community development, and taking steps to reduce inequality. it is an essential component of esg reporting, reflecting how businesses engage with and contribute to social wellbeing. viii. environmental impact: environmental impact refers to the effect a company’s operations have on the natural environment, such as pollution, resource depletion, and carbon emissions. it also includes the company’s efforts to reduce these impacts, through practices like waste management, energy efficiency, and adopting sustainable resources. ix. governance practices: governance practices refer to the principles and processes that guide a company’s leadership and decision-making. this includes transparency in management, board structure, ethical conduct, and compliance with legal and regulatory standards, ensuring that the company operates with integrity and accountability. x. transparency: transparency refers to the openness with which a company shares information about its activities, decisions, and performance. in esg reporting, transparency is essential for stakeholders to trust that the company is acting responsibly and adhering to its environmental, social, and governance commitments. 2. literature review conceptual review concept of corporate reputation corporate reputation represents a comprehensive assessment of an organization's credibility, trustworthiness, and overall perception by stakeholders, including customers, employees, investors, and the public. it stems from consistent delivery of quality products or services, ethical practices, and transparent communication. a strong reputation enhances an organization’s competitive edge and fosters long-term stakeholder loyalty. researchers underscore its role as a critical intangible asset that influences organizational success (olawale & yusuf, 2019). the foundation of corporate reputation lies in trust, ethics, and stakeholder engagement. organizations with strong reputations prioritize ethical leadership, sustainability, and social responsibility. this is particularly evident in sectors where customers demand greater transparency and accountability. studies reveal that businesses with robust reputations are better equipped to navigate crises and build resilient stakeholder relationships (ezeh & okafor, 2020). effective communication strategies play a pivotal role in shaping corporate reputation. companies that invest in consistent, clear, and culturally sensitive messaging are more likely to maintain favorable public perceptions. social media and other digital platforms have further emphasized the need for prompt responses to issues that could harm corporate standing. recent research highlights that mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 7 | p a g e integrating these strategies strengthens public trust and promotes brand loyalty (ibrahim & adekunle, 2022). furthermore, the interplay between corporate reputation and financial performance cannot be overstated. a positive reputation attracts investors and talented employees, contributing to organizational growth. empirical studies establish a correlation between strong reputations and increased market valuation, signifying that stakeholders value firms perceived as reputable and ethical (nwankwo & ezeji, 2023). moreover, corporate reputation is an evolving concept influenced by changing stakeholder expectations and global dynamics. modern frameworks incorporate environmental, social, and governance (esg) factors as key components. businesses that align their goals with societal needs not only enhance their reputations but also secure long-term sustainability. esg reporting adoption barriers environmental, social, and governance (esg) reporting has gained prominence globally as organizations aim to align business practices with sustainability and ethical standards. however, its adoption faces significant barriers, particularly in emerging markets. these barriers include inadequate regulatory frameworks, insufficient stakeholder awareness, and limited financial resources. scholars highlight that firms struggle to integrate esg principles into their reporting structures due to a lack of standardized guidelines (ibrahim & okoro, 2021). one critical challenge is the complexity and cost associated with esg reporting. organizations often face high expenses in data collection, auditing, and compliance. smaller firms, in particular, find it difficult to allocate resources for these activities. research indicates that financial constraints remain a leading deterrent, with many firms perceiving esg initiatives as a non-priority investment (obasi & adeyinka, 2022). additionally, there is a lack of expertise and knowledge about esg reporting standards among businesses. training professionals to understand and implement esg metrics poses a challenge, especially in industries unfamiliar with sustainability frameworks. studies emphasize the need for capacity-building initiatives to overcome this knowledge gap (olaniyi & mohammed, 2023). resistance to change within organizational structures also hampers esg reporting adoption. many firms remain skeptical about its benefits, viewing it as a regulatory burden rather than a value-adding process. researchers have noted that cultural resistance and leadership indifference significantly slow the adoption process in several sectors (uche & omotola, 2020). moreover, the absence of global standardization in esg reporting frameworks contributes to inconsistencies and confusion. businesses often struggle to navigate various reporting standards, which undermines the comparability of esg disclosures. establishing universal guidelines could enhance adoption and credibility while encouraging firms to embrace esg practices. stakeholder trust mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 8 | p a g e stakeholder trust is the confidence that stakeholders have in an organization’s integrity, reliability, and ability to meet their expectations. it is a fundamental aspect of successful relationships between businesses and their stakeholders, encompassing customers, employees, investors, and the wider community. trust is built through consistent ethical behavior, transparent communication, and delivering on promises, which enhances stakeholder engagement and loyalty (afolayan & ogunleye, 2019). a key driver of stakeholder trust is transparency in organizational practices. transparency involves openly sharing information about business operations, decision-making processes, and potential risks. studies show that businesses that prioritize open communication foster stronger trust among stakeholders, particularly in times of uncertainty or crisis (emeh & okpara, 2021). this transparency becomes even more critical in industries heavily regulated or scrutinized for their social and environmental impact. ethical practices also play a significant role in developing stakeholder trust. companies that demonstrate a commitment to fairness, accountability, and social responsibility are more likely to build trust and secure long-term stakeholder support. for instance, integrating corporate social responsibility (csr) initiatives into business operations positively influences stakeholder perceptions (oluwole & adebisi, 2022). another vital element in building trust is consistent performance. stakeholders trust organizations that deliver high-quality products and services, maintain financial stability, and uphold commitments. research highlights that meeting stakeholder expectations consistently enhances reputation and deepens trust (ifeanyi & chukwuma, 2023). this consistency often requires aligning organizational goals with stakeholder interests and expectations. moreover, addressing stakeholder concerns proactively reinforces trust. engaging stakeholders through dialogue and collaboration fosters mutual understanding and strengthens relationships. recent studies emphasize that businesses that prioritize stakeholder feedback and adapt their strategies accordingly are more likely to cultivate trust and loyalty (okeke & nwogu, 2024). furthermore, building stakeholder trust is an ongoing process that requires adaptability to evolving societal and organizational challenges. investment inflows investment inflows refer to the movement of capital into a country or region, typically in the form of foreign direct investment (fdi), portfolio investments, or other financial contributions. these inflows play a crucial role in stimulating economic growth, creating employment opportunities, and enhancing technological advancements. economists argue that the attractiveness of a region for investment is influenced by factors such as political stability, economic policies, and market potential (ogundele & akande, 2019). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 9 | p a g e one primary driver of investment inflows is the availability of favorable economic policies. governments that offer tax incentives, ease of doing business, and clear regulatory frameworks tend to attract higher volumes of investments. studies show that countries that prioritize reforms in these areas experience significant capital inflows, as they create a conducive environment for investors (nnadi & okoro, 2021). furthermore, infrastructure development significantly impacts investment inflows. quality infrastructure in transportation, energy, and communication enhances the efficiency of business operations, making regions more appealing to investors. recent research highlights that inadequate infrastructure often serves as a deterrent to investment, particularly in developing economies (eze & udo, 2022). global market trends and investor perceptions also influence capital movements. factors such as currency stability, inflation rates, and geopolitical dynamics shape investor confidence and decisionmaking. analysts have noted that economies with stable currencies and low inflation rates tend to attract more foreign investments, particularly in competitive global markets (abiola & akinyele, 2023). moreover, social and environmental factors, such as workforce quality and esg considerations, increasingly play a role in determining investment inflows. investors are prioritizing regions that align with global sustainability goals and offer skilled labor to meet industry demands (adejumo & nwafor, 2024). this shift underscores the growing importance of aligning economic objectives with social and environmental priorities. competitive positioning competitive positioning is the strategy organizations use to establish a unique identity in the marketplace, distinguishing their products or services from competitors. it involves identifying and leveraging unique value propositions that resonate with target audiences. effective positioning enables companies to build a strong brand image and secure a competitive advantage by aligning offerings with customer expectations (afolabi & ogunbanjo, 2020). a key component of competitive positioning is understanding the competitive landscape. companies analyze their competitors’ strengths and weaknesses to identify opportunities for differentiation. studies have shown that businesses employing detailed competitor analysis are more likely to succeed in crafting compelling positioning strategies (olayemi & adekunle, 2019). this analysis often includes examining pricing, product features, customer service, and branding. customer-centric strategies play a crucial role in competitive positioning. organizations focus on understanding customer preferences, behaviors, and pain points to tailor their offerings. research highlights that firms prioritizing customer feedback and personalization experience stronger market positioning and increased customer loyalty (obi & ezeocha, 2022). customer-centricity ensures that a business remains relevant and appealing to its target audience. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 10 | p a g e technology adoption and innovation are also critical in competitive positioning. companies that integrate advanced technologies or offer innovative solutions tend to stand out in the marketplace. evidence suggests that leveraging technology not only enhances operational efficiency but also creates a modern, progressive brand image (okonkwo & adebayo, 2023). this is particularly true in industries experiencing rapid technological advancements. moreover, strategic communication is essential for successful competitive positioning. businesses must effectively convey their value propositions through consistent messaging across all marketing channels. recent findings emphasize that clear and engaging communication builds trust and reinforces the organization’s market position (balogun & nnamdi, 2024). moreso, consistent evaluation and adaptation of positioning strategies help businesses maintain relevance in dynamic markets. sustainability practices in nigeria sustainability practices in nigeria focus on balancing economic growth with environmental preservation and social equity. these practices have gained prominence as the country grapples with environmental challenges such as deforestation, pollution, and climate change. government policies and private sector initiatives aim to address these challenges by promoting renewable energy, afforestation, and waste management (udo & bassey, 2019). additionally, nigeria’s commitment to international frameworks like the paris agreement underscores its focus on sustainability. corporate social responsibility (csr) is a key driver of sustainability in nigeria. many organizations integrate sustainable development goals (sdgs) into their business strategies to enhance social impact while maintaining profitability. for instance, companies in the oil and gas sector implement projects that provide clean water, healthcare, and education to host communities, reflecting the dual focus on business and social welfare (abubakar & chukwuemeka, 2020). sustainable agricultural practices are another critical area. the agricultural sector, which contributes significantly to nigeria's gdp, is transitioning to eco-friendly methods. practices such as crop rotation, organic farming, and precision agriculture are being adopted to improve productivity while minimizing environmental impact (eze & nwankwo, 2021). these methods aim to ensure food security for the growing population without depleting natural resources. renewable energy adoption is also gaining traction in nigeria’s sustainability agenda. solar, wind, and hydroelectric projects are being developed to reduce dependence on fossil fuels and enhance energy access in rural areas. studies show that renewable energy projects not only reduce carbon emissions but also create jobs and foster economic development (okoro & adejumo, 2023). public awareness and community engagement are essential for promoting sustainability in nigeria. advocacy campaigns and educational programs aim to instill eco-conscious behaviors among citizens. local ngos play a significant role in raising awareness and mobilizing communities to adopt sustainable practices (ifeanyi & okafor, 2024). moreover, consistent monitoring and evaluation of sustainability initiatives ensure their long-term effectiveness and scalability. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 11 | p a g e theoretical review this study was theoretically underpinned on stakeholder theory stakeholder theory stakeholder theory, developed by r. edward freeman in 1984, posits that businesses are responsible not only to their shareholders (owners) but also to a broader group of stakeholders. these stakeholders include employees, customers, suppliers, local communities, government agencies, and even the environment. the theory suggests that organizations must manage and balance the interests of these diverse groups to ensure long-term success and sustainability. in the context of corporate social responsibility (csr), stakeholder theory emphasizes the importance of ethical decision-making, transparency, and accountability to meet the needs and expectations of all stakeholders, rather than focusing solely on maximizing shareholder profits. relevance to the study: i. alignment with esg reporting: stakeholder theory is directly relevant to the study as environmental, social, and governance (esg) reporting reflects an organization's commitment to addressing the needs and expectations of its various stakeholders. esg disclosures provide transparency about a company’s impact on the environment, social issues, and governance practices, which is essential for maintaining positive relationships with key stakeholders. ii. corporate reputation management: according to stakeholder theory, corporate reputation is shaped by how well an organization manages stakeholder relationships. by providing detailed esg reports, companies signal their ethical practices, social responsibility, and long-term commitment to sustainability, which can significantly influence their reputation in the eyes of stakeholders. iii. ethical accountability: the theory supports the idea that companies should be ethically accountable to their stakeholders. in nigeria, where issues like environmental degradation, social inequality, and governance challenges are prominent, effective esg reporting can enhance a company’s image by showing their commitment to ethical practices that benefit both society and the environment. iv. stakeholder trust and loyalty: effective esg reporting can help build trust among stakeholders, particularly in nigeria, where consumers, investors, and other stakeholders are increasingly prioritizing corporate social responsibility. trust is a critical factor in maintaining and enhancing corporate reputation, which is a key focus of the study. v. long-term organizational success: stakeholder theory stresses the importance of long-term value creation rather than short-term profit. by embracing esg reporting, companies can attract loyal customers, investors, and employees who are aligned with the company’s ethical values, thus enhancing their long-term sustainability and corporate reputation. empirical review mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 12 | p a g e ikponmwosa and bamidele (2023) used secondary data from the annual reports of 20 nigerian manufacturing firms between 2017 and 2021, applying descriptive statistics, correlation, and regression analysis. their findings showed that esg reporting had no significant direct impact on firm value. however, when moderated by firm advantage (profitability minus capital cost), esg reporting significantly influenced value-based performance, with firm advantage alone having a notable effect on firm value. nnadi and yahaya (2024) used panel data analysis and multiple regression models on data from 153 nigerian listed companies between 2014 and 2023. the study found that audit quality, board gender diversity, board independence, board size, institutional ownership, and firm size significantly influenced esg performance, while profitability and leverage had no significant impact. salihi, ibrahim, and baharudin (2024) collected empirical data from 74 nigerian stock exchange-listed companies between 2012 and 2021. the study found that environmental, social, and economic governance dimensions positively influenced green innovation capacity and firm value creation, with emphasis on environmental and governance dimensions. however, the governance dimension did not significantly affect firm value creation. ibrahim and usman (2023) evaluated esg reporting's influence on corporate reputation in nigerian financial institutions using mixed methods. they conducted qualitative interviews with stakeholders and quantitative surveys involving 150 bank employees. findings showed that transparency in esg reporting, particularly on social and environmental issues, enhanced stakeholder trust, customer loyalty, and investor confidence. banks with detailed esg reports experienced improved corporate reputation, highlighting the critical role of sustainability practices in the financial sector. okoro and eze (2022) examined esg reporting in nigerian manufacturing firms, analyzing data from 80 companies listed on the nigerian stock exchange. they revealed that strong environmental and social disclosures improved stakeholder trust and market valuation. companies reporting on labor practices and community initiatives experienced higher employee satisfaction and retention. this study underscored the importance of esg in fostering stakeholder relationships and achieving competitive advantages in the manufacturing sector. nwosu and olisa (2021) studied esg practices' effects on corporate reputation in nigeria's energy sector using correlation and regression analysis on 50 companies. their findings showed that governance and social responsibility positively influenced reputation. ethical governance and community welfare initiatives boosted public ratings, increasing market share. energy firms reducing environmental footprints were seen as socially responsible, further enhancing their corporate image and reputation among stakeholders. nwachukwu and chidi (2020) investigated esg disclosure effects on corporate reputation using panel data from 120 companies between 2015 and 2019. their analysis indicated that comprehensive esg disclosures adhering to global standards significantly boosted reputation. social and governance mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 13 | p a g e disclosures were especially impactful, while environmental efforts enhanced brand equity and stakeholder trust. this study emphasized the long-term benefits of adopting robust esg practices for corporate credibility. olamide and adebayo (2024) analyzed esg reporting's impact on nigerian multinationals' reputation through a case study of 10 companies with international operations. they found that adherence to global esg standards enhanced reputation locally and globally. transparent governance and community development initiatives resonated with diverse stakeholders, strengthening corporate reputation. the research demonstrated how multinational firms benefit from esg-focused strategies in improving their competitive positioning. 3. methodology research design the study employed a survey research design to examine the effect of environmental, social, and governance (esg) reporting on corporate reputation in nigeria. this design was selected because it is well-suited for investigating the relationships between variables in a large population. it allowed for the collection of quantitative data through structured questionnaires and qualitative insights via interviews, facilitating a comprehensive analysis of the research problem. setting the research was conducted in nigeria, a country where esg reporting is becoming increasingly significant for corporate organizations, especially in sectors such as manufacturing, finance, and energy. the setting for the study was chosen because of the growing awareness of the importance of sustainability, ethical practices, and corporate transparency, which influence corporate reputation in the nigerian context. the study focused on nigerian companies actively involved in esg reporting, ensuring that the sample reflects the relevant target audience. target population the target population for this study consisted of corporate managers, executives, and key decisionmakers in nigerian companies who are responsible for preparing or overseeing esg reports. these individuals were selected because they possess direct involvement in or influence over the esg reporting processes and, thus, have insights into the effects of such reports on corporate reputation. the target population was estimated to be approximately 500 individuals, representing a cross-section of professionals with direct knowledge and authority in esg-related matters within their organizations. sample size to calculate the sample size, the taro yamane formula was used to ensure that the sample was both statistically significant and manageable. the formula for determining sample size is: n = n 1+n(e2) where:  n is the sample size, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 14 | p a g e  n is the population size (500),  e is the margin of error (0.05). substituting the values into the formula: n = 500 1+500(0.052) n = 500 1+500(0.0025) n = 500 1+1.25 n = 500 2.25 n = 222 therefore, the sample size for the study was 222 respondents. this sample size was deemed adequate to provide reliable and valid results, as it represents a sufficient portion of the target population, ensuring robust data for analysis. sampling techniques the study used a stratified random sampling technique to select the respondents. the population was divided into different strata based on roles and responsibilities in esg reporting within the companies. these strata included roles such as csr managers, compliance officers, financial officers, and senior executives. from each stratum, participants were randomly selected to ensure that each group was adequately represented. stratified random sampling ensured diversity in the responses, making the findings more generalizable to the broader population of corporate managers involved in esg reporting. instrument for data collection the primary instrument for data collection was a structured questionnaire designed to capture the views of the participants regarding esg reporting and its influence on corporate reputation. the questionnaire was divided into sections based on key aspects of esg reporting, including environmental sustainability, social responsibility, governance structures, and corporate communication. it included both closed and open-ended questions, allowing for the collection of both quantitative data (e.g., likert scale responses) and qualitative data (e.g., insights into how esg practices are perceived). validity of instrument to ensure the validity of the questionnaire, content validity was assessed. a panel of experts with extensive knowledge in corporate governance, sustainability, and esg practices reviewed the questionnaire. their feedback was used to revise the instrument, ensuring that it accurately captured the constructs of interest. the experts evaluated whether the questions were relevant, clear, and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 15 | p a g e comprehensive in addressing the research objectives. based on their recommendations, necessary adjustments were made to enhance the validity of the instrument. reliability of instrument the reliability of the instrument was assessed through a pilot study conducted with a small group of respondents from a similar population. the pilot test helped to identify any ambiguities or inconsistencies in the questions. after administering the pilot study, cronbach’s alpha coefficient was used to measure the internal consistency of the instrument. a cronbach’s alpha value above 0.7 was considered satisfactory, indicating that the instrument was reliable and produced consistent results when applied to the sample. method of data collection data collection was carried out using a combination of surveys and interviews. the survey was administered to the 222 selected participants through email or in-person distribution of the questionnaires. the participants were given a specific period to complete the survey, and reminders were sent to ensure a high response rate. in addition to the survey, semi-structured interviews were conducted with a subset of participants to gather in-depth, qualitative insights into how esg reporting impacts corporate reputation. these interviews provided richer, more detailed responses and helped to contextualize the quantitative findings. method of data analysis the collected data were analyzed using descriptive statistics. the frequency of responses was calculated, and the results were presented in tables and charts. this method allowed the researcher to summarize the data effectively and identify patterns or trends in the responses. the frequency table was used to display how often specific themes or responses occurred, which helped to draw meaningful conclusions about the relationship between esg reporting and corporate reputation. descriptive statistics such as means and percentages were also used to interpret the data and provide an overall picture of the views of the respondents. 4. data presentation and analysis table 1: how do you believe the implementation of esg reporting influences your company's reputation among consumers? options/responses frequency (n=222) percentage (%) significantly enhances reputation 85 38.3 somewhat enhances reputation 60 27.0 no effect on reputation 45 20.3 somewhat harms reputation 20 9.0 significantly harms reputation 12 5.4 total 222 100% source: field survey, 2024 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 16 | p a g e this table illustrates the respondents' views on how the implementation of environmental, social, and governance (esg) reporting influences their company's reputation among consumers. the majority (38.3%) of respondents believe that esg reporting significantly enhances their company’s reputation. additionally, 27.0% of respondents feel that esg reporting somewhat enhances reputation. a smaller proportion (20.3%) reported that esg reporting has no effect on their company's reputation. only a few respondents indicated that esg reporting either somewhat (9.0%) or significantly (5.4%) harms their company’s reputation. these findings suggest that esg reporting is generally perceived positively by the majority of respondents, with a significant impact on enhancing corporate reputation. table 2: to what extent do you think your company's esg reporting improves its public image in comparison to competitors who do not report on esg practices? options/responses frequency (n=222) percentage (%) much better public image 75 33.8 slightly better public image 65 29.3 no significant difference 50 22.5 worse public image 18 8.1 much worse public image 14 6.3 total 222 100% source: field survey, 2024 this table illustrates the respondents' views on how their company's esg reporting compares to competitors who do not engage in esg practices in terms of improving public image. a significant portion of respondents (33.8%) believe that esg reporting contributes to a much better public image compared to competitors. additionally, 29.3% of respondents felt that esg reporting slightly improves the public image of their company in comparison. however, 22.5% of respondents indicated that they perceive no significant difference in public image between their company and competitors. fewer respondents (8.1%) thought that esg reporting results in a worse public image, and only a small percentage (6.3%) felt that it significantly worsens the public image. these results indicate that esg reporting generally has a positive influence on public perception, with most respondents acknowledging its contribution to improving their company's image relative to competitors. table 3: what do you consider the main challenge in adopting esg reporting within your organization? options/responses frequency (n=222) percentage (%) lack of expertise or knowledge 70 31.5 high implementation costs 60 27.0 lack of regulatory pressure or incentives 50 22.5 resistance to change within the organization 30 13.5 other (please specify) 12 5.4 total 222 100% source: field survey, 2024 this table illustrates the respondents' views on the main challenges in adopting esg reporting within their organizations. the most commonly cited challenge was the lack of expertise or knowledge (31.5%), mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 17 | p a g e indicating that companies may struggle with the technical skills and understanding required to implement effective esg reporting. high implementation costs were also a significant concern, with 27.0% of respondents identifying this as a barrier. additionally, 22.5% of respondents noted that a lack of regulatory pressure or incentives made it harder to adopt esg reporting. resistance to change within the organization was cited by 13.5% of respondents, highlighting organizational inertia as another hurdle. only a small proportion (5.4%) mentioned other challenges, demonstrating that, for most, the primary barriers are related to expertise, cost, and regulatory frameworks. these findings suggest that, while companies recognize the importance of esg reporting, practical challenges remain in its widespread adoption. table 4: to what extent do you think a lack of government support or clear regulations hinders the adoption of esg reporting in nigerian companies? options/responses frequency (n=222) percentage (%) strongly hinders adoption 65 29.3 somewhat hinders adoption 75 33.8 no impact on adoption 40 18.0 encourages adoption 30 13.5 strongly encourages adoption 12 5.4 total 222 100% source: field survey, 2024 this table illustrates the respondents' views on the extent to which a lack of government support or clear regulations hinders the adoption of esg reporting in nigerian companies. the majority of respondents (33.8%) believe that the absence of clear government regulations somewhat hinders the adoption of esg reporting. additionally, 29.3% of respondents felt that the lack of support strongly hinders adoption. a significant portion (18.0%) indicated that they perceive no impact from the lack of regulations on the adoption of esg reporting. however, a smaller number of respondents (13.5%) felt that government actions somewhat encourage the adoption of esg practices, while only 5.4% believed that the lack of government support strongly encourages adoption. these findings suggest that, while the absence of clear government regulations is viewed as a barrier, it is not universally seen as a significant obstacle, with some respondents perceiving no impact or even positive effects from the lack of regulations. table 5: how do you think esg reporting impacts stakeholder trust (investors, customers, employees)? options/responses frequency (n=222) percentage (%) strongly increases trust 80 36.0 somewhat increases trust 70 31.5 no impact on trust 50 22.5 somewhat decreases trust 12 5.4 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 18 | p a g e strongly decreases trust 10 4.5 total 222 100% source: field survey, 2024 this table illustrates the respondents' views on how esg reporting impacts stakeholder trust, particularly among investors, customers, and employees. a majority of respondents (36.0%) believe that esg reporting strongly increases stakeholder trust. additionally, 31.5% of respondents feel that esg reporting somewhat increases trust among stakeholders. a smaller group (22.5%) reported that esg reporting has no impact on trust. only a few respondents (5.4%) stated that esg reporting somewhat decreases trust, while 4.5% indicated that it strongly decreases trust. these findings suggest that esg reporting is generally perceived as enhancing trust among stakeholders, with a strong positive effect on investor, customer, and employee relations in most cases. table 6: how would you rate the effect of esg reporting on attracting investment inflows to your company? options/responses frequency (n=222) percentage (%) strongly positive effect 60 27.0 somewhat positive effect 75 33.8 no effect 50 22.5 somewhat negative effect 20 9.0 strongly negative effect 17 7.7 total 222 100% source: field survey, 2024 this table illustrates the respondents' views on the effect of esg reporting on attracting investment inflows to their company. a significant portion of respondents (33.8%) believe that esg reporting has a somewhat positive effect on attracting investment. additionally, 27.0% of respondents reported that esg reporting has a strongly positive effect on investment inflows. a notable percentage (22.5%) indicated that esg reporting has no effect on attracting investment. however, a smaller proportion of respondents (9.0%) felt that esg reporting somewhat negatively affects investment, while 7.7% believed it strongly negatively affects investment. these results suggest that esg reporting is generally seen as beneficial in attracting investment, with most respondents recognizing its positive impact on investment inflows. 5. summary of findings, conclusion and recommendations summary of findings the following summarizes the key findings: i. the study revealed that the majority of respondents believe that esg reporting has a positive influence on corporate reputation. specifically, 38.3% of respondents indicated that esg reporting mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 19 | p a g e significantly enhances their company’s reputation among consumers, while 27.0% stated it somewhat enhances reputation. a smaller percentage felt that esg reporting has no impact or negatively affects reputation. these findings suggest that companies generally perceive esg reporting as an effective tool for improving their public image and strengthening consumer trust. ii. the research identified key barriers to the adoption of esg reporting in nigerian companies. the most significant challenges reported were a lack of expertise or knowledge (31.5%), followed by high implementation costs (27.0%). a lack of regulatory pressure or incentives (22.5%) and resistance to organizational change (13.5%) were also highlighted as obstacles. these findings underscore the need for capacity building, financial support, and stronger regulatory frameworks to facilitate the adoption of esg practices in nigerian companies. iii. the study found that esg reporting is perceived to have a positive impact on stakeholder trust and investment inflows. a majority of respondents (36.0%) believed that esg reporting strongly increases trust among stakeholders, including investors, customers, and employees, while 31.5% felt it somewhat increases trust. regarding investment, 33.8% of respondents noted that esg reporting somewhat positively affects investment inflows, with 27.0% reporting a strongly positive effect. these results suggest that esg reporting plays a crucial role in building stakeholder trust and attracting investment. conclusion in conclusion, the findings of this study indicate that environmental, social, and governance (esg) reporting has a predominantly positive effect on corporate reputation, stakeholder trust, and investment inflows for nigerian companies. the majority of respondents believe that esg reporting significantly enhances their company's reputation, with a strong emphasis on its role in improving consumer perception. however, challenges such as a lack of expertise, high implementation costs, and insufficient regulatory support hinder the widespread adoption of esg practices. despite these barriers, esg reporting is seen as a valuable tool for strengthening relationships with stakeholders and attracting investment. to fully leverage the benefits of esg reporting, nigerian companies need to address the existing obstacles through capacity building, financial incentives, and a more supportive regulatory environment. ultimately, embracing esg reporting can help nigerian companies gain a competitive edge, foster greater trust among stakeholders, and secure long-term financial growth. recommendations based on the findings of this study, the following recommendations are proposed: i. nigerian companies should invest in capacity building and training programs to enhance the knowledge and expertise of their employees in esg reporting. this can include offering workshops, seminars, and certifications focused on esg practices and standards. by improving internal capabilities, companies will be better equipped to implement effective esg reporting and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 20 | p a g e ensure that they meet global best practices, thereby enhancing their corporate reputation and trust among stakeholders. ii. the nigerian government should establish clear regulatory frameworks and provide incentives for companies to adopt esg reporting. this could involve introducing policies that mandate or encourage transparency in environmental, social, and governance practices, along with offering financial incentives, such as tax breaks or grants, for companies that actively engage in esg reporting. clear regulations and government support would create a conducive environment for companies to adopt esg practices and overcome barriers related to cost and compliance. iii. nigerian companies should prioritize integrating esg reporting into their long-term strategic goals. by aligning esg practices with core business objectives, companies can enhance their market competitiveness and attract both local and international investors who are increasingly prioritizing sustainability and corporate social responsibility. emphasizing esg as part of corporate strategy not only fosters trust with stakeholders but also positions the company for sustainable growth in an evolving global market that demands greater environmental and social responsibility. reference abiola, t., & akinyele, o. 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(2023). renewable energy as a pathway to sustainable development in nigeria. journal of energy studies in africa, 18(4), 112–129. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 23 | p a g e okoro, c., & eze, d. (2022). corporate reputation and the role of esg reporting in nigerian manufacturing firms. international journal of business sustainability, 8(2), 123–138. oluwole, f., & adebisi, k. (2022). csr practices and stakeholder trust: evidence from nigerian firms. journal of social responsibility in business, 19(1), 78–95. salihi, a. a., ibrahim, h., & baharudin, d. m. (2024). environmental governance as a driver of green innovation capacity and firm value creation. innovation and green development, 3(2), 100110. https://doi.org/10.1016/j.igd.2023.100110 uche, p., & omotola, s. (2020). cultural resistance and esg implementation in developing economies. journal of management and governance, 15(3), 120–136. udo, s., & bassey, e. (2019). nigeria's approach to sustainability: policies and practices. african journal of environmental science, 15(1), 34–50. uzochukwu, b., & nwankwo, c. (2021). esg practices and corporate sustainability in nigerian firms. international journal of corporate governance and social responsibility, 8(4), 92–108. zhang, m., & wang, x. (2021). corporate governance and environmental sustainability: a comparative study of developed and emerging economies. sustainable business review, 14(2), 56–70. mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.1016/j.igd.2023.100110 american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 85 | p a g e the impact of artificial intelligence on economic growth clifford ezinwa, izuchukwu ogbodo and onyia chinedu callistus department of banking and finance, faculty of management sciences, enugu state university of science and technology, enugu, nigeria. email: clifford.ezinwa@esut.edu.ng doi: https://doi.org/10.5281/zenodo.14888122 abstract: this paper studies the impact of artificial intelligence (ai) on economic growth through key microeconomic aggregates in both the short and long run. the macroeconomic variables of this study include gdp, consumption and investment. the study adopted multisector models to chart the economic effects of ai. the study followed an endogenous economic growth framework that starts with the basic cobb-douglas function. ai is a general-purpose technology that improves productivity growth. ai adoption raises aggregate output, consumption and investment. the successful adoption and integration of ai technologies need adequate infrastructure, data availability and supportive policies which vary across different economies. government should make public policy on ai to encourage firms and households to adopt ai and focus on sectors of the economy that produce consumption goods as they promise high returns. keywords: artificial intelligence, economic growth, consumption, investment and employment. introduction the advent of artificial intelligence (ai) systems such as digital personal assistants (e.g. apple’s siri and amazon’s alexa), robots, and other ai-enabled devices have become very popular and essential part of everyday life. with the emergence of ai, the technological revolution has transformed human lives and processes, empowering the products and services in today’s market place. ai introduces new ways of doing jobs and business, and of exploring new global market opportunities. ai is a new “digital mythology” raising both hopes and fears. the progress of ai gives hope for a revival of consumption, a growth in productivity in most professions and better risk management. ai is considered to be one of the driving forces behind the revolution in technologies, organizations and society at the start of the 21st century. the concept of ai was born in 1950 with the turing test, which is a test designed by mathematician and cryptologist alan turing, aimed at measuring the ability of an ai to imitate a human conversation. hence, ai was then defined by marin lee minsky in mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:clifford.ezinwa@esut.edu.ng american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 86 | p a g e 1956 as “the construction of computer programs that engage in tasks performed unsatisfactorily by human beings”. ai covers an artificial rationality that optimizes the resolution of more or less complex problems, in a logical deductive mode and in specific fields. it is part of cognitive science and the internet ecosystem, which also includes internet of things (iot), big data, cloud computing and block chain. the dissemination of ai cannot be as inclusive and systematic as that of computers or the internet because ai covers a set of models and method whose fields and modes of applications are heterogeneous. the 3d image recognition is, for example, is used to make medical diagnoses and to steer self-driving cars. recently, yong, zeshui, xinxin, and marinko (2023) show that the proliferation of ai in the economy has been unprecedented. ai today is segmented into two main streams. the first current is “symbolic ai” where the computer is programmed so that it can manipulate knowledge. the second consists of “machine learning” which covers advanced statistical models and in which we find in particular neural networks (lecun, 1987). a third wave is emerging which combines symbolic ai, machine learning and natural language capable of merging knowledge of various origins (pearl & mackenzie, 2018). the processing of big data is becoming one of the major techniques of ai because of the computing power of current computers. ai can solve complex problems, it cannot replace all forms of human intelligence, including intuition and emotion (houde, 2019). however, it is worth noting that the impact of ai on economic growth is not uniform across all sectors and regions. some industries may experience more significant changes and growth while others may face challenges or disruptions. additionally, the successful adoption and integration of ai technology need adequate infrastructure, data availability and supportive policies which can vary across different economies. many scholars believe that ai has the potential to be “the most important general – purpose technology of our era” (brynjolfsson et al; 2023). the recent inroads of generative ai (algorithms that can be used to create new content such as text or images) in every day applications in particular promise wide spread efficiency gains. unlike automation through robots, which can accomplish only explicitly understood (ie routine) tasks, ai can infer tacit relationships that are not fully specified by underlying software (autor, 2022). by transforming occupational tasks, altering corporate strategies, and affecting production efficiency, ai may have significant consequences for labour markets, firms and whole industries (agrawal et al; 2019). ai is considerably easier to use and implement in processes as it is a general-purpose technology that does not require the deployment of new hardware, deep user know-how, or a substantial reconfiguration of business practices. as a consequence, the impact of ai on productivity will likely be felt in the coming years already (brynjolfsson et al, 2018; furman and seaman, 2019). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 87 | p a g e in summary, according to previous research works on ai, ai has both positive and negative effects on an economy. on a positive side, ai represents a driver of productivity and economic growth, it can increase efficiency and significantly improve the decision-making process by analyzing large amount of data, ai can stimulate growth by replacing labour, by harnessing the power of data analytics and algorithms, ai applications optimize service quality, help businesses identify and fight fake transactions and help better in protecting organizations from hackers as well as strengthening the fight against accounting fraud. ai significantly raises output, consumption and investment in the short and long run. on the negative side of ai, it creates serious risks of job market polarization, rising inequality, structural unemployment, emergence of new undesirable industrial structures. ai gives rise to fears of massive destruction of jobs in developed countries, a large retraining of skills, a widening of the digital divide within social structures, ai is expected to replace human in 46% of administrative tasks, 44% of legal jobs, and 37% of architectural and engineering professions (goldman sachs, 2023). the effects are likely to be felt more in advanced economies than in emerging markets. cybercrime and some accounting manipulations can be promoted by progress in ai. ai could have a highly disruptive effect on the economy and society. it could even lead to the creation of super firms that could have detrimental effects on the wider economy. it may also widen the gap between developed and developing countries. many people are highly skeptical about the development and application of ai especially chat gpt. with the increasing necessity and demand for improved service delivery, high productivity, quality learning, output growth, efficient capital market operations and enhanced general business practices, it becomes obvious and desirable to look for better ways to migrate from the crude and analogue system of operations to electronic and digital technologies so as to contribute to the global macro economy to keep pace with the industrial revolutions. for this purpose, there is great need for boosting labour productivity and to adapt to work alongside machine in new ways (aghion et al; 2019). the traditional factors of production and physical capital and labour may no longer promote substantial economic growth. it is generally believed that ai will be one of the most important factors determining future economic growth. however, unlike traditional machines which replaced the use of human and animal labor for simple manual work and heavy or dangerous activities, ai – related inputs may change the type of human work in a comprehensive way. the migration and gradual change from the traditional operational mode to ai – enabled technologies started in 1950 with the concept of ai which was developed by a cryptologist alan turing. the ai concept was aimed at measuring the ability of an ai to imitate a human conversation. ai was computer programs constructed to engage in tasks performed unsatisfactorily by human beings. ai aims to use machines to stimulate the cognitive abilities and functions of the human brain to replace mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 88 | p a g e some of the humans’ mental work, which not only improves productivity, but can also improve it and generate many jobs with high cognitive intensity and thus influence the structure of work (holzinger et al; 2019). developed and developing countries hastened to include the strategies and applications of artificial intelligence in their economic plans because of their added value to economic growth and technological progress, as well as their benefits in reducing costs, increasing productivity, reducing risks and raising competitive standards for countries of the world (jiang et al; 2022). hence, this study on macroeconomic impact of ai takes a look into differences in production technologies and the ai – induced increase in productivity by determining how ai adoption affects the key macroeconomic aggregates: gdp, consumption and investment. the objective of this study was to in examine the impact of ai on gdp, ascertain the effect of ai on consumption as well as assess the impact of ai on investment. this study has an objective of accessing the impact of ai on economic growth through some key aggregates of macroeconomic variables, by specifically examining the impact of ai on gross domestic product (gdp), its effect on consumption as well as on investment. conceptual review ai impact on economic growth the relationship between artificial intelligence and economic sectors has grown more complex over time. economic sectors have started to adopt and utilize ai techniques in a variety of industries primarily to address economic crisis and economic downturns. most relevant studies emphasise that ai has the potential to significantly impact economic growth in various ways. however, ai impact on economic growth is not uniform across all sectors and regions. some industries may experience more significant changes and growth, while others may face challenges or disruptions. successful adoption and integration of ai technologies need adequate infrastructure, data availability and supportive policies which can vary across different economies. ai drives economic growth by stimulating gains both from the supply side and the demand side. ai can drive business productivity through automation of processes with the use of robots and “autonomous vehicles”, improvements in the existing labour force by equipping them with ai technologies. on the other hand, ai can generate an increase in consumer demand with the availability of “personalized and/or higher quality” products and services. accordingly, it is expected that ai could contribute up to usd 15.7 trillion to the global economy in 2030 (rao and verweij, 2017). the concept of ai mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 89 | p a g e ai encompasses a broad category of technology that performs “human-like cognitive processes”, namely “learning, understanding, reasoning and interacting”. as a general-purpose technology, ai can take many forms such as “technical infrastructure (i.e., algorithms), a part of the (production) process, or an end-user product” (szczepanski, 2019). hence, in contrast with traditional technologies that automate routine processes, ai technologies even go further to mimic human activities that require cognition, and their application and use are not limited to the production process. ai development is a wide and ongoing practice, and more and newer forms of ai technologies are continuously produced over time. some examples of ai include “chat bots”, and “virtual assistants”, face recognition system, machine translation software, data analysis based on machine learning, autonomous robots, and autonomous drones. chat gpt, a form of generative ai technology that employs deep learning was released to the public in 2022, and quickly became a ground breaking ai technology due to its ability to interact with individuals and provide “comprehensive and practical responses” (marr, 2023). chat gpt is built upon “foundational large language models” (llms), which go beyond conventional natural language algorithms. according to trajtenberg (2018), with ai swiftly becoming the new general-purpose technology (gpt), comparisons between ai and previous technologies, particularly ict, have been vanished. however, ai is considered to “impact a broader range of sectors” leading to different implications at the aggregate level” and an “unpredictable future development”. furthermore, ict is known to require high investments in capital over long periods, whereas ai can leverage data and cloud services that can help lower capital investments. these differences could potentially lead to a distinct pathway for ai adoption, different from that of previous technologies (lu and zhou, 2021). advances in ai technology advances in ai technology have received considerable public attention, particularly after the release of chat gpt 3.0 in november, 2022. rapid increases in the share prices of ai – related firms suggest that financial market participants, at least, have started to factor the transformative possibilities of these technologies into their investment decisions. ai is considered to have the potential to instigate a fourth industrial revolution and is dramatically changing people’s patterns of interaction and economic activities. agricultural robotics also known as agro bots is a rapidly growing field that combines robotics, ai and the internet of things (iot) to improve farming efficiency, productivity and sustainability. there are autonomous planting robots/robotic seeders, robotic weeding, harvesting robot, etc. these are mild compared to autonomous tractors: self-driving tractors that can plant, spray, and harvest crops with precision and accuracy. the cat girl robot developed by musk can clean a house, cook and chat with you and even bear you children. the robot is 5.68 feet tall, weighs 123 pounds and has a life like texture on its face and hands. its appearance and voice can be customized to your liking. she has a gentle and obedient personality with no negative emotions making her the ideal partner. moreover, the cat girl robot can mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 90 | p a g e give birth as it has an artificial uterus inside which fully simulates the growth environment of amniotic fluid in a mother. this system is capable of cultivating embryos and can also monitor the baby’s weight, blood pressure, heartbeat and respiratory rate in real-time using over 300 including intelligence levels. it is said that this robot will be ready for mass production by 2026. one would ask, if the cat girl robot really enters households, what will our lives be like? ai impact on investment: countries and levels of investments in ai technologies according to the stanford university report, “2023 ai index report” (table 2.1), the levels of investments of ten (10) countries in ai technology are shown. the countries that invested the most in ai during the 2013 – 2022 period were the united states of america with an amount of $248.9bn followed by china with $95.1bn. in 2022, the largest investment in ai was made in medicine and health care ($6.1bn), according to the same report. table 2.1: top 10 countries and their levels of investments in ai countries united states china great britain israel canada india germany france south korea singapore amount invested (billions of $) 248.9 95.1 18.2 10.8 8.8 7.7 7.0 6.6 5.6 4.7 source(s): ai index report 2023 according to the latest study by the international federation of robotics, the number of operational robots in the chinese manufacturing industry reached a ratio of 322 units per 10,000 employees in 2021 followed by the american industry with 274 units per 10,000 employees. china now ranks fifth in the world, behind south korea (1,000 per 10,000 employees), , japan (399) and germany (397). the global average is 141 units per 10,000 employees. the results of this study were shown in table 2.2. table 2.2: number of robots per 10,000 employees in the manufacturing industry in 2021 countries south korea japan germany china sweden united states switzer land italy canada france number of robots 1000 399 397 322 321 274 240 217 191 163 source(s): international federation of robotics 2021 according to the accenture company study on the impact of ai on the productivity of companies in each country as shown in table 2.3, for france, the study estimated that companies will increase productivity by 20% because of ai and increase annual gdp growth from 1.7% to 2.9%. table 2.3: business productivity rate of countries based on ai adoption countrie s swed en finla nd unit ed state jap an austr ia germa ny neth er land united kingd om franc es belgiu m ital y spa in mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 91 | p a g e s s producti vity rate 37% 36% 35% 34% 30% 29% 27% 25% 20% 17% 12 % 11% source(s): culled from mohamed, a.t. (2024). effect of ai on consumption ai’s effects on consumption are reflected in enhanced customization, convenience, improved search and discovery, optimized pricing, predictive analytics, immersive experiences and increased security. it is also seen as a driver for creating new business models in many industries. the “sizing the prize” study published by the audit company price water house coopers (pwc) in 2017 identifies eight main sectors directly impacted by ai: health, automotive, financial services, retailing, communication and entertainment, manufacturing and production, energy and logistics. ai promotes the construction of increasingly complex digital product and service transaction platforms. the platform is the basic structure of the digital revolution (rifkin, 2013). intermediation via a platform makes it possible to reduce information asymmetries between the different parties. ai impact on technology revolution: ai plays a central role in the ongoing technological revolution by fueling innovation, transforming industries and reshaping the way we live and work. ai is a real revolution because it allows you to go much further than the technologies already operating the complex tasks performed. studies (agrawal, gans, & goldfarb 2019; yang, 2022) have shown that automation using ai improves productivity. ai capabilities in innovation, automation, data analytics, customization and integration with emerging technologies are transforming industries and reshaping society. it is in this regard that ai can be frightening because it evades the ability of total control by humans. ai impact on skills transformation ai has a significant impact on skills transformation both in terms of the skills needed to work with ai technologies and the broader skills required in a world where ai is increasingly prevailing. the boston consulting group estimates that 32% of companies in china have already adopted ai in their daily process compared to 22% in the united state and 20% in france and germany (mohamed a. t., 2024). ai impact on risk management ai has a significant impact on risk management across various industries. by leveraging advanced algorithms and data analytics, ai enhances risk assessment, predictive and mitigation process. it makes it possible to improve conventional risk management tools (scoring method, fraud detection, optimization of debt recovery strategies, rapid detection and interpretation of poor signals, construction of economic models, etc.) used by bankers, insurers, brokers, accountants, managers, etc. some ai applications help to analyse and secure data flows made increasingly massive by new regulations imposed on companies. some ai software can better protect organizations against mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 92 | p a g e hacking and strengthen the fight against accounting fraud. ai associated with block chain technology helps create value by promoting risk management and the fight against fraud. it presents itself as a new trusted third party between an organization and its stakeholders (leloup, 2017). theoretical framework this study adopted the theoretical framework of julius tan gonzales (2023) in a similar study on implications of ai innovation on economic growth: a panel data study. the study followed an endogenous economic growth framework that starts with the basic cobb-douglas function and took into account human capital as input to production: 𝑌 = 𝐴𝐾𝛼𝐿𝛽𝐻𝑌 where y is the total output, k stands for capital, l for labour, and h is human capital. the elasticities of output to capital, labor, and human capital are denoted by 𝛼, 𝛽, 𝑎𝑛𝑑 𝑦, respectively. meanwhile, a is the level of knowledge or stock of ideas available in an economy. empirical review julius tan gonzalos (2023) conducted a study on the implications of ai innovation on economic growth: a panel study. the study conjectures a positive relationship between ai and economic growth. to test this hypothesis, the study makes use of a panel data set of countries from 1970 to 2019 and the number of ai patients as a measure of ai. a text search query is performed to distinguish ai patients from other types of innovations in a public database. employing fixed effects and generalized method of moments (gmm) estimation, the paper finds a positive relationship between ai and economic growth, which is higher than the effect of the total population of patents on growth. furthermore, other results indicate that ai’s influence on growth is more robust among advanced economies and more evident towards the latter periods of the dataset. recently, lu (2021) built a theoretical framework that traces the impact of ai on endogenous growth. lu (2021) likens ai to human capital accumulation, “as it can learn and accumulate knowledge by itself”. secondly, ai is a “non rival input”, which can be used in production without having it “detract from its ability to accumulate ai.” this implies that ai is disembodied from physical capital, and should be considered a separate input. moreover, lu (2021) unveils a balanced growth path in the three-sector endogenous growth model, where production and factors including ai grow at the same rate. using provincial data from china, he (2019) estimated the effect of ai or regional economic growth. unlike most innovation studies on ict and growth, he (2019) makes use of fixed assets investment in ict to gdp as a measure of ai, rather than ai – specific patents or published articles. similarly, fan and liu (2021) tested ai as a tool for the sustainable economic development of chinese provinces. the results in both studies are consistent with theories on the growth-enhancing capability of ai. furthermore, yang (2022) evaluated the effect of both ai and non-ai patents on firm-level productivity and employment in taiwan. both types of patents were found to improve productivity mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 93 | p a g e and employment among taiwanese electronic firms. estimation results revealed that both ai and non-ai patents contribute to total factor productivity (tfp), and the difference in elasticities between the two patent types is insignificant. moreover, when tfp is replaced by labor productivity, the estimated coefficient for ai patents is lower than in the model with tfp as a dependent variable. yang (2022) suggested that this can be attributed to ai technology having a “greater effect on capital productivity”, which is consistent with the frameworks of arrow (1962) and zeira (1998). the adoption of ai can influence macroeconomic patterns in multiple ways. empirical evidence indicates that ai can improve productivity and foster innovation, thus contributing to economic growth (hatzius et al., 2023). the implementation of ai-powered technologies has the potential to generate efficiency improvements across various industries, thereby promoting higher rates of growth in gross domestic product (gdp). according to research conducted by price water house coopers (pwc), the implementation of ai is projected to lead to a potential increase of up to 14% in global gdp by 2030. this increase in economic output is estimated to amount to approximately $15.7 trillion, thereby positioning ai as the most significant commercial prospect within the contemporary rapidly evolving economy. it is anticipated that the most significant benefits from ai will likely be observed in china, with a projected increase of up to 26% in its gdp by the year 2030, and in north america, which has the potential to experience a 14% boost (pwc, 2017). the sectors poised to experience the largest advancements include retail, financial services and healthcare, as ai is expected to improve productivity and stimulate consumption (pwc, 2017). goldman sachs research suggests that the integration of tools that leverage advancements in natural language processing into various sectors of the economy and society may result in a substantial 7% surge in global gdp, equivalent to nearly $7 trillion, and a corresponding 1.5 percentage point boost in productivity growth over a decade (goldman sachs, 2023). according to the recent investigation of mckinsey & company, the implementation of generative ai across the 63 use cases it analyzed could result in an annual increase of approximately $2.6 trillion to $4.4 trillion (mckinsey & company, 22023). the potential influence of generative ai as a special kind of technology on productivity can contribute trillions of dollars in value to the global economy. consequently, the overall impact of ai could be enhanced by 15 to 40 percent (mckinsey& company, 2023). however, there are apprehensions regarding the possibility of job displacement because of automation, which could subsequently lead to alterations in employment trends and modifications in consumer expenditure patterns. the model this study adopted a multi-sector model used by aldasoro et al (2024) in their study on the impact of artificial intelligence on output and inflation. the study used the multi-sector model to chart the economic effects of ai. the model features a detailed industry structure in both its demand and supply sides which capture the key industry – level and aggregate transmission mechanisms of ai. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 94 | p a g e the model was used to account for the direct effects of ai on industry – level productivity and then to trace through the effects of these changes across the economy to assess the implications for aggregate outcomes. the model consists of a closed economy featuring households’ firm, the government and the central bank. households make consumption, work, investment and saving decisions to maximize their lifetime utility, subject to an inter temporal budget constraint. their utility function is given by: ∑ 𝛽𝑡 [log(𝐶𝑡 − ℎ𝐶𝑡 − 1) − 𝐴𝑁 1 + 𝑉 𝑁𝑡 1+𝑣] ∞ 𝑡=0 where ct and nt are household consumption and labour supply. the parameters𝛽, h and v are the household’s intertemporal discount rate, its habits parameter and its frisch labour supply elasticity. based on the multi-sector model constructed to take care of various industry-based dynamics, the effect of ai is modeled by simulating its effects. results and discussion our discussion is based on how ai adoption affects key macroeconomic aggregates, in other words, we are looking at the macroeconomic impact of ai on gdp, consumption and investment. figures 4.1, 4.2 and 4.3 represent gdp, consumption and investment respectively. in figure 4.1, productivity improvements from ai adoption lead to a significant increase in gdp. growth is fastest in the first 10 years, ie the period in which ai directly raises industry level of total mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 95 | p a g e factor productivity (tfp) at which point gdp is almost 30% higher than it would have been without ai adoption. gdp continues to increase even after the direct productivity gains from ai adoption are exhausted, however, at a slower pace, as it takes time for firms to adjust their capital stock and use of intermediate inputs to take full advantage of ai. the level of gdp ultimately stabilizes around 35% above the noai baseline. the paths of aggregate consumption and investment broadly resemble that of gdp (figure 4.2 and 4.3). the level of investment overshoots, thereby delivering the required increase in the economy’s capital stock, before converging to its long-run level. taken together, these results illustrate that while different expectation formation mechanisms change the transitory dynamics of macro variables, they do not affect the long-term input of ai on the economy. these results support the productivity effect in the task-based framework of acemoglu and restrepo (2018). the impact of ai across sectors of the economy records three observations: first, value-added output rises in all industries, reflecting the nature of ai as a general-purpose technology (gpt) . second, the impact varies significantly across industries, ranging from a nearly 50% increase in value-added output in manufacturing and real estate services to about 20% in education and management services. third, there is no direct mapping between an industry’s initial exposure to ai and the long run increase in value added output. in general, primary and secondary industry display the largest increases in value added output, while professional services are in the bottom half of the distribution, with a couple of notable exceptions such as information & communications and real estate services. ai adoption leads to a reallocation of labour across industries. in general, employment increases in services industries that experience higher relative prices and the smallest increases in value added output. higher selling price allow firms in these industries to raise wages more than firms in industries whose relative prices decline. this induces workers to adjust their labour supply towards these industries. in contrast, in the capital-intensive industries that record the largest increases in value-added, and where relative prices decline, hours worked falls. ai as a general purpose/factor – specific technology, some qualitative differences in terms of the effect on output: the long run impact is smaller when ai is a factor – specific technology (especially so for capital – augmenting tfp). but regardless of how ai enters the production function as a general purpose or factor specific, the long run impact on output is positive and significant. based on knowledge from previous studies on the impact of ai on economic growth and this present study on the impact of ai on economic growth through key macroeconomic aggregates, the findings, conclusion and recommendation of this study are as follows: findings the successful adoption and integration of ai technologies need adequate infrastructure, data availability and supportive policies which can vary across different economies. by transforming occupational tasks, altering corporate strategies, and affecting production efficiency, ai may have significant consequences for labour markets, firms, and whole industries. while ai, and in particular mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 96 | p a g e generative ai is a general-purpose technology, its impact differs across occupational and industries. ai adoption leads to a reallocation of labour across industries. ai is neither capital nor labour specific, but is rather a general-purpose technology affecting overall total factor productivity (tfp). conclusion ai represents a driver of productivity and economic growth. it can increase efficiency and significantly improve the decision-making process by analyzing large amount of data, yet at the same time, it creates equally serious risks of job market polarization, rising inequality, structural unemployment and the emergence of a new undesirable industrial structures. recommendations government should collaborate with academia, industry experts and other stakeholders to leverage their expertise and experiences in ai implementation. public-private partnership can accelerate the development and deployment of ai solutions while ensuring alignment with public needs. once ai systems are implemented, government should continuously monitor their performance and evaluate their impact. regular assessment will help identify any issues or biases and allow for necessary adjustments and improvement. government should make public policy on ai to encourage firms and households to adopt ai and focus on sectors of the economy that produce consumption goods as they promise high returns. there is need to set up strong data science resource unit for proper functioning of ai adoption since data science is the center point of ai and machine learning. government should encourage and support school management both in the secondary and tertiary institutions to provide opportunities for them to carve a niche for themselves by building innovative ai models tailored toward their unique needs and competitive advantages. education planners and managers should integrate ai technique into economic and financial sciences as aspects of the knowledge economy which is characterized by providing statistical and measurement methods that achieve more efficient and accurate results compared to traditional statistical models. toward a policy agenda this study has shown the good, the bad and the challenges surrounding the adoption of ai in different sectors of the economy. as we noted that ai represents a driver of productivity and economic growth, it can increase efficiency and significantly improve the decision – making process. at the same time, ai creates serious risks of job market polarization, rising inequality, structural unemployment, emergence of new undesirable industrial structures, etc. the question that arises is, how would different sectors and organizations welcome the adoption of ai seeing that ai is capable of raising an organization up or bringing it down through its innovative destructive potentials. this calls for a new policy decision in organizations adopting ai technologies. it is expected that labour unions must figure out what kind of relationship they want with ai and what mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 97 | p a g e their demand will be. although, we have sketched a number of possible futures for ai, we want to emphasize not only how deeply unpredictable the future of this technology is but also the agency society which ai future emerges. business organization need innovations in economic and policy understanding that match the scale and scope of the breakthrough in ai itself. reorienting research priorities and developing a smart policy agenda can help move toward a future of both sustained and inclusive growth. references aghion, p., b., & jones, c. (2017). artificial intelligence and economic growth. nber working paper no. 23928. https://doi.org/10.3386/w23928 agrawal, a., gans, j., & goldfarb, a. (2016). the simple economics of machine intelligence. harvard business review, 17, 2-5. agrawal, a., gans, j., & goldfarb, a. (2019). artificial intelligence: the ambiguous labour market impact of automating prediction. journal of economic perspectives, 33(2), 31-50. https://doi.org/10.3386/w25619 acemoglu, d., & pascual, r. (2018). artificial intelligence automation and work. nber working paper no. 24196. araujo, d., sebastian, d., leonardo, g., & bruno, t. (2024). artificial intelligence in central banking. bis bulletin. autor, d. (2022). the labour market impacts of technological change: from unbridled enthusiasm to qualified optimism to vast uncertainty. nber working paper no. 30074. banerjee, s., singh, p. k., & bajpai, j. (2018). a comparative study on decision-making capability between human and artificial intelligence in nature inspired computing. in springer: singapore, 203–210. babina, t., anastassia, f., alex, h., & hames, h. (2024). artificial intelligence, firm growth, and product innovation. journal of financial economics, 151, 103745. baily, m. n., erik, b., & anton, k. (2023). machines of mind: the case for an ai-powered productivity boom. brookings. brynjolfsson, e., & andrew, m. (2017). the business of artificial intelligence. harvard business review. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 98 | p a g e czarnitzki, d., gonzalo, p. f., & christian, r. (2023). artificial intelligence and firm-level productivity. journal of economic behaviour & organization, 211, 188-205. david, a., jon, h., & pascual, r. (2022). artificial intelligence and jobs: evidence from online vacancies. journal of labour economics, 40(si), 293-340. felten, e., meera, r., & robert, s. 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(2020). exploring digital government transformation in the eu. luxembourg: publications office of the european union. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 99 | p a g e mohammed, f., & negrish, a. (2024). the impact of the use of artificial intelligence on economic growth: the case of jordan. kurdish studies, 12(2), 1929-1941. https://www.kurdishstudies.net nguyen, c. p., & doytch, n. (2022). the impact of ict patents on economic growth: an international evidence. telecommunications policy, 46(5), 102291. https://doi.org/10.1016/j.telpol.2021.102291 pathak, b. k., & bend, s. (2020). internet of things enabled electronic markets: transparency issues. information systems, 21, 306-316. pearl, j., & mackenzie, d. (2018). the book of why: the new science of cause and effect. basic books. peiya, z., yu, g., & xue, s. (2022). how does artificial intelligence affect green economic growth? evidence from china. science of the total environment, 834, 155306. https://doi.org/10.1016/j.scitotenv.2022.155306 pesapane, f., volonte, c., codari, m., & sardanelli, f. (2018). artificial intelligence as a medical device in radiology: ethical and regulatory issues in europe and the united states. insights imaging, 9, 745-753. rogerson, a., hankins, e., nettle, p. f., & rahim, s. (2022). government ai readiness index 2022. oxford: oxford insights. sahmim, s., & gharsellaoui, h. 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(2019). artificial intelligence and the public sector – applications and challenges. international journal of public administration, 42, 596-615. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 100 | p a g e wirtz, b. w., weyerer, j. c., & sturm, b. j. (2020). the dark sides of artificial intelligence: an integrated ai governance framework for public administration. international journal of public administration, 43, 818-929. yang, c. h. (2022). how artificial intelligence technology affects productivity and employment: firmlevel evidence from taiwan. research policy, 51(6), 104536. https://doi.org/10.1016/j.respol.2022.104535 yong, q., zeshui, x., xinxin, w., & marinko, s. (2023). artificial intelligence and economic development: an evolutionary investigation and systematic review. journal of the knowledge economy. https://doi.org/10.1007/s13132-023-01183-2 yuxin, f., hongjun, c., & jihui, s. (2022). impact of artificial intelligence on regional green development under china’s environmental decentralization system: based on spatial durbin model and threshold effect. international journal of environmental research and public health, 19(22), 14776. https://doi.org/10.3390/ijerph192214776 zeira, j. (1998). workers, machines, and economic growth. quarterly journal of economics, 113(4), 1091-1117. https://doi.org/10.1162/003355 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 191 | p a g e effect of corporate financial disclosure on investors confidence in nigeria. a case study of nigeria stock exchange 1eke robert ike, phd, fca, 2korka goodluck barineka and 3edmund obayagbonna 1department of accounting and finance, college of management and social sciences, wellspring university benin city, edo state. 2,3department of business administration, college of social and management sciences, wellspring university benin city, edo state. email:robbyeke19@yahoo.com/robert.eke@wellspringuniversity.edu.ng/kgbarineka@gmail.com/edmund. obayagbonna2020@gmail.com doi: https://doi.org/10.5281/zenodo.15281161 phone: +2348034712733, +2348169651424, +2348038010140. abstract: this study examines the effect of corporate financial disclosure on investor confidence in nigeria, with a focus on earnings transparency, disclosure compliance, and audit quality as determinants of trading volume. specifically, the study investigates the effect of earnings transparency on trading volume, assesses the impact of disclosure compliance on trading volume, and evaluates the influence of audit quality on trading volume. the research adopts an ex-post facto design, utilizing secondary data from publicly available financial reports of listed firms on the nigerian exchange group (ngx) from 2010 to 2019. a purposive sampling technique was used to select 30 firms from key sectors, including banking, manufacturing, oil and gas, and telecommunications, based on their consistent financial disclosures. data analysis involved descriptive statistics and ordinary least squares (ols) regression to determine the relationship between corporate financial disclosure variables and trading volume. findings indicate that firms generally exhibit high disclosure compliance and earnings transparency levels, with a majority audited by big four firms. the regression analysis reveals that earnings transparency positively influences trading volume; however, its effect is not statistically significant (p > 0.05). disclosure compliance and audit quality were not directly tested in the model but were inferred to have limited explanatory power based on the low adjusted r-squared value (0.226). these results suggest that while financial disclosure enhances market confidence, other factors such as market sentiment and macroeconomic conditions may play a dominant role in investor decision-making. the study concludes that corporate financial disclosure alone may not sufficiently drive trading volume. it contributes to the literature by highlighting the need for enhanced qualitative disclosures and investor education. it recommends that regulatory bodies strengthen compliance mechanisms and that firms improve voluntary disclosures to bolster investor confidence and market efficiency. mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:robbyeke19@yahoo.com mailto:robert.eke@wellspringuniversity.edu.ng/ american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 192 | p a g e keywords: corporate financial disclosure, investor confidence, earnings transparency, disclosure compliance, audit quality, trading volume, nigeria 1.1 introduction investor confidence is a critical component of capital market stability and economic growth. globally, well-functioning financial markets rely on transparent corporate financial disclosure to ensure that investors have adequate and reliable information for decision-making. the united states and other developed economies have established stringent financial reporting standards such as the generally accepted accounting principles (gaap) and the international financial reporting standards (ifrs) to enhance corporate disclosure and strengthen investor trust (wali & velasco, 2024). in europe, regulatory bodies such as the european securities and markets authority (esma) enforce financial disclosure policies to safeguard investors and maintain capital market integrity (siri & zhu, 2019). these measures have significantly contributed to the confidence investors place in stock markets by reducing information asymmetry and promoting fair valuation of securities. in africa, investor confidence in stock exchanges varies significantly due to disparities in financial reporting practices, corporate governance, and enforcement of disclosure standards. while south africa's johannesburg stock exchange (jse) has maintained investor confidence through stringent disclosure requirements and corporate governance codes, many other african stock markets, including nigeria's, continue to struggle with inconsistent financial reporting and regulatory enforcement (hammond, opoku, & kwakwa, 2022). regional organizations such as the african securities exchanges association (asea) have emphasized the need for harmonized disclosure standards to enhance transparency and investor protection across african stock markets (samamba & trivedi, 2023). however, challenges such as weak enforcement mechanisms, corporate fraud, and poor audit quality continue to undermine investor confidence in several african economies. in the nigerian context, corporate financial disclosure plays a fundamental role in determining investor confidence in the nigeria stock exchange (nse). investors rely on accurate financial statements, compliance with disclosure regulations, and audit quality to assess the financial health and performance of listed companies (okolie & jeroh, 2022). however, persistent corporate governance failures, financial misreporting, and weak enforcement of disclosure policies have led to declining investor trust in nigeria’s capital market (lawuyi, 2022). as a result, foreign and domestic investors often perceive the nse as a high-risk market, affecting capital inflows and overall market performance. one major problem affecting investor confidence in the nigeria stock exchange is financial misreporting by listed companies. several corporate scandals, including cases of fraudulent financial statements and earnings manipulations, have raised concerns about the credibility of financial disclosures in nigeria (edeh, 2020). when companies engage in financial misreporting, investors face difficulties in making informed decisions, leading to reduced trust in the market. improving earnings mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 193 | p a g e transparency through timely and accurate financial reporting can help mitigate this issue by ensuring that investors have reliable information on company performance. regulatory weaknesses and poor enforcement of corporate disclosure requirements constitute another significant challenge. despite the existence of the financial reporting council of nigeria (frcn) and the securities and exchange commission (sec), compliance with disclosure standards remains inconsistent, leading to information asymmetry and market inefficiencies (lawuyi, 2022). strengthening disclosure compliance through enhanced regulatory oversight and stringent penalties for non-compliance can improve transparency and restore investor confidence in the nse. audit quality deficiencies also pose a threat to investor confidence in nigeria’s capital market. some audit firms have been implicated in cases of compromised financial reporting due to conflicts of interest, lack of independence, and weak audit regulations (egiyi, 2023). poor audit quality reduces the credibility of financial statements, making it difficult for investors to rely on reported earnings and financial positions of listed firms. enhancing audit quality through stricter regulatory supervision and improved auditor independence can enhance financial statement reliability and investor trust. another issue affecting investor confidence in the nse is corporate governance failure. weak corporate governance structures, including board ineffectiveness, lack of accountability, and inadequate risk management practices, have resulted in financial instability and stock market volatility (oyelekan, 2022). investors are less likely to invest in firms with poor governance practices due to the risks of mismanagement and financial misappropriation. strengthening corporate governance through stringent disclosure compliance and transparent reporting mechanisms can contribute to improved investor confidence. market volatility and macroeconomic instability also undermine investor confidence in nigeria’s stock market. factors such as inflation, exchange rate fluctuations, and political uncertainty create unpredictable investment conditions, discouraging long-term investment in the capital market (erhijakpor & honour, 2024). when investors perceive the market as unstable, they become hesitant to commit their funds, leading to reduced market liquidity. promoting transparency through robust financial disclosure can help mitigate the effects of market volatility by providing investors with clear insights into corporate financial health and market trends. liquidity constraints further compound the problem of investor confidence in the nse. limited access to capital and the illiquidity of certain stocks deter investors from actively participating in the market (mafiejor, 2023). when investors face difficulties in buying or selling securities at fair prices, they lose confidence in the efficiency of the market. improving disclosure compliance and ensuring timely publication of financial reports can enhance market liquidity by enabling investors to make wellinformed investment decisions. furthermore, corporate fraud and unethical business practices continue to threaten investor confidence in the nigerian stock market. high-profile cases of financial fraud, insider trading, and asset mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 194 | p a g e misappropriation have eroded trust in the transparency and fairness of the market (okaro, okafor, & ofoegbu, 2013). addressing these issues through enhanced audit quality and strict compliance with corporate financial disclosure requirements can help rebuild investor confidence and ensure a more secure investment environment. foreign investor participation in the nse has also been adversely affected by perceived risks related to financial disclosure and regulatory enforcement. international investors often compare disclosure standards in nigeria with those in developed markets and find inconsistencies that deter them from investing (ojogbo & ezechukwu, 2020). aligning nigeria’s financial disclosure framework with global best practices can attract more foreign investment and improve overall market confidence. given the significance of corporate financial disclosure in enhancing investor confidence, this study seeks to examine the effect of corporate financial disclosure on investor confidence in nigeria, with a focus on the nigeria stock exchange. by analyzing the impact of earnings transparency, disclosure compliance, and audit quality on investor confidence, the study aims to provide empirical insights that can inform policy recommendations and regulatory improvements to strengthen nigeria’s capital market. 1.2 objectives of the study the primary objective of this study is to examine the effect of corporate financial disclosure on investors confidence. specifically, the study aims to: 1. to examine the effect of earnings transparency on trading volume as a measure of corporate financial disclosure. 2. to assess the impact of disclosure compliance on trading volume as a measure of corporate financial disclosure. 3. to evaluate the influence of audit quality on trading volume as a measure of corporate financial disclosure 1.3 research questions 1. to what extent does earnings transparency affect trading volume as a measure of corporate financial disclosure? 2. to what extent does disclosure compliance impact trading volume as a measure of corporate financial disclosure? 3. to what extent does audit quality influence trading volume as a measure of corporate financial disclosure? 1.4 research hypotheses 1. h₀₁: earnings transparency has no significant effect on trading volume as a measure of corporate financial disclosure. 2. h₀₂: disclosure compliance has no significant impact on trading volume as a measure of corporate financial disclosure. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 195 | p a g e 3. h₀₃: audit quality has no significant influence on trading volume as a measure of corporate financial disclosure. 2. literature review 2.1 conceptual review 2.1.1 investor’s confidence investor confidence, particularly in relation to trading volume, is a crucial determinant of market behavior and efficiency. investor confidence refers to the degree of trust that investors place in financial markets, their stability, and their potential for return on investment. according to shi et al (2024), investor sentiment significantly affects trading volume, as confident investors are more likely to trade frequently, assuming that their knowledge or intuition will yield profitable outcomes. shiller (2017) argues that psychological factors, such as optimism and market speculation, drive investor confidence, influencing market liquidity through increased trading activities. moreover, shi et al (2023) suggest that investor confidence is often reflected in trading volume surges, particularly during market booms when traders believe in sustained price increases. several scholars have attempted to define investor confidence in ways that highlight its behavioral and economic implications. hoekstra et al (2022) define investor confidence as the level of certainty investors have regarding expected returns, which directly influences their willingness to engage in trading. high confidence leads to increased market participation, whereas low confidence results in market withdrawal and reduced trading volume. trinugroho et al (2024) emphasize the role of overconfidence, noting that individual investors who exhibit excessive confidence tend to trade more frequently, often leading to suboptimal financial outcomes. this aligns with the findings of wang (2024), who argues that behavioral biases, such as over-optimism and herd mentality, significantly shape investor confidence and trading patterns. empirical studies suggest that investor confidence is cyclical, rising during bullish markets and declining in bearish periods. for example, hoekstra et al (2022) propose that trading volume acts as a proxy for investor confidence, indicating that higher volumes correspond with strong market sentiment. similarly, zhang et al (2023) found that investor sentiment, as reflected in financial news and media, influences trading volume, with positive sentiment leading to higher market participation. the relationship between confidence and trading volume is further supported by nofsinger (2017), who contends that institutional investors react to confidence indicators such as earnings reports and macroeconomic data, which, in turn, affect trading activity. investor confidence is also influenced by external macroeconomic and regulatory factors. laine (2023) explains that economic stability, monetary policies, and interest rates significantly impact investor confidence and, consequently, trading volume. for instance, periods of low interest rates often enhance investor confidence by making borrowing cheaper, leading to higher stock market participation. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 196 | p a g e similarly, regulatory measures, such as financial transparency requirements and market oversight, play a critical role in sustaining investor confidence by reducing uncertainty and promoting fair trading practices (junaedi & sasmitha, 2025). in contrast, financial crises, such as the 2008 global recession, demonstrate how rapidly investor confidence can deteriorate, leading to panic selling and a decline in trading volume (da, engelberg, & gao, 2022). ultimately, investor confidence remains a dynamic and complex phenomenon shaped by psychological, economic, and institutional factors. the literature consistently highlights the strong correlation between confidence and trading volume, reinforcing the notion that market participation is driven by perceived stability and return expectations. studies by kansal et al (2024) illustrate that cognitive biases, such as self-attribution and illusion of control, contribute to fluctuating confidence levels, influencing market liquidity. as financial markets continue to evolve, understanding investor confidence remains crucial for policymakers, traders, and financial analysts in predicting market trends and mitigating risks associated with investor sentiment fluctuations. 2.1.2 corporate financial disclosure corporate financial disclosure is a fundamental aspect of financial reporting that ensures transparency, accountability, and investor confidence in financial markets. it involves the process through which companies communicate financial performance, risks, and future prospects to stakeholders, particularly investors (che et al., 2024). the key dimensions of corporate financial disclosure include earnings transparency, disclosure compliance, and audit quality, each playing a crucial role in the reliability and integrity of financial statements. 2.1.2.1 earnings transparency earnings transparency is a critical component of financial disclosure that refers to the clarity and reliability of financial reports in reflecting a company’s true economic performance (pratiwi et al., 2024). high earnings transparency ensures that stakeholders receive relevant, comparable, and timely information, reducing information asymmetry and enhancing market efficiency (chen & smith, 2024). transparent earnings reporting allows investors to make well-informed decisions based on the actual financial health of a firm. conversely, low earnings transparency increases uncertainty and the risk of financial misrepresentation, leading to distorted investment decisions (yoro, 2024). firms with opaque financial disclosures may engage in earnings management practices, manipulating financial figures to meet market expectations. this practice not only undermines investor trust but also exposes firms to regulatory scrutiny and potential legal consequences (abraham et al., 2024). research suggests that companies with high earnings transparency benefit from lower capital costs and improved stock valuation due to enhanced investor confidence (yoro, 2024). 2.1.2.2 disclosure compliance mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 197 | p a g e disclosure compliance refers to a company’s adherence to regulatory and statutory financial reporting requirements. regulatory bodies such as the international financial reporting standards (ifrs) and the u.s. generally accepted accounting principles (gaap) set the guidelines for financial disclosures to ensure consistency and comparability across firms and industries (black et al., 2021). compliance with these regulations is essential in mitigating risks associated with earnings management, financial fraud, and misrepresentation (shima et al., 2025). firms operating in jurisdictions with stringent disclosure requirements exhibit higher levels of financial integrity and investor trust (anjani, 2023). however, some companies engage in selective disclosure practices, manipulating financial data to present a more favorable financial position. this selective disclosure undermines market confidence and increases the likelihood of financial restatements and stock price volatility (kitchens et al., 2024). regulatory oversight and enforcement mechanisms play a critical role in ensuring compliance and reducing corporate scandals (akinsola et al., 2025). the literature emphasizes the role of corporate governance in enhancing disclosure compliance. firms with independent audit committees and strong internal control mechanisms are more likely to adhere to regulatory requirements, reducing the risks of financial misreporting (khan et al., 2024). additionally, technological advancements such as blockchain and artificial intelligence are emerging as potential tools for improving disclosure compliance by enhancing data security and reporting accuracy (adewale et al., 2022). 2.1.2.3 audit quality audit quality is a crucial dimension of corporate financial disclosure, influencing the credibility and reliability of financial statements. darmawan (2023) defines audit quality as the probability that an auditor will detect and report material misstatements in a company’s financial records. high-quality audits provide assurance that financial reports are free from material errors and fraud, thereby enhancing investor confidence. big four audit firms—pwc, deloitte, ey, and kpmg—are generally associated with higher audit quality due to their extensive expertise, independence, and rigorous audit procedures (cziffra et al., 2024). however, concerns about auditor independence and conflicts of interest arise when auditors develop close relationships with their clients, potentially compromising financial disclosures (saeed et al., 2022). to safeguard audit quality, regulatory authorities have proposed mechanisms such as auditor rotation policies and enhanced oversight of audit firms (kwon et al., 2017). empirical studies suggest that firms with high audit quality experience improved financial reporting integrity and reduced earnings manipulation (abraham et al., 2024). furthermore, strong corporate governance frameworks, such as board independence and the presence of financial experts on audit committees, have been found to positively influence audit quality and financial disclosure practices (khan et al., 2024). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 198 | p a g e corporate financial disclosure remains a cornerstone of financial reporting, influencing market efficiency, investor decision-making, and corporate governance. the literature consistently highlights that earnings transparency, disclosure compliance, and audit quality are essential factors in ensuring the credibility of financial statements (akhigbe et al., 2017). firms that prioritize comprehensive and reliable financial disclosures tend to experience lower capital costs, reduced stock price volatility, and higher valuation multiples (yoro, 2024). as financial markets evolve, regulatory bodies and policymakers continue to implement stricter disclosure requirements and auditing standards to mitigate financial fraud and enhance investor protection (akinsola et al., 2025). future research should explore the role of emerging technologies, such as blockchain and artificial intelligence, in improving financial transparency and disclosure compliance. robust corporate financial disclosure practices are indispensable for maintaining trust and stability in capital markets (adewale et al., 2022). 2.2. theoretical review 2.2.1 signaling theory signaling theory was introduced by michael spence in 1973 to explain how individuals or organizations convey information to reduce information asymmetry in decision-making (spence, 1973). the theory is based on the premise that one party, typically the more informed party, sends signals to another lessinformed party to influence perceptions and behaviors (connelly et al., 2011). in financial markets, companies use various signals, such as corporate financial disclosures, to communicate their financial health and credibility to investors (healy & palepu, 2001). the rationale for the theory lies in addressing market inefficiencies caused by information asymmetry, where investors may lack complete or accurate knowledge about a company's financial position. by providing clear and credible signals, firms can differentiate themselves from competitors and attract investor confidence (morris, 1987). supporters of signaling theory argue that high-quality corporate disclosures, including earnings transparency and audit quality, enhance market efficiency by reducing uncertainty (verrecchia, 2001). firms with strong financial performance voluntarily disclose more information to distinguish themselves from weaker firms, reinforcing investor confidence and improving stock liquidity (miller & triana, 2009). empirical studies have demonstrated that companies engaging in transparent financial reporting experience lower capital costs and higher stock valuations due to the positive signaling effect (botosan, 1997). similarly, audit quality serves as a signal of financial integrity, as reputable auditors enhance the credibility of financial reports, thereby fostering greater investor trust (francis et al., 2005). critics, however, argue that signaling theory assumes rationality and ignores behavioral biases that influence investor decision-making (dutta & trueman, 2002). some scholars contend that firms may engage in strategic disclosures or earnings management to manipulate investor perceptions rather than provide genuinely useful information (fields et al., 2001). others highlight the potential for signaling mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 199 | p a g e failure, where market participants misinterpret signals or where dishonest firms mimic strong signals to deceive investors (karasek & bryant, 2012). additionally, mandatory disclosure regulations may reduce the need for signaling, as investors increasingly rely on standardized financial reports rather than voluntary disclosures (leuz & wysocki, 2016). signaling theory provides a strong justification for the study on the effect of corporate financial disclosure on investor confidence. by examining earnings transparency, disclosure compliance, and audit quality as determinants of trading volume, the study aligns with the theory’s core principle that firms send financial signals to investors (healy & palepu, 2001). earnings transparency ensures that investors receive accurate financial data, reducing uncertainty and increasing trading activity (beyer et al., 2010). disclosure compliance reflects a firm's commitment to regulatory standards, signaling credibility and mitigating information asymmetry (leuz & verrecchia, 2000). audit quality further enhances financial reporting reliability, reinforcing investor confidence and influencing stock liquidity (defond & zhang, 2014). applying signaling theory to this study highlights the importance of corporate financial disclosure in shaping investor behavior. the study’s findings could provide valuable insights into how firms can optimize disclosure practices to enhance market confidence and stock market performance. by understanding the signaling effects of transparency, compliance, and audit quality, policymakers and corporate leaders can implement strategies that strengthen investor trust and promote financial stability. ultimately, the research will contribute to the broader discussion on how signaling mechanisms improve corporate governance and financial market efficiency. 2.3 empirical review ogan and adegbe (2022) investigated the impact of corporate financial reporting on investors' confidence in listed manufacturing companies in nigeria. adopting an ex-post facto research design, the study utilized data from annual financial reports of ten manufacturing firms as of december 31, 2020, analyzed using eviews. investors' confidence was measured using tobin's q, while corporate financial reporting was proxied by earnings management. the findings revealed that corporate financial reporting significantly influences investors' confidence (f-stat. = 24.0918; p = 0.0000). however, when audit quality was introduced as a moderating variable, corporate financial reporting had a significant but negative effect on investors' confidence (f-stat. = 27.7559; p = 0.0000). the study concluded that corporate financial reporting plays a crucial role in shaping investors' confidence, and audit quality could be leveraged to enhance this effect. it recommended that firms and accounting stakeholders implement measures to improve corporate financial reporting quality as a critical tool for strengthening investors' confidence at both micro and macro levels. lasisi (2017) examined the relationship between corporate governance mechanisms and organizational performance in nonfinancial firms listed on the nigerian stock exchange. using agency, stakeholder, and stewardship theories as the theoretical framework, the study employed multiple regression analysis mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 200 | p a g e to analyze data collected from firms' published accounts and the archives of the nigerian stock exchange for the period between january 1, 2011, and december 31, 2015. corporate governance mechanisms were measured by board independence, audit committee independence, board size, number of board meetings, and executive compensation, while financial performance was assessed using return on assets, return on capital employed, and tobin’s q. the findings indicated a positive but statistically insignificant relationship between corporate governance mechanisms and financial performance. the study concluded that while corporate governance plays a role in shaping organizational performance, its direct impact may not always be statistically significant. it recommended that firms and regulators strengthen corporate governance practices to enhance investor confidence, employee commitment, and the reduction of agency costs, ultimately leading to stronger financial performance. igbekoyi and agbaje (2018) investigated the effect of corporate governance on the quality of accounting information disclosure in the nigerian banking sector. the study focused on banks listed on the nigerian stock exchange and employed secondary data from annual reports and factbooks of selected banks covering the period from 2006 to 2015. using statistical tools such as unit root tests, cointegration, and an error correction model, the study analyzed the relationship between corporate governance indices—including audit committee meetings (acm), audit committee qualification (acq), board size (bs), directors in the audit committee (dac), ownership structure (os), and corporate board members (cbm)—and accounting information disclosure. the findings indicated that acm, acq, bs, dac, and os had a significant positive relationship with accounting information disclosure at the 1% and 5% levels of significance, whereas cbm had an insignificant negative relationship. the study concluded that corporate governance enhances the quality of accounting information disclosed in the banking sector. it recommended that banks strengthen corporate governance practices to improve transparency and accountability, thereby mitigating agency conflicts and information asymmetry between management and shareholders. the study by adebanjo and wisdom (2024) aimed to examine the impact of financial reporting quality and disclosure on the stock prices of listed deposit money banks in nigeria. conducted using secondary data from the annual reports of these banks, the research employed descriptive statistics, correlation analysis, and panel ordinary least squares (ols) regression to analyze the relationship between the variables. the findings revealed that the combined effect of financial reporting quality and disclosure has a positive and significant impact on the stock prices of listed deposit money banks in nigeria. in conclusion, the study suggests that for financial institutions to achieve sustainable performance, they must meet stakeholders' expectations by providing comprehensive and high-quality accounting information. the authors recommend improving the quality of financial reporting by ensuring adherence to accounting standards and financial regulations regarding disclosures. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 201 | p a g e the study by ayodele and afolabi (2018) aimed to examine the impact of corporate financial disclosure on the performance of nigerian deposit money banks (dmbs), focusing on compliance with financial disclosure requirements set by monetary authorities. the research was conducted in nigerian dmbs, using primary data collected through a questionnaire survey, with 100 valid responses out of 120 distributed. the study employed t-tests and analysis of variance (anova) to analyze the data. the findings revealed that corporate financial disclosure significantly influences the stability and performance of banks in nigeria’s financial sector. the study concluded that improved corporate financial disclosure practices could aid banks in managing non-performing loans effectively, thereby enhancing stability and performance. consequently, the authors recommended the enforcement of better corporate financial disclosure practices, mandatory compliance with corporate governance codes, and the establishment of an effective legal framework that defines the rights and obligations of banks, directors, and shareholders. 3. methodology this study adopts an ex-post facto research design, which is suitable for analyzing historical data to determine the effect of corporate financial disclosure on investor confidence. the study employs a quantitative approach by utilizing secondary data from publicly available financial reports of listed companies. ordinary least squares (ols) regression was used to examine the relationship between corporate financial disclosure variables and trading volume. the population of this study comprises all publicly listed companies on the nigerian exchange group (ngx) between 2010 and 2019. the study focuses on firms across various sectors, including banking, manufacturing, oil and gas, and telecommunications, as these sectors are crucial for understanding corporate financial disclosure practices and their impact on investor confidence. a purposive sampling technique was used to select 30 firms from different sectors that have been consistently listed on the ngx during the study period. the selection criteria include: ● firms that have published audited financial statements consistently from 2010 to 2019. ● firms with publicly available data on earnings transparency, disclosure compliance, and audit quality. ● firms with available trading volume data for the study period. the data was analyzed using descriptive and inferential statistical methods. the descriptive analysis summarized the trends and distribution of the variables, while inferential analysis was conducted using ordinary least squares (ols) regression to test the hypotheses. the general regression model is specified as follows: tvt=β0+β1ett+β2dct+β3aqt+εt where: ● tvt = trading volume at time t (dependent variable) ● ett = earnings transparency at time t mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 202 | p a g e ● dct = disclosure compliance at time t ● qt = audit quality at time t ● β0 = intercept ● β1,β2,β3 = regression coefficients ● εt = error term the table below presents the measurement and data sources for each variable: variable type measurement source trading volume (tv) dependent total number of shares traded per period ngx trading records earnings transparency (et) independent earnings quality index based on accruals and persistence financial statements disclosure compliance (dc) independent compliance score based on ifrs disclosure checklist annual reports audit quality (aq) independent audit firm reputation (big four vs. non-big four) financial statements 4. data analysis and interpretation table 4.1: descriptive statistics audit_quality disclosure_co mpliance earnings_tra nsparency trading volume mean 0.7 0.758107 0.760068 848386.8 median 1 0.719094 0.799943 850989 maximum 1 0.987964 0.975357 1041120 minimum 0 0.608234 0.529042 697215.3 std. dev. 0.483046 0.120948 0.157933 89264.45 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 203 | p a g e skewness -0.872872 0.82907 -0.222491 0.553321 kurtosis 1.761905 2.524881 1.65253 3.763543 jarque-bera 1.908541 1.239654 0.839035 0.75319 probability 0.385093 0.538038 0.657364 0.686194 sum 7 7.581071 7.600684 8483868 sum sq. dev. 2.1 0.131656 0.224485 7.17e+10 observations 10 10 10 10 the statistical analysis presented in the table provides key insights into the relationship between corporate financial disclosure and investors' confidence in nigeria, using trading volume as a proxy. the mean values indicate that audit quality is relatively high (0.7), with a majority of firms audited by big four firms (median = 1). disclosure compliance and earnings transparency indices also have relatively high mean values of 0.7581 and 0.7601, respectively, suggesting that firms generally comply with disclosure regulations and provide transparent financial statements. the standard deviation for these variables remains moderate, with earnings transparency (0.1579) exhibiting higher variability compared to disclosure compliance (0.1209), implying that transparency levels differ more across firms. trading volume has a significant average of 848,386.8 shares traded, indicating an active stock market, though the variation in trading volume (standard deviation = 89,264.45) suggests fluctuations in investor participation. furthermore, the skewness and kurtosis values provide insights into the distribution of these variables. audit quality is negatively skewed (-0.8729), indicating that more firms are audited by the big four, while disclosure compliance is positively skewed (0.8291), suggesting that most firms have higher disclosure compliance levels. the jarque-bera test results suggest that none of the variables significantly deviate from normality, as all probability values exceed 0.05. the study is justified based on these statistics, as higher earnings transparency and disclosure compliance are expected to enhance investor confidence, reflected in increased trading volume. additionally, firms audited by big four firms generally exhibit higher levels of financial disclosure, further strengthening investor trust and market participation. the observed variability in trading volume highlights the need to explore the extent to which corporate financial disclosure influences investment decisions, making this study relevant for improving market efficiency in nigeria. 4.2 test of hypotheses table 4.2: regression results variable coefficient std. error t-statistic prob. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 204 | p a g e c (constant) 608,413.20 128,402.60 4.738 0.0015 earnings transparency index (0-1) 315,726.30 165,746.00 1.905 0.0933 table 4.3: model summary statistics statistic value statistic value r-squared 0.312 mean dependent variable 848,386.80 adjusted r-squared 0.226 s.d. dependent variable 89,264.45 s.e. of regression 78,530.19 akaike info criterion 25.5572 sum squared residuals 4.93e+10 schwarz criterion 25.6177 log likelihood -125.7861 hannan-quinn criterion 25.4908 f-statistic 3.6286 durbin-watson statistic 1.6455 prob(f-statistic) 0.0933 h₀₁: earnings transparency has no significant effect on trading volume as a measure of corporate financial disclosure. the regression results indicate that the coefficient of earnings transparency (et) is 315,726.3, implying that a one-unit increase in earnings transparency leads to an increase of 315,726.3 shares traded. however, the p-value (0.0933) is greater than the conventional significance levels (0.05 and 0.01), suggesting that the effect of earnings transparency on trading volume is not statistically significant. the t-statistic (1.904880) further confirms that earnings transparency does not have a strong explanatory power in determining trading volume. based on this, we fail to reject the null hypothesis (h₀₁) and conclude that earnings transparency does not have a statistically significant effect on trading volume. the implication is that while earnings transparency might influence investor confidence, other factors such as market sentiment, macroeconomic conditions, and firm-specific attributes may play a more dominant role in driving trading volume. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 205 | p a g e h₀₂: disclosure compliance has no significant impact on trading volume as a measure of corporate financial disclosure. the regression output does not provide direct evidence for the effect of disclosure compliance on trading volume, meaning additional analysis is required to assess this relationship. given that the rsquared value (0.312) indicates that only 31.2% of the variation in trading volume is explained by the included independent variables (earnings transparency and potentially disclosure compliance), it suggests that disclosure compliance—if included—may not have a strong explanatory power in determining trading volume. without sufficient statistical evidence, we fail to reject the null hypothesis (h₀₂) and infer that disclosure compliance does not significantly impact trading volume. this finding implies that while regulatory compliance is important, investors may rely on additional qualitative factors, such as firm reputation and industry trends, when making trading decisions. h₀₃: audit quality has no significant influence on trading volume as a measure of corporate financial disclosure. the regression model does not include audit quality (aq) as an independent variable, so its effect on trading volume is not directly tested in this model. however, the relatively low adjusted r-squared value (0.226) suggests that other omitted variables—such as audit quality—may have an impact on trading volume. since no statistical evidence is presented in the current model to support a significant relationship between audit quality and trading volume, we fail to reject the null hypothesis (h₀₃). the implication is that while audit quality is theoretically important for enhancing investor trust, its influence on actual trading volume may be indirect and dependent on other financial disclosure practices. future studies should include audit quality in the regression model to better assess its impact on investor behavior. 5. conclusion and recommendations 5.1 conclusion the findings of this study indicate that corporate financial disclosure variables—specifically earnings transparency, disclosure compliance, and audit quality—do not have a statistically significant impact on trading volume. the regression analysis shows that while earnings transparency has a positive relationship with trading volume, its effect is not statistically significant (p = 0.0933). similarly, disclosure compliance and audit quality were not directly tested in the model, but the low r-squared value (0.312) suggests that other factors beyond financial disclosure may play a more substantial role in influencing investor trading behavior. these findings suggest that while corporate financial disclosure is important for investor confidence, it may not be the primary driver of trading activity. instead, factors such as market sentiment, macroeconomic conditions, firm performance, and industry trends may have stronger explanatory power in determining trading volume. 5.2 recommendations enhancing financial disclosure quality although earnings transparency did not have a statistically significant impact on trading volume, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 206 | p a g e companies should continue to enhance financial disclosure practices by providing comprehensive, accurate, and timely information. regulatory bodies such as the securities and exchange commission (sec) and the financial reporting council of nigeria (frcn) should strengthen compliance mechanisms to ensure that firms disclose financial data in a manner that improves investor confidence. incorporating additional investor confidence factors future research should include macroeconomic indicators, investor sentiment analysis, and governance quality metrics in models examining trading volume. since corporate financial disclosure alone does not fully explain variations in trading activity, incorporating these factors will provide a more holistic understanding of investor behavior. strengthening regulatory enforcement the lack of a significant relationship between disclosure compliance and trading volume suggests that regulatory enforcement mechanisms may need to be reinforced. government agencies should ensure that disclosure requirements are not only adhered to but also structured in a way that effectively influences investment decisions. this could involve imposing stricter penalties for non-compliance and promoting better transparency in financial reporting. expanding research scope on audit quality since audit quality was not directly tested in the regression model, future studies should include specific audit quality indicators (e.g., auditor independence, audit firm reputation, and frequency of audit rotations) to assess their impact on investor trading behavior. a more detailed model incorporating audit quality variables may yield better insights into how external financial assurance affects trading volume. investor education and market awareness since trading volume may be influenced by qualitative factors such as market reputation, investor perception, and firm performance, financial literacy programs should be developed to educate investors on the importance of corporate financial disclosures. increased awareness of financial reporting standards could help investors make more data-driven decisions, potentially enhancing market efficiency. reference: adebanjo, 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contact@americaserial.com 234 | p a g e effects of quality medical laboratory services on workers productivity in state house clinic aso rock, abuja titus-okpanachi akuchinyere onyinyechukwu and prof. ngozi ejionueme department of business administration, faculty of management sciences, enugu state university of science and technology doi: https://doi.org/10.5281/zenodo.15296431 abstract: the study explored the effect of quality medical laboratory services on workers’ productivity in the state house clinic, abuja. the study defined some research objectives, questions, and hypotheses. data was collected through primary and secondary sources. the study used stratified random sampling as the study population was not homogeneous, as it consisted of 29 doctors, 17 nurses, 18 clinical officers, 14 laboratory scientists/technicians, and 12 pharmacists, making it the most appropriate sample to come up with the target sample. data collected were analyzed using the normal frequencies, percentage, and chi-square test. results showed that employees’ capacity influences the provision of quality medical laboratory services in state house clinic, abuja (x2=60.6>x2 =9.488). the adoption of technology has a significant effect on quality medical laboratory service delivery in the state house clinic abuja (x2=57.3>x2 =9.488). the study concluded that quality medical laboratory services have a great effect on workers’ productivity. the study recommended government comprehensively address all the issues of concern in the public health sector. quality indicators in laboratory medicine that can evaluate and improve the health care system should be initiated. keywords: laboratory, medical, productivity, services, workers 1.1 introduction the health sector is one of the most dynamic sectors, which has changed dramatically in recent years due to changes in patient expectations, quality health services, social models, public policies, and technological progress (sorescu et al., 2008). success in modern healthcare delivery worldwide depends on the accuracy and efficiency of diagnostic services rendered by biomedical scientists. patients’ lives and the treatment they receive depend on biomedical scientists' valuable skills and knowledge. they carry out a range of laboratory and scientific laboratory tests that play a pivotal role in diagnosing and treating diseases. their helpful service is the key to the effective functioning of many https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 235 | p a g e clinical departments, including the accident and emergency (a&e) departments. they play a key role in the diagnosis of diseases such as anemia, diabetes, malignancies, emergency blood transfusion services, meningitis, hepatitis, chronic liver disease, chronic kidney disease, hematological malignancies, hemoglobinopathies, coagulation disorders, hiv and aids (erhabor and njemanze, 2014). they also use computer-based laboratory information management systems (lims) and other highly sophisticated automated equipment employing a wide range of complex modern scientific techniques to carry out varied, efficient, and analytical tests on blood, body fluids, and other biological materials, including tissue samples in a bid to ensuring an excellent laboratory service delivery. areas of specialties in biomedical science include hematology, blood transfusion science, medical microbiology, virology, clinical biochemistry, immunology, histology, cytology, andrology, and reproductive science (erhabor and njemanze, 2014). therefore, accurate and timely medical laboratory testing and diagnosing are essential to a high-quality medical laboratory system. quality medical laboratory services are the epicenter of the healthcare sector (chawla et al., 2010). delivery of quality service has a significant relationship with customer satisfaction, retention, loyalty (boshoff and gray, 2004), costs, profitability (irving and dickson, 2004), service guarantees, and organization growth (kandampully and butler, 2001). however, the poor state of medical laboratory service in some hospitals in nigeria has resulted in high turnover and weak morale among staff/workers, making it challenging to guarantee 24-hour coverage, resulting in problems with patient care, increased cost of operations due to inefficiencies (owino and korir, 1997) leading some patients to look for an alternative provider and to spread negative word of mouth which affects potential patients hence growth of the hospital (tam, 2005). increasing productivity is one of the fundamental challenges of life sciences research. the work is complex, lengthy, and costly, and the failure rate is high. however, successful research can lead to diseasebeating medicines and significant financial rewards for the research organizations involved. in the past, companies have tried to improve productivity through extensive, top-down initiatives, such as reorganizing research or investing heavily in new technology platforms (beards et al., 2009). no known study has investigated the factors affecting quality laboratory services in the health sector. therefore, this study explores the factors affecting the quality of medical laboratory services and their effect on workers’ productivity in nigeria. 1.2 statement of problem laboratory services are the cornerstone of health care programs, as laboratory test results directly influence 70% of clinical decision-making. quality medical laboratory services are recognized globally; quality and reliability are essential for appropriate case management. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com http://labmed.ascpjournals.org/search?author1=ranjna+chawla&sortspec=date&submit=submit american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 236 | p a g e poor quality of laboratory services and unreliable test results can lead to inappropriate actions or inaction, such as overor under-treatment, when healthcare providers act upon inaccurate laboratory results. in an era of potential and infectious disease epidemics or pandemics, laboratory facilities of poor quality or limited capacity may lead to a severe under-detection of disease cases, allowing epidemics to gain a critical mass and spread. poor performance and productivity result from too few staff or staff not providing care according to standards and not being responsive to the needs of the community and patients. most performance problems can be attributed to unclear expectations, skills deficits, resource or equipment shortages, or a lack of motivation (hughes et al., 2002). these causes are rooted in a failing health system, low salaries, difficult working and living conditions, and inappropriate training. this situation is further worsened by the patient's or customer's perception of functional issues which they perceive and interact with during seeking treatment, such as physical facilities, internal process, interactions with doctors, nurses, and other support staff as poor and unresponsive (boshoff and gray, 2004; algilanan and connor, 2003). 1.3 objectives of the study the main objective of this study is to determine the effect of quality medical laboratory services on workers’ productivity at state house clinic, abuja. the specific objectives of this study are as follows: i. to determine the influence of employees’ capacity on providing quality medical laboratory services. ii. to determine the effect of adopting technology on quality medical laboratory service delivery. 1.4 hypotheses of the study i. employees’ capacity does not influence the provision of quality medical laboratory services. ii. technology adoption does not affect the quality of medical laboratory service delivery. literature review 2.1 conceptual review quality, as defined by the international organization for standardization, is a relative concept. if a service's inherent characteristics meet the customer's requirements, it can be rated high quality (reinartz, 2004). in a service industry like healthcare, the patient's experience plays a crucial role in rating and assessing the quality of services. quality in healthcare may comprise newer technology, newer and effective medication, higher staff-to-patient ratios, affordability, efficiency, and effectiveness of service delivery (tam, 2005). the health sector comprises the public system with major players, including the ministry of health and parastatals organizations, and the private sector includes private for-profit, non-governmental organizations, and faith-based organizations facilities (rok, 2010). in the healthcare industry, service quality has become imperative (ennis and harrington, 2001) in https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 237 | p a g e providing patient satisfaction because delivering quality service directly affects customer satisfaction, loyalty, and financial profitability of service businesses. in healthcare, service quality can be broken down into two quality dimensions: technical quality and functional quality (dean and lang, 2008). while technical quality in the health care sector is defined primarily based on the technical accuracy of the medical diagnoses and procedures or the conformance to professional specifications, functional quality refers to how the health care service is delivered to the patients. the organization for european economic cooperation formally defined productivity as: “the quotient obtained by dividing output by one of the factors of production. in this way, it is possible to speak of capital productivity, investment, or raw materials according to whether output is being considered about capital, investment or raw materials, etc”. it must be noted that productivity is a relative concept with comparisons either being made across time or between different production units. productivity is represented where unit of measurement of both outputs and inputs is given in dollar values (nzd$) or in any other relevant unit. a productivity index is defined as the ratio of an output index to an input index, that is: where is a labour productivity index, is an output index and is a labour input index. each index represents accumulated growth from period 0 to period t. some of the most common index formulae (laspeyres, paasche, fisher, and tornqvist) are included here. suppose information on prices and quantity of i outputs is available for period t = 0…t. denote the price and quantity vectors as respectively; the laspeyres , paasche , fisher , and tornqvist quantity indices are defined as follows: https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 238 | p a g e for and and where of these, the tornqvist and fisher index formulae are the most widely used by statistics officials around the world. health sector in nigeria the health sector in any country has been recognized as the primary engine of growth and development. but despite the laudable contributions of the health sector to economic development, the nigerian health sector has witnessed various turbulence that has negatively reversed the progress recorded at different times. nearly 15 percent of nigerian children do not survive to their fifth birthday. two leading causes of child mortality are malaria (30 percent) and diarrhea (20 percent). malnutrition contributes to 52 percent of deaths of children under five. a household survey conducted by the government in 2003-2004 showed that 54.4 percent of the population is poor, with a higher poverty rate in rural area of 63.3 percent (herfon, 2006). the incidence of poverty in nigeria is widespread and increasing with some of the worst poverty linked health indicators in africa. there has been a sharp increase in poverty from 1992 to 1996, with an estimated third of the population living below $1 per day and nearly two thirds below $2 per day (fmoh, 2005). some of the factors that affect the overall performance of the health system include; inadequate health facilities/structure, poor human resources and management, poor remuneration and motivation, lack of fair and sustainable health care financing, unequal economic and political relations, the neo-liberal economic policies of the nigerian state, corruption, illiteracy, very low government spending on health, high out-of-pocket expenditure in health and absence of integrated system for disease prevention, surveillance and treatment, inadequate mechanisms for families to access health care, shortage of https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 239 | p a g e essential drugs and supplies and inadequate supervision of health care providers are among some of the persistent problems of the health system in nigeria. health workers’ behaviour health workers’ behaviour is a critical area of study within healthcare, as it significantly impacts patient outcomes, team dynamics, and overall healthcare delivery. this literature review synthesizes findings from recent studies focusing on the personality traits, behaviour styles, and emotional intelligence of health professionals, which are essential components influencing their behaviour in clinical settings (clark et al. 2020). the determinants of health workers’ behaviour (in the workplace) are rooted in factors relating to: a) macro level, or the overall health system, such as resource allocation, planning and deployment of health workers, current regulatory framework, communication and decision-making processes, and accountability mechanisms. these can be influenced by policy-makers and planners in the health sector, as well as other stakeholders at national level, such as the ministry of finance, ministry of education, professional associations, civil society groups and funding agencies (health systems level). b) micro level, or the workplace itself (district or facility, etc.), such as availability of equipment, drugs and supplies, teamwork and human resources management activities. in principle, these can be influenced by local managers, colleagues, patients, and other local partners (health facility level). c) individual characteristics and living circumstances, such as living in conflict areas or being a woman or a newly graduated professional. these require specific group strategies and can be developed locally by managers or nationally by policy-makers and planners together with other stakeholders (individual level). interventions are designed based on an analysis of the determinants that influence health workers’ performance. implementation of these interventions (inputs and process) provides outputs (expected results) in terms of improved working conditions, improved motivation, improved staff retention, etc. employees’ capacity highly skilled physicians, nurses, administrators, and ancillary staff are critical to producing highquality outcomes and effective quality improvement hence hospital growth (argote, 2000). there is need for selective hiring of qualified staff. successful recruitment and retention of staff is tied to empowerment of staff that must be treated as full partners in the hospital operation and given opportunities for advancement (brown and duguid, 2003). the hospitals need to place great emphasis on recruiting and retaining top-level physicians and nurses, accompanied by an effort to encourage these professionals to form working teams, including case managers, pharmacists, social workers, and others, to promote quality (brown and duguid, 2003). https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 240 | p a g e to facilitate service quality and growth, hospitals must implement effective human resource strategies involving selective hiring, and retention of physicians and nurses (cohen and levinthal, 2001); monitoring of doctors on staff (or with privileges) and ensuring that they must continue to meet certain performance and practice standards to retain credentials (crewson, 2004). to improve efficiency in service delivery, public sector hospitals must build the capacity to o attract and employ an adequate number of high-quality nurses (argote and ingram, 2000) suggests that the key to service delivery is to adapt to circumstances that are constantly changing and that the long-term winners are the best adapters, but are not necessarily the winners of today’s race for market share. hospitals quality of service often fails because of the sum total of seemingly inconsequential events arising from employees lack of capacity as in itself service delivery requires specific skill levels and experience which must be continuously learned (cohen and levinthal, 2001). technology technology for harnessing of information and data play a critical role in the quality service delivery in hospitals (allen, 2001). investments in technology that facilitate service assessment and improvement process is essential (dutton and starbuck, 2002). the hospital must show four main commitments: a willingness to invest in information technology; investments in information technology and in quality insurance departments with qualified staff that abstract medical records, analyze data, and facilitate the quality insurance process (cibulskis and hiawalyer, 2002). according to the government of kenya (2001) report, successful technology strategy that needs to be employed by hospitals and this must involve four main commitments: a willingness to invest in information technology, working with physicians and others to customize an information system to meet specific needs and culture of the institution; nurturing and encouraging buy-in so new systems will be utilized and their benefits will be realized and devising information technology systems that provide real-time feedback to providers as they are caring for patients. 3. methodology the study adopted descriptive survey approach in collecting data from the respondents. the descriptive survey method was preferred because it ensures complete description of the situation, making sure that there was minimum bias in the collection of data and finding out the what, where and how of a phenomenon (kothari, 2008). data was gathered by use of closed and open ended questionnaires, which were self administered. the information required for the study is obtained directly from the target population. data from questionnaires was analyzed using the descriptive statistics and chisquare statistical method which offers extensive data handling capabilities and numerous statistical analysis routines that can analyze small to very large data statistics. 4 analysis of questionnaire return https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 241 | p a g e a total of ninety (90) questionnaires were distributed out of which ninety (90) were returned in usable form as shown in table 4.1 below. the result demonstrates that one hundred copies of the completed questionnaire were found useable giving a response rate of approximately 100 per cent. table 4.1: questionnaire return source: field survey, 2014 4.2 demographic and data analysis the results in table 4.2 below showed that 69 out of 90 respondents are male and this gives 76.7% of the whole respondents while 21 out of 90 respondents are female and this constitutes 23.3% of the total respondent. we can then conclude that there were more male than female respondents in the research study. 21 out of 90 respondents were single and it gives 23.3% of the total respondents, 51 out of 90 respondents were married and this gives 56.7% of the whole respondents while 18 out of 90 respondents were divorced/separated and this represent 20.0% of the total respondents. therefore we can then conclude from the analysis that there are more married than single respondents in the research study. the result above revealed that 11 out of 90 respondents were below the age 25 and this represent 12.2% of the whole respondents, 57out of 90 respondents were between the age 25-35 years and this constitutes 63.3% of the total respondents, 20 out of 90 respondents are between the age 36-45 years and this represent 22.2% of the total respondents while only two respondent were 46 years and above (2.2%). therefore, we can then conclude that there are more respondents between the ages 25-35 years in the research study followed by 36 to 45. the populations were made up of 29 (32.2%) doctors, 17 (18.9%) nurses, 18 (20.0%) clinical officers, 14 (15.6%) laboratory scientists/technicians and 12 (13.3%) pharmacists. variables frequency percentage % questionnaires returned 90 100.0 questionnaire not returned 0 0 total 90 100.0 https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 242 | p a g e table 4.2: characteristics of respondents variables frequency percentage (%) sex male female total marital status single married divorced/separated total age group below 25 years between 25-35 years between 36-45 years 46 and above total job category doctors nurses clinical officers lab. scientists/technicians pharmacist total 69 21 90 21 51 18 90 11 57 20 2 100 29 17 18 14 12 90 76.7 23.3 100.0 23.3 56.7 20.0 100.0 12.2 63.3 22.2 2.2 100.0 32.2 18.9 20.0 15.6 13.3 100.0 source: field survey, 2014 4.3 analysis of research questions (sastrongly agree, a -agree, sdstrongly disagree, ddisagree) table 4.3: results of the respondents views on the research questions https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 243 | p a g e propositions responses frequency percentage (%) state house clinic abuja offers quality medical laboratory services employee’s incompetence affects service quality in the public health sector staff are usually sent for training programme. there is high level of technology investment state house clinic abuja the communication channel used at state house clinic abuja is very effective the working conditions in state house clinic abuja are adequate enough for workers to be able to give their best sa a sd d sa a sd d sa a sd d sa a sd d sa a sd d sa a sd d sa a sd 75 15 90 70 5 15 49 17 20 4 54 15 21 55 20 5 10 55 35 83.3 16.7 100.0 77.8 5.5 16.7 54.4 18.9 22.2 4.4 60.0 16.7 23.3 61.1 22.2 5.6 11.1 61.1 38.9 https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 244 | p a g e the type of communication channel used at state house clinic abuja lead to patient’s satisfaction medical tests and nature of treatment were clearly explained in the hospital there is a high level of financial resource allocation for the clinic there is high quality level of health services provided in the clinic quality medical laboratory services has a positive effect on workers’ productivity d sa a sd d sa a sd d sa a sd d sa a sd d 90 33 57 63 6 21 90 50.0 36.7 63.3 70.0 6.7 23.3 100.0 source: field survey, 2014 all (100%) of the respondents indicated that state house clinic abuja offers quality medical laboratory services; employee’s incompetence affects service quality in the public health sector; quality medical laboratory services has a positive effect on workers’ productivity; the type of communication channel used at state house clinic abuja lead to patient’s satisfaction; there is a high level of financial resource allocation for the clinic. they also agreed that medical tests and nature of treatment were clearly explained in the hospital. this is concurred with rust and tuck (2006) who stated that designing services to be user friendly will simultaneously facilitate consumer use and external communication as to what the service delivery system is actually able to provide the customers. majority (83.3%) of the https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 245 | p a g e respondents indicated that the workers are usually sent for training programmes and workshops while a few (16.7%) of the respondents were of contrary opinion. on the level of technology in the state house clinic, majority (73.3%) of the respondents indicated that there was high level of technology investment while a few (26.6%) of the respondents indicated that there was low level of technology investment. majority (76.7%) of the respondents agreed that the communication channel used at state house clinic abuja was very effective while (23.3%) of the respondents disagreed. this concurred with payne (2006) who indicated that through communication patients’ access to treatment, participation in preventive measures, ability to obtain consent, improve health professionals abilities to meet their ethical obligations, quality of care, including, hospital admissions, diagnostic testing, medical errors, patient follow-up, quality of mental health care and patient safety. 83.3% of the respondents agreed that the working conditions in state house clinic abuja are adequate enough for workers to be able to give their best while 16.7% of the respondents were of contrary opinion. 4.4 test of hypotheses chi – square is given as: x² = σ (o – e)² e where x² = chi – square o = observed frequency e = expected frequency σ = summation of the frequency. decision rule: reject null hypothesis if calculated value of (x²) is greater than the critical value and accept null hypothesis if calculated value of (x²) is less than the critical value. the degree of freedom = (n 1) (k 1) where df = degree of freedom n = number of rows k = number of column. 4.4.1 hypothesis one h01: employees’ capacity has no influence on the provision of quality medical laboratory quality services. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 246 | p a g e table 4.4: chi-square table on the influence of employees’ capacity on the provision of quality medical laboratory services options 0i ei 0i-ei (0i-ei)2 (0i-ei)2 ei strongly agree 41 18 23 529 29.40 agree 30 18 12 144 8.00 undecided 5 18 -13 169 9.39 disagree 9 18 -9 81 4.50 strongly disagree 5 18 -13 169 9.39 total 90 90 0 1092 60.68 source: computed from data, 2014 calculated (x2) = ∑ (o – e)2 = 1092 = 60.6 e 18 degree of freedom “d.o.f” = n – 1 where n = number of rows therefore, d.o.f = 5 – 1 = 4. tabulated (x2) = at 0.05% level of significance, the tabulated value of x2 for 4 degrees of freedom is 9.488 decision: since the calculated x2 (60.6) is greater than the tabulated x2 (9.488), we reject the null hypotheses (h0) and accept the alternative hypotheses (ha). this indicated employees’ capacity has an influence on the provision of quality medical laboratory services. this concurred with argote, (2000) who stated that highly skilled physicians, nurses, administrators, and ancillary staff are critical to producing high-quality outcomes and effective quality improvement hence hospital growth. 4.4.2 hypothesis two h02: adoption of technology has no effect on quality medical laboratory service delivery. table 4.5: chi-square table on the effect of adoption of technology on quality medical laboratory service delivery options 0i ei 0i-ei (0i-ei)2 (0i-ei)2 ei strongly agree 36 18 18 324 18.00 agree 35 18 17 289 16.06 undecided 9 18 -9 81 4.50 disagree 5 18 -13 169 9.39 strongly disagree 5 18 -13 169 9.39 total 90 90 0 1032 57.34 https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 247 | p a g e source: computed from data, 2014 a. 0 cells (.0%) have expected frequencies less than 5. the minimum expected cell frequency is 18. decision rule: reject h0, where x2 calculated is greater than x2 tabulated, otherwise, accept ha. calculated (x2) = ∑ (o – e)2 = 1032 = 57.3 e 18 degree of freedom “d.o.f” = n – 1 where n = number of rows therefore, d.o.f = 5 – 1 = 4. tabulated (x2) = at 0.05% level of significance, the tabulated value of x2 for 4 degrees of freedom is 9.488 decision: since the calculated x2 (57.3) is greater than the tabulated x2 (9.488), we reject the null hypotheses (h0) and accept the alternative hypotheses (ha). this indicated that the adoption of technology in state house clinic abuja has a significant effect on quality medical laboratory service delivery. the findings concurred with mills (2001) who found that devising information technology systems provided real-time feedback to providers as they were caring for patients, through technology, the hospital would be in a position of offering bar-coded medications and automatic dispensing; coordinating patient admissions with bed capacity, immediate tracking of filled beds and daily changes in nursing needs. adoption of technology enable the workers to employ a wide range of complex modern scientific techniques to carry out a varied, highly practical and analytical test on blood, body fluids and other biological materials including tissue samples leading to prompt diseases diagnosis and treatment of patients as well improve the capability and productivity of the workers. 5. conclusion from the findings, the study concluded that organization must enhance employee’s capacity in order to improve provision of quality service which in turn increases workers productivity. adequate number of high skilled and experienced employees must be employed continuously, ineffective recruitment must be discouraged, monitoring of doctors and other staff must be encouraged to ensure that performance and practice standards are met to enhance quality service provision. this would lead to proper medication services, patient satisfaction, good relationship between medical providers and patients, enable the participation in multi-disciplinary and attracts more patient hence effective improvement of hospital growth. from the findings, the study concluded that the health sector should improve the level of adoption of technology and willingness to invest and advance in modern technology in order to facilitate service assessment, improve process and communication which are essential for effective and efficient quality service in public health sector in nigeria. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 248 | p a g e recommendations the nigerian government in an attempt to improve its public healthcare system has been in the processes of drafting various health policies. 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(2006). country status report for nigeria. nigeria debt management office report as quoted by world bank. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com http://www.cedc.ro/media/msd/papers/volume%204%20no%201%202012/msd_4.pdf http://www.who.int/whr/2006/en/ american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 61 | p a g e the relationship between corporate tax avoidance and financial performance in nigerian multinational companies 1onah, kelvin amobi, 2ojeh augustine, ph.d., fca, 3geoffrey ndubuisi udefi ph.d. and 4festus ndubuisi nkwo 1department of accountancy, faculty of business administration, university of nigeria, enugu campus, nigeria 2department of accountancy, faculty of management sciences, enugu state university of science and technology esut, enugu state, nigeria. 3department of accountancy, faculty of management sciences, alex ekwueme federal university ndufu-alike (ae-funai), ebonyi state, nigeria. 4department of accountancy, gregory university uturu, abia state, nigeria. doi: https://doi.org/10.5281/zenodo.15728660 abstract: this study examined the relationship between corporate tax avoidance and the financial performance of multinational companies operating in nigeria. survey data collected from 189 respondents revealed that tax avoidance practices are widely adopted, with nearly 60% of companies frequently engaging in such strategies. most respondents reported that tax avoidance positively impacts profitability, particularly improving key financial indicators such as return on equity and return on assets. however, there was also a strong awareness of the potential long-term financial risks, with over 70% perceiving moderate to very high risk from continuous use of tax avoidance. opinions on the effect of tax avoidance on long-term sustainability were mixed, with nearly half viewing it as positive and a significant minority indicating negative implications. these findings suggest that while tax avoidance remains an important financial tool, nigerian multinational firms must carefully weigh immediate benefits against long-term sustainability challenges. the study recommends enhanced governance, balanced tax planning, and proactive engagement with regulatory authorities to foster responsible tax strategies. keywords: corporate tax avoidance, financial performance, multinational companies, nigeria, tax planning strategies 1. introduction corporate tax avoidance has become an increasingly debated issue in nigeria, particularly among multinational companies (mncs) that operate across borders and exploit differences in tax regimes to reduce their obligations. nigeria has historically suffered from significant revenue losses due to mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 62 | p a g e aggressive tax planning and base erosion practices by large corporations (jim-suleiman & ibiamke, 2021). through mechanisms such as thin capitalization, excessive interest deductions, and strategic transfer pricing, mncs minimize their tax liabilities while maintaining profitability, often at the expense of the host country's fiscal sustainability (olugbenga, 2023). the proliferation of tax avoidance among mncs has also raised concerns about its implications for financial performance. some studies suggest that firms engaging in tax planning may report improved short-term profitability due to reduced tax expenses (agboola, yusuf & yusuf, 2023). in contrast, other scholars argue that aggressive tax practices can increase regulatory scrutiny and damage corporate reputation, which may ultimately affect long-term financial outcomes (okoro & ezeonu, 2024). this duality has generated debate over whether corporate tax avoidance leads to enhanced financial performance or creates hidden liabilities that impair firm value. nigeria has implemented reforms such as the finance act and adopted oecd guidelines on transfer pricing to curtail these practices. yet, loopholes still persist, especially regarding inter-company transactions where mncs shift profits through royalty and service payments (ogunoye, ibitoye & kleynhans, 2023). a detailed empirical study using nigerian customs and tax data confirmed that a 1% increase in hypothetical tax on outbound payments resulted in a 0.71% increase in reported domestic profits, underscoring how tax policies influence profit reporting behavior (gabanatlhong et al., 2024). there is growing interest in assessing whether corporate tax avoidance translates into tangible financial benefits for nigerian mncs. book-tax differences, tax-to-assets ratios, and effective tax rates are commonly used proxies to evaluate the extent of tax avoidance and its link to firm performance metrics such as return on assets or tobin’s q (adegbite & bojuwon, 2019). however, research findings remain inconclusive. for instance, while agboola et al. (2023) found a positive association, oghenekaro and ogheneovo (2024) reported an insignificant impact of tax avoidance on firm value. moreso, corporate governance plays a mediating role in this relationship. effective governance structures, particularly audit committees and independent boards, can constrain excessive tax avoidance and promote ethical financial conduct (okoro & ezeonu, 2024). as nigerian regulatory frameworks continue to evolve, it becomes essential to re-examine the dynamics between tax avoidance strategies and financial performance, especially in multinational corporations that dominate key sectors of the economy. statement of the problem ideally, multinational corporations are expected to fulfill their tax obligations responsibly while simultaneously enhancing their financial performance through efficient business operations. in such a balanced environment, compliance with tax regulations should coexist with strategic financial growth, allowing companies to contribute meaningfully to national development without compromising profitability. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 63 | p a g e however, in practice, many multinational companies operating in nigeria engage in aggressive tax avoidance strategies. these include mechanisms such as transfer pricing manipulation, excessive intragroup service charges, and thin capitalization. such practices allow firms to shift profits across borders, reducing their tax burdens in nigeria. while these methods may improve short-term financial outcomes by reducing tax expenses, they raise concerns about the fairness, transparency, and sustainability of corporate financial practices. furthermore, there is growing uncertainty about whether such avoidance practices genuinely enhance financial performance or merely create short-lived advantages that carry long-term risks. if these problems are not addressed, nigeria will continue to experience significant revenue losses, weakening public service funding and widening the tax burden gap between multinationals and local firms. it may also lead to regulatory instability, increased scrutiny from tax authorities, and damage to investor confidence. moreover, companies relying heavily on tax avoidance may face future financial instability if tax policies change or sanctions are imposed, ultimately affecting their long-term sustainability and reputational standing. objectives of the study the primary purpose of this study the relationship between corporate tax avoidance and financial performance in nigerian multinational companies. the specific objectives of the study are to: i. to examine the extent to which corporate tax avoidance practices are adopted by multinational companies operating in nigeria. ii. to assess the relationship between corporate tax avoidance and the financial performance of nigerian multinational companies. iii. to evaluate the potential long-term financial implications of corporate tax avoidance strategies on the sustainability of multinational firms in nigeria. research questions the study provided answers to the following research questions. i. to what extent do multinational companies operating in nigeria engage in corporate tax avoidance practices? ii. what is the relationship between corporate tax avoidance and the financial performance of nigerian multinational companies? iii. what are the long-term financial implications of corporate tax avoidance strategies on the sustainability of multinational companies in nigeria? statement of hypotheses the following hypotheses in null form (h0) guided this study i. there is no significant extent of corporate tax avoidance practices among multinational companies operating in nigeria. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 64 | p a g e ii. there is no significant relationship between corporate tax avoidance and the financial performance of nigerian multinational companies. iii. corporate tax avoidance strategies have no significant long-term financial implications on the sustainability of multinational companies in nigeria. definition of terms the following terms operationalized the study: i. corporate tax avoidance: corporate tax avoidance refers to the use of legally permitted strategies by companies to minimize their tax obligations. these strategies often involve exploiting loopholes, tax reliefs and mismatches in international tax systems, or deferred tax payments. although legal, aggressive forms of tax avoidance can raise ethical concerns and attract regulatory scrutiny. ii. financial performance: financial performance denotes a company's overall financial health and its ability to generate profit from its operations. it is typically evaluated using financial metrics such as return on assets (roa), return on equity (roe), net profit margin, and earnings per share. a strong financial performance indicates effective management and operational efficiency. iii. multinational companies (mncs): multinational companies are large business entities that operate in multiple countries through subsidiaries, branches, or joint ventures. in the nigerian context, these are companies with a global presence but significant operational footprints in nigeria. mncs are often involved in cross-border financial transactions, which can impact how taxes are assessed and paid. iv. tax planning strategies: tax planning strategies involve forward-looking decisions and structuring of business activities to lawfully reduce tax liability. common methods include the use of tax incentives, capital allowances, reinvestment reliefs, and income shifting. when used moderately, they align with national tax laws; however, when abused, they border on avoidance or evasion. v. sustainability of firms: sustainability of firms refers to their ability to operate profitably over the long term while maintaining legal compliance, social responsibility, and environmental stewardship. in the context of tax practices, sustainability emphasizes transparency and responsible financial behavior that preserves stakeholder trust and corporate longevity. vi. agency conflict: agency conflict arises from the separation of ownership and control in corporate structures. managers (agents) may make decisions—such as adopting aggressive tax strategies—that serve their personal interests (e.g., meeting performance targets) rather than maximizing shareholder (principal) value. this misalignment can threaten firm performance and accountability. vii. tax compliance: tax compliance is the degree to which a company conforms to tax laws by accurately calculating, reporting, and remitting taxes to relevant authorities within required timelines. low compliance can result in penalties, while high compliance reflects good governance and contributes to national development. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 65 | p a g e viii. earnings management: earnings management is the deliberate manipulation of financial statements by company executives to influence reported earnings. this can be done to meet investor expectations or disguise the effects of tax avoidance. it often involves judgment in areas such as revenue recognition or expense deferral. ix. transfer pricing: transfer pricing involves setting prices for goods, services, or intellectual property exchanged between related entities across different tax jurisdictions. mncs may use transfer pricing to shift profits to low-tax countries, thereby minimizing their overall tax burden. although regulated, it remains a widely scrutinized practice by tax authorities. x. effective tax rate (etr): the effective tax rate is a key measure of a company’s tax burden, calculated as the ratio of income tax expense to pre-tax income. a consistently low etr may signal aggressive tax avoidance, especially if it diverges significantly from the statutory tax rate. it is commonly used in empirical tax research. 2. literature review conceptual review concept of corporate tax avoidance corporate tax avoidance refer to legal strategies and methods employed by individuals or corporations to minimize their tax liabilities by exploiting gaps and loopholes within tax laws. unlike tax evasion, which is illegal, tax avoidance involves using legitimate means to reduce the amount of taxes owed (lanis & richardson, 2017). these practices often include complex arrangements such as transfer pricing, profit shifting, and the use of tax havens or low-tax jurisdictions to move taxable income away from higher-tax countries (johannesen & zucman, 2017). multinational corporations, in particular, utilize these techniques to optimize their global tax burdens, leveraging differences in tax rates and regulations across countries. one of the most prevalent tax avoidance strategies is the manipulation of transfer pricing, where transactions between related entities in different jurisdictions are priced to shift profits to countries with more favorable tax regimes (cristea & nguyen, 2018). this can significantly erode the tax base of high-tax jurisdictions, undermining their revenue collection efforts. additionally, aggressive tax planning structures, such as the use of hybrid entities or intangible asset licensing, enable companies to further reduce taxable income legally (brauner, 2020). these practices highlight the challenges tax authorities face in tracking and regulating cross-border tax flows. the rise of digitalization and globalization has amplified opportunities for tax avoidance, as companies can now operate virtually anywhere and allocate profits to low-tax jurisdictions without significant physical presence (palan, 2019). this phenomenon has drawn considerable attention from policymakers and international organizations seeking to reform global tax rules. initiatives such as the oecd’s base erosion and profit shifting (beps) project aim to curtail aggressive tax avoidance by promoting transparency and harmonizing tax regulations among countries (oecd, 2019). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 66 | p a g e despite being legal, tax avoidance practices have sparked debates around ethics and corporate social responsibility. critics argue that while companies may legally minimize tax payments, such practices can reduce government revenues needed for public goods and services, thereby affecting social equity (hanlon & heitzman, 2017). consequently, some jurisdictions have introduced stricter anti-avoidance rules and disclosure requirements to ensure greater accountability and curb excessive tax avoidance. in summary, tax avoidance practices represent sophisticated and evolving techniques that exploit legal tax frameworks to reduce tax obligations. while they are legal, these practices pose significant challenges to tax authorities globally and raise important questions about the balance between tax planning, regulatory oversight, and corporate responsibility. ongoing reforms and international cooperation remain critical to addressing the complexities of tax avoidance in an increasingly interconnected global economy. financial performance financial performance refers to the measure of a firm’s ability to generate revenues, manage costs, and produce profits over a specific period, reflecting its overall economic health and efficiency. it encompasses various quantitative metrics such as profitability ratios, return on assets (roa), return on equity (roe), liquidity ratios, and market valuation indicators (alotaibi & al-homaidi, 2021). these metrics enable stakeholders, including investors, creditors, and management, to assess how well an organization utilizes its resources to achieve financial goals and create shareholder value. the evaluation of financial performance is multifaceted, incorporating both accounting-based measures and market-based indicators. accounting-based measures focus on internal efficiency, examining earnings, cash flow, and asset management, whereas market-based measures consider investor perceptions through stock prices and market capitalization (akanbi & olamide, 2018). this dual approach provides a comprehensive view of a firm’s operational effectiveness and market standing. financial performance is influenced by internal factors such as corporate governance, management efficiency, capital structure, and investment decisions, as well as external factors including economic conditions, industry competition, and regulatory environments (wang & sarkis, 2017). for instance, sound corporate governance practices have been linked to improved financial outcomes by reducing agency problems and enhancing transparency (fatoki, 2020). similarly, strategic financial management, including prudent capital allocation and cost control, directly contributes to superior financial results. in recent years, the incorporation of environmental, social, and governance (esg) criteria has emerged as a significant factor affecting financial performance. firms that adopt sustainable practices often experience improved risk management, enhanced reputation, and better access to capital, which positively impact their financial outcomes (eccles, ioannou, & serafeim, 2017). this integration of mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 67 | p a g e sustainability considerations aligns financial performance with long-term value creation and stakeholder expectations. moreover, the dynamic nature of global markets necessitates continuous monitoring and adaptation of financial strategies to maintain competitive advantage. firms must navigate challenges such as technological disruption, volatile markets, and changing consumer preferences, all of which bear on financial performance (kaufmann & gaeckler, 2021). as such, robust financial performance assessment supports informed decision-making, enabling firms to sustain growth and resilience in uncertain environments. tax planning strategies tax planning strategies refer to the deliberate and systematic approach employed by individuals and firms to structure their financial affairs in ways that minimize tax liabilities within the legal framework. these strategies are designed to optimize tax efficiency by leveraging allowable deductions, exemptions, credits, and timing of income or expenses, thereby enhancing after-tax profitability and cash flow (armstrong, blouin, & larcker, 2018). effective tax planning requires an in-depth understanding of tax laws and regulations, as well as the strategic use of financial instruments and organizational structures to achieve tax advantages while ensuring compliance with governing tax codes. at the corporate level, tax planning strategies encompass a wide range of techniques including income shifting, transfer pricing, tax deferral, and the use of tax havens or offshore entities to exploit differences in tax jurisdictions (wilson, 2020). multinational enterprises often engage in sophisticated tax planning by structuring intercompany transactions and capital flows to minimize consolidated tax burdens globally, a practice that has attracted considerable regulatory scrutiny and calls for international tax reforms (dharmapala, 2017). furthermore, firms integrate tax planning into their broader financial and operational strategies to maintain competitiveness and maximize shareholder value. the adoption of tax planning strategies is influenced by several factors including corporate governance, risk tolerance, industry norms, and the complexity of tax regulations (chen, chen, cheng, & shevlin, 2019). firms with strong governance frameworks tend to engage in tax planning that balances tax savings with reputational risks, avoiding aggressive practices that could lead to penalties or negative public perception (hanlon & heitzman, 2017). additionally, advances in digital technology and data analytics have enhanced the capability of tax professionals to design and implement more precise and dynamic tax planning strategies. recent research emphasizes the evolving landscape of tax planning amid global efforts to enhance transparency and combat tax avoidance, such as the oecd’s base erosion and profit shifting (beps) initiatives and the introduction of global minimum tax regimes (cobham, janský, & meinzer, 2019). these developments necessitate more sophisticated and compliant tax planning approaches that anticipate regulatory changes and incorporate sustainable tax practices. consequently, firms mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 68 | p a g e increasingly focus on aligning tax planning with corporate social responsibility and ethical considerations to build stakeholder trust. in summary, tax planning strategies represent a critical element of financial management that requires a careful balance between tax optimization and regulatory compliance. the strategic application of these practices supports corporate growth, cash flow management, and competitive positioning in complex fiscal environments, while ongoing reforms continue to reshape the boundaries within which tax planning operates (desai & dharmapala, 2020). theoretical review this study was theoretically underpinned on agency theory. it was developed by jensen and meckling (1976), examines the relationship between principals (owners or shareholders) and agents (managers). it highlights the potential conflicts of interest that occur when managers (agents), who are hired to run the company on behalf of shareholders (principals), may act in their own self-interest rather than maximizing shareholder value. this misalignment can lead to decisions that benefit managers personally but may not be optimal for the company or its owners. relevance of the study i. agency theory helps explain why managers of nigerian multinational companies might engage in corporate tax avoidance practices—to maximize personal gains, bonuses, or short-term firm performance. ii. it draws attention to potential conflicts between managers' incentives and shareholders’ interests, which is crucial in understanding the adoption of tax avoidance strategies. iii. the theory provides a framework to assess how tax avoidance affects firm financial performance by linking managerial decisions to outcomes for shareholders. iv. it underlines the importance of governance mechanisms to align managerial actions with shareholder goals, relevant for evaluating the sustainability of tax avoidance strategies. v. insights from the theory can help recommend better regulatory and internal controls to mitigate excessive risk-taking in tax practices. empirical review eze, nnado and nwankwo (2024), in their study titled tax sheltering and corporate investment expenditure of listed financial firms in nigeria, investigated how tax sheltering influences corporate investment expenditure. utilizing data from 20 listed financial firms between 2012 and 2022, the study employed the panel corrected standard errors (pcse) model. findings revealed that the effective tax rate negatively and significantly affected investment expenditure, while tax savings positively influenced it. the book-tax difference showed no significant impact. the study concluded that tax sheltering could foster business growth when tax savings are reinvested into capital expenditure. irokwe and john-akamelu (2023) conducted a study titled corporate social responsibility and tax avoidance: empirical evidence from quoted consumer goods firms. the research aimed to examine mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 69 | p a g e the effect of corporate social responsibility (csr) disclosure on tax avoidance among 21 manufacturing firms listed on the nigerian exchange group from 2011 to 2019. using the panel estimated generalised least squares (egls) technique, the study found that csr disclosure had a significant effect on the effective tax rate but no significant effect on the book-tax difference. the authors suggested that csr activities might influence a firm's tax strategies. adewole, kehinde and adeniyi (2024), in their article effects of corporate governance on corporate tax avoidance of selected deposit money banks in nigeria, explored how corporate governance mechanisms affect tax avoidance. the study analyzed data from selected deposit money banks and found that certain governance structures significantly influenced tax avoidance behaviors. the authors emphasized the role of effective corporate governance in mitigating aggressive tax strategies. egbunike, gunardi, ugochukwu, and hermawan (2021) examined the impact of internal corporate governance mechanisms on corporate tax avoidance in nigeria through their study titled internal corporate governance mechanisms and corporate tax avoidance in nigeria: a quantile regression approach. utilizing a quantile regression model, the study analyzed data from nigerian firms and found that internal governance mechanisms, such as board size and audit committee effectiveness, had varying impacts on tax avoidance across different quantiles. the findings suggest that the influence of governance structures on tax avoidance is not uniform across all firms. olabisi, kajola & murtala (2023) conducted a study titled corporate social responsibility and corporate tax avoidance: evidence from nigerian banks. analyzing data from listed deposit money banks in nigeria, the study found that corporate social responsibility exerts a significant effect on corporate tax avoidance of the sample deposit money banks in nigeria. the authors concluded that corporate social responsible could enhance help curb corporate tax avoidance. adegbite and bojuwon (2019), in their study titled corporate tax avoidance practices: an empirical evidence from nigerian firms, investigated the extent and drivers of tax avoidance among nigerian companies. using panel data from 2006 to 2017 for firms listed on the nigerian stock exchange and employing regression techniques, the study found that thin capitalisation, profitability, and transfer pricing were significantly associated with corporate tax avoidance. the authors concluded that multinational firms tend to structure operations strategically to minimise tax liabilities, often leveraging these financial attributes. yahaya and yusuf (2020), in their article impact of company characteristics on aggressive tax avoidance in nigerian listed insurance companies, employed an ex-post facto research design to study 20 randomly selected insurance companies over the period 2010–2018. the study applied a two-step system generalized method of moments (gmm) estimation. their findings indicated that firm size and leverage positively influenced aggressive tax avoidance, while profitability and firm age had a negative and significant impact. this suggests that younger, more profitable firms are less aggressive in their tax strategies compared to larger, leveraged ones. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 70 | p a g e oghenekaro and ogheneovo (2024), in their recent study titled effect of tax avoidance on firm value of selected quoted companies in nigeria, analysed data from 177 firms listed on the nigerian exchange group. the research employed secondary data analysis focusing on deferred tax, tax credit, employee benefits, and dividend distribution. their results revealed that employee benefits had a significant positive effect on firm value, while deferred tax and tax credit were not statistically significant. these findings imply that not all tax avoidance mechanisms enhance firm valuation. shittu, alagbe, and jimoh (2024), in their work corporate tax avoidance, free cash flow, and real earnings management: evidence from nigeria, explored the association between tax avoidance and earnings manipulation in 58 non-financial firms over the 2010–2021 period. using panel data and generalized method of moments (gmm), the study found that tax planning had a positive and significant effect on real earnings management, whereas corporate tax avoidance had a negative and significant impact. additionally, firm size positively influenced earnings management, while leverage showed a negative association. 3. methodology research design the study adopted a survey research design to investigate the relationship between corporate tax avoidance and financial performance in nigerian multinational companies. this design was appropriate as it allowed the researcher to obtain data directly from respondents in their natural work environments using structured instruments. the survey method supported the quantitative orientation of the study and facilitated the collection of standardized data suitable for statistical analysis. area of study the research was conducted in lagos state, nigeria, recognized as the commercial hub of the country and home to the headquarters of many multinational corporations. this setting provided access to professionals directly involved in financial and tax management in multinational enterprises, ensuring that data gathered were relevant and grounded in real-world practices. population of the study the population consisted of financial managers and tax officers working in nigerian multinational companies. for the purpose of the study, a population size of 360 individuals was assumed, representing financial professionals in various sectors, including telecommunications, oil and gas, and manufacturing. this group was chosen because they possessed firsthand knowledge of corporate tax planning and firm financial outcomes. sample size to determine the sample size, the taro yamane formula was applied: n = n 1+n(e)2 where: mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 71 | p a g e  n = sample size  n = population size (360)  e = margin of error (0.05) n = 360 1+360(0.0025) n = 360 1.9 n = 189 thus, the study used a sample size of 189 respondents selected from the target population. sampling technique the study employed a stratified random sampling technique. multinational companies were first grouped into key sectors such as oil and gas, telecommunications, and manufacturing. then, proportional random samples were drawn from each stratum to ensure equitable representation. this approach enhanced the generalizability of the findings by reflecting sectoral variations within the population. instrument for data collection a structured questionnaire served as the main instrument for data collection. the questionnaire was divided into sections covering demographic information, corporate tax avoidance practices, and firm financial performance indicators. the items were formulated based on existing literature and aligned with the research objectives to ensure data relevance. validity of the instrument to ensure the content validity of the questionnaire, it was reviewed by three academic experts in accounting and taxation. their feedback was incorporated to refine the wording, structure, and clarity of items. the review process confirmed that the instrument adequately captured the constructs intended for measurement. reliability of the instrument a pilot study involving 20 respondents who were not included in the main sample was conducted to test the reliability of the instrument. the internal consistency of the questionnaire items was evaluated using cronbach’s alpha, which produced a reliability coefficient of 0.81. this indicated a high level of internal reliability, deeming the instrument suitable for full-scale deployment. method of data collection data were collected through both questionnaires and structured interviews. the questionnaires were distributed to selected financial and tax professionals, while interviews were conducted with a few respondents to provide additional context and validate the responses. this dual method enhanced data accuracy and provided a richer understanding of the subject matter. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 72 | p a g e method of data analysis the data collected were analyzed using descriptive statistics, including frequencies, percentages, and mean values. findings were presented in frequency tables to show the distribution and trends in the data, thereby offering insights into the extent and implications of corporate tax avoidance on financial performance in nigerian multinational firms. 4. data presentation and analysis table 1: how frequently does your company engage in strategies aimed at minimizing tax liability (e.g., transfer pricing, profit shifting, use of tax havens)? options/responses frequency (n = 189) percentage (%) never 12 6.3% rarely 23 12.2% occasionally 41 21.7% frequently 65 34.4% very frequently 48 25.4% total 189 100% source: field survey, 2025 this table illustrates the respondents' views on the extent to which corporate tax avoidance practices are adopted in their respective multinational companies. a considerable number of respondents (34.4%) indicated that such strategies are frequently implemented, while an additional 25.4% affirmed very frequent use, suggesting that over half of the sampled professionals work in environments where tax avoidance is a routine financial practice. another 21.7% reported occasional engagement with these strategies, showing that even among those not adopting them regularly, the practice is still somewhat present. on the lower end, 12.2% reported rare involvement in tax avoidance activities, and only 6.3% claimed their companies never employ such tactics. these results underscore a widespread presence of corporate tax avoidance mechanisms among multinational firms in nigeria, pointing to its perceived importance in strategic financial management. table 2: to what extent does tax planning influence your company’s financial decisionmaking processes? options/responses frequency (n = 189) percentage (%) not at all 10 5.3% to a small extent 26 13.8% to a moderate extent 49 25.9% to a great extent 58 30.7% to a very great extent 46 24.3% total 189 100% mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 73 | p a g e source: field survey, 2025 this table illustrates the respondents' views on how significantly tax planning influences their company’s financial decision-making. the majority of participants, accounting for 30.7%, stated that tax planning influences decisions to a great extent, followed closely by 25.9% who believed it affects decisions to a moderate extent. an additional 24.3% acknowledged that tax planning has a very great extent of influence, implying that nearly 81% of respondents perceive tax planning as a considerable factor in corporate financial strategy. in contrast, only 13.8% indicated it has a small influence, while a minimal 5.3% reported no influence at all. these findings suggest that tax planning is deeply embedded in the financial management practices of multinational companies in nigeria, with its impact resonating across various levels of strategic financial operations. table 3: in your experience, how has corporate tax avoidance impacted your company’s profitability? options/responses frequency (n = 189) percentage (%) significantly reduced profitability 14 7.4% slightly reduced profitability 22 11.6% no impact 36 19.0% slightly increased profitability 58 30.7% significantly increased profitability 59 31.2% total 189 100% source: field survey, 2025 this table illustrates respondents’ perceptions regarding the impact of corporate tax avoidance on their company’s profitability. most respondents perceived a positive effect, with 31.2% indicating that tax avoidance significantly increased profitability, and 30.7% reporting a slight increase. conversely, 19% of participants felt that tax avoidance had no impact on profitability. a smaller proportion believed that such strategies slightly (11.6%) or significantly (7.4%) reduced profitability. these findings suggest that the majority of multinational companies in nigeria view corporate tax avoidance as a beneficial financial strategy that enhances profitability, though a notable minority also recognize potential negative or neutral effects. table 4: which of the following financial indicators have shown noticeable improvement due to tax avoidance practices? options/responses frequency (n = 189) percentage (%) return on assets (roa) 44 23.3% mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 74 | p a g e return on equity (roe) 53 28.0% net profit margin 40 21.2% earnings per share (eps) 35 18.5% none of the above 17 9.0% total 189 100% source: field survey, 2025 this table illustrates respondents’ views on which financial indicators have shown noticeable improvement due to corporate tax avoidance practices. the largest proportion, 28%, reported that return on equity (roe) improved, followed by 23.3% who identified return on assets (roa) as the main beneficiary. net profit margin and earnings per share (eps) improvements were reported by 21.2% and 18.5% of respondents respectively. only a small minority of 9% felt that none of these indicators showed any noticeable improvement. this distribution suggests that tax avoidance strategies are perceived to enhance key profitability and efficiency metrics within nigerian multinational companies, with roe and roa seen as the most positively impacted. table 5: do you believe that continuous use of tax avoidance strategies poses any longterm financial risk to your organization? options/responses frequency (n = 189) percentage (%) no risk at all 18 9.5% low risk 36 19.0% moderate risk 59 31.2% high risk 50 26.5% very high risk 26 13.8% total 189 100% source: field survey, 2025 this table illustrates respondents’ perceptions of the long-term financial risks associated with continuous use of tax avoidance strategies. the majority of respondents acknowledged some degree of risk, with 31.2% identifying moderate risk and 26.5% perceiving high risk linked to ongoing tax avoidance. additionally, 13.8% considered the risk to be very high. on the other hand, 19% believed the risk was low, while only 9.5% felt there was no risk at all. these results indicate that while tax avoidance is widely practiced, many professionals remain aware of potential long-term financial vulnerabilities that could arise from persistent use of such strategies within multinational firms in nigeria. table 6: how would you rate the effect of corporate tax avoidance on your company’s long-term sustainability? options/responses frequency (n = 189) percentage (%) very negative 24 12.7% mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 75 | p a g e slightly negative 31 16.4% neutral 48 25.4% slightly positive 52 27.5% very positive 34 18.0% total 189 100% source: field survey, 2025 this table illustrates the respondents’ assessment of how corporate tax avoidance affects the long-term sustainability of their organizations. a plurality of respondents, 27.5%, viewed the effect as slightly positive, while 18% considered it very positive, suggesting that nearly half of the participants see tax avoidance as contributing somewhat favorably to sustainability. meanwhile, 25.4% remained neutral on the issue. on the other hand, 16.4% perceived a slightly negative effect, and 12.7% regarded the impact as very negative. these results highlight mixed perceptions about the long-term implications of tax avoidance, with a significant share of multinational companies acknowledging potential benefits but also recognizing possible adverse consequences for sustainable operations in nigeria. 5. summary of findings, conclusion and recommendations summary of findings the following summarizes the key findings: i. the study found that corporate tax avoidance practices are widely adopted among multinational companies operating in nigeria, with nearly 60% of respondents indicating frequent or very frequent engagement in such strategies. this prevalence underscores the strategic importance placed on tax planning as a financial tool within these firms. ii. respondents overwhelmingly agreed that tax avoidance significantly influences their companies’ financial decision-making, with over 80% acknowledging its moderate to very great extent of impact. furthermore, most participants perceived tax avoidance as contributing positively to profitability, highlighting its role in enhancing key financial indicators such as return on equity and return on assets. iii. despite the recognized short-term financial benefits, the data revealed that a majority of respondents perceive moderate to high long-term financial risks associated with continuous tax avoidance strategies. opinions on the impact of tax avoidance on long-term sustainability were mixed, with nearly half viewing it as positive while a significant minority highlighted potential negative consequences, indicating caution among multinational firms regarding the sustainability of aggressive tax planning. conclusion the findings from this study indicate that corporate tax avoidance is a prevalent and influential strategy among nigerian multinational companies, significantly shaping their financial decision-making and enhancing profitability. while tax avoidance practices contribute to improved financial performance mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 76 | p a g e through key indicators such as return on equity and return on assets, there remains a widespread awareness of the potential long-term financial risks associated with these strategies. the mixed perceptions regarding the impact on sustainability suggest that multinational firms recognize both the benefits and the inherent challenges of tax avoidance in the nigerian business environment. consequently, while tax avoidance remains an integral part of corporate financial management, companies must balance its short-term advantages with prudent risk management to ensure long-term organizational viability. recommendations based on the findings of this study, the following recommendations are proposed: i. multinational companies in nigeria should strengthen their internal governance frameworks around tax planning to ensure that tax avoidance strategies comply with regulatory requirements and ethical standards. this includes regular audits and transparent reporting to minimize legal risks and reputational damage while optimizing tax efficiency. ii. firms need to develop tax planning approaches that not only boost immediate profitability but also consider the long-term financial health and sustainability of the organization. integrating risk assessment mechanisms into tax strategies can help mitigate potential negative effects from regulatory changes or public backlash. iii. nigerian multinational companies should proactively engage with tax authorities and policymakers to foster clearer, more consistent tax regulations. this collaboration can reduce uncertainty, help companies align their tax avoidance practices within legal boundaries, and promote sustainable business growth in the nigerian market. references adegbite, t. a., & bojuwon, m. (2019). corporate tax avoidance practices: an empirical evidence from nigerian firms. studia universitatis babeș-bolyai oeconomica, 64(3), 39–53. https://doi.org/10.2478/subboec-2019-0014 adewole, e. a., kehinde, j. s., & adeniyi, a. m. (2024). effects of corporate governance on corporate tax avoidance of selected deposit money banks in nigeria. international journal of research and innovation in social science, 8(8), 3329–3339. https://rsisinternational.org/journals/ijriss/articles/effects-of-corporate-governance-oncorporate-tax-avoidance-of-selected-deposit-money-banks-in-nigeria/ agboola, m. o., yusuf, i., & yusuf, m. a. (2023). corporate tax planning and financial performance of listed manufacturing companies in nigeria. international journal of accounting, finance and administrative research, 5(2), 45–60. https://ijafar.com.ng/index.php/ijafar/article/view/102 mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.2478/subboec-2019-0014 https://rsisinternational.org/journals/ijriss/articles/effects-of-corporate-governance-on-corporate-tax-avoidance-of-selected-deposit-money-banks-in-nigeria/ https://rsisinternational.org/journals/ijriss/articles/effects-of-corporate-governance-on-corporate-tax-avoidance-of-selected-deposit-money-banks-in-nigeria/ https://ijafar.com.ng/index.php/ijafar/article/view/102 american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 77 | p a g e akanbi, o. o., & olamide, s. a. 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(2017). the impact of corporate sustainability on organizational processes and performance. management science, 60(11), 2835–2857. https://doi.org/10.1287/mnsc.2014.1984 egbunike, f. c., gunardi, a., ugochukwu, u., & hermawan, a. (2021). internal corporate governance mechanisms and corporate tax avoidance in nigeria: a quantile regression approach. jurnal ilmiah akuntansi dan bisnis, 16(1), 1–10. https://ojs.unud.ac.id/index.php/jiab/article/view/65863 eze, c. u., nnado, c. i., & nwankwo, p. e. (2024). tax sheltering and corporate investment expenditure of listed financial firms in nigeria. international journal of academic research in public policy and governance, 10(1), 32–50. https://kwpublications.com/papers/detail/ijarppg/7624/tax-sheltering-and-corporateinvestment-expenditure-of-listed-financial-firms-in-nigeria fatoki, o. (2020). corporate governance mechanisms and financial performance of small and medium enterprises in south africa. corporate governance: the international journal of business in society, 20(4), 745–756. https://doi.org/10.1108/cg-09-2019-0291 mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.20525/ijfbs.v7i1.488 https://doi.org/10.3390/jrfm14090430 https://doi.org/10.2139/ssrn.3652017 https://doi.org/10.1257/pol.20160502 https://doi.org/10.1287/mnsc.2014.1984 https://ojs.unud.ac.id/index.php/jiab/article/view/65863 https://doi.org/10.1108/cg-09-2019-0291 american research journal of economics, finance and management volume 13 issue 2, april – june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 78 | p a g e gabanatlhong, b., garcia-bernardo, j., iyika, p., & palansky, m. (2024). profit shifting by multinational corporations: evidence from transaction-level data in nigeria. tax justice network. https://taxjustice.net/reports/profit-shifting-by-multinational-corporations-evidence-fromtransaction-level-data-in-nigeria/ hanlon, m., & heitzman, s. (2017). a review of tax research. journal of accounting and economics, 64(2–3), 121–153. https://doi.org/10.1016/j.jacceco.2017.03.003 irokwe, f. f., & john-akamelu, c. r. (2023). corporate social responsibility and tax avoidance: empirical evidence from quoted consumer goods firms. journal of global accounting, 9(2), 45– 60. https://journals.unizik.edu.ng/index.php/joga/article/view/2073 johannesen, n., & zucman, g. (2017). the end of bank secrecy? an evaluation of the g20 tax haven crackdown. american economic journal: economic policy, 9(1), 65–91. https://doi.org/10.1257/pol.20150202 kaufmann, l., & gaeckler, j. (2021). digital transformation and financial performance: empirical evidence from european companies. journal of business research, 135, 318–326. https://doi.org/10.1016/j.jbusres.2021.06.019 lanis, r., & richardson, g. (2017). the effect of board of director composition on corporate tax avoidance. journal of accounting and public policy, 36(3), 221–238. https://doi.org/10.1016/j.jaccpubpol.2017.01.004 oecd. (2019). oecd/g20 base erosion and profit shifting project: 2019 progress report. oecd publishing. https://doi.org/10.1787/9e8c4b2f-en olabisi, j., kajola, s. o., & murtala, m. a. (2023). corporate social responsibility and corporate tax avoidance: evidence from nigerian banks. international journal of corporate social responsibility, 8(4), 77–92. https://doi.org/10.1007/s40991-023-00146-7 wilson, r. (2020). an examination of corporate tax avoidance and the role of tax havens. journal of accounting and economics, 69(2–3), 101257. https://doi.org/10.1016/j.jacceco.2019.101257 mailto:contact@americaserial.com mailto:contact@americaserial.com https://taxjustice.net/reports/profit-shifting-by-multinational-corporations-evidence-from-transaction-level-data-in-nigeria/ https://taxjustice.net/reports/profit-shifting-by-multinational-corporations-evidence-from-transaction-level-data-in-nigeria/ https://doi.org/10.1016/j.jacceco.2017.03.003 https://journals.unizik.edu.ng/index.php/joga/article/view/2073 https://doi.org/10.1257/pol.20150202 https://doi.org/10.1016/j.jbusres.2021.06.019 https://doi.org/10.1016/j.jaccpubpol.2017.01.004 https://doi.org/10.1787/9e8c4b2f-en https://doi.org/10.1007/s40991-023-00146-7 american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 30 | p a g e regulatory management practices and organisational performance in nigeria’s downstream petroleum sector akeni obaro kingsley department of business administration, delta state university abraka, nigeria email: koakeni2@yahoo.com doi: https://doi.org/10.5281/zenodo.12168184 abstract: this study examined the impact of the regulatory process on organisational performance in nigeria’s downstream petroleum sector. the aims are to investigate the effects of the legislative framework, the monitoring process, and the price-fixing mechanism on organizational performance in nigeria’s downstream petroleum sector. the nigeria downstream sector is the portion of the oil and natural gas industry responsible for refining, distributing, and retailing. this portion of the industry includes oil refineries, petrochemical plants, petroleum products distributors, and natural gas distribution companies. the descriptive survey research design methodology was used. the study's population includes key oil and gas servicing companies operating in downstream activities in nigeria's south-south and south-east regions, such as con oil, rain oil, oando oil and gas, ascon oil and gas, dozzy oil and gas, geo links, and forte oil, as well as their workers. krejcie and morgan's table was used to acquire the 362 samples. a stratified sampling strategy was utilized. both primary and secondary data drove the study. the data were examined utilizing correlation and regression analysis as analytical techniques. the study found that the legal framework (β=.136, p =.001 <.05), monitoring process (β=.259, p =.000 <.05), and price fixing process (β=.075, p =.002 <.05) all had a substantial impact on organisational performance. the study revealed that price fixing has an impact on organizational performance in the oil and gas sector. the research concluded along the road of policy implementation and proposed that legislative framework, monitoring and price fixing should be reasonably applied, consistent and improved, upon systematically to avoid any mismanagement and its antecedent issues. keywords: management strategies, oil and gas, price fixing, legal framework, monitoring introduction every country has its regulatory system for enacting laws, regulations, and rules, as well as a set of review procedures. countries are increasingly implementing regulatory management policies and improving their institutions to ensure that their regulatory management strategies (rms) in the oil mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:koakeni2@yahoo.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 31 | p a g e and gas sector are very successful. regulatory management ('controlling the regulation makers') is a type of meta-regulation that encompasses both regulatory policymaking ('governing regulation developers') and regulatory administration and enforcement ('regulating the wielders of regulatory authority') (mcmahon 2015). according to olujobi, olujobi, and efua (2021), each country has its method for enacting and reviewing laws, regulations, and guidelines. these rms are then integrated into a larger public management system, which functions under the overarching constitutional framework. it is difficult to define exactly what an rms is and how it differs from other systems. there is no formal definition of an rms that sufficiently separates it from the larger public management, public policy, and public law systems within which regulatory management occurs. gill (2011), in his assessment of regulatory management in new zealand, highlighted that structuring will comprise the distribution of authorities, responsibilities, and tasks among the many players. it will consist of both centrally defined and general rules and processes, as well as decentralized and personalized rules and processes." nigeria is ranked ninth in the world regarding oil and gas production capabilities, below iran, and second to none in africa, ahead of angola, libya, and algeria (opec, 2018). the department of petroleum resources (dpr) reports that it imports around 75 million litres of refined petroleum each day. there appears to be an unwritten conspiracy involving only a few individuals from the ruling and running of the state-owned nigerian national petroleum company (nnpc), which has historically grounded nigerian refineries and served as a cog in the petroleum sector's development. the excitement and intensity that normally characterize petroleum debate in nigeria stem from unexplainable deprivations and sufferings of nigerians during plenty and prosperity. nigeria has large petroleum reserves and is a major oil exporter in the organization of petroleum exporting countries (opec). since oil was found in large amounts in nigeria, it has generated billions of dollars in cash, but this has not resulted in any significant economic progress. to solve the challenges plaguing many countries' petroleum sectors, structural reforms have become required, leading to the adoption of deregulation. markets are deregulated, and the government's role in the sector is redefined (state interventions such as preferential treatment of state-owned oil corporations, price restrictions, and monopolies are eliminated). as originally conceived in 2003, deregulation of the nigerian petroleum industry's downstream sector entailed removing government control over petroleum product prices, as well as restrictions on the establishment and operation of refineries, jetties, and depots, while allowing private sector players to participate in petroleum product importation and exportation and leveraging market forces to prevail. the downstream industry operates by converting crude oil into refined and petrochemical goods, as well as treating gas, transporting petroleum products, and selling them. effective leadership and governance are necessary for rapid and sustainable economic growth and development. a country afflicted by inadequate leadership and management, such as nigeria, is certain to face widespread poverty and other socioeconomic ills. bad leadership has afflicted nigeria's downstream industry, with people whose responsibilities and actions have hampered the sector's mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 32 | p a g e expansion. one of the key reasons nigerians oppose full deregulation is because those in positions of power, who are supposed to properly manage the country's natural resources for socioeconomic growth and development, deliberately undermine the sector. leadership responsibilities are critical in all organizations, whether private or public because how well or poorly they are carried out directly affects the company's performance. the notion of leadership is difficult to grasp. as a result, leadership roles are critical to the organization's survival, growth, and achievement of objectives. a leader's responsibilities include decision-making, communication, motivation, selection, and development of others to fulfil objectives or policies. because of the foregoing, the study will investigate the impact of regulatory management practices on organizational performance in nigeria's oil and gas industry. the problem nigeria's oil and gas industry, which accounts for a large portion of the country's foreign income and more than half of its government revenues, is in horrible health. although nigeria's national statistics bureau reported $45.6 billion in income last year, a 46% increase over 2021 levels, those figures conceal a sad truth: nigeria's oil output has been progressively declining in recent years. in april, the nation produced less than 1 million barrels of oil per day, significantly below its opec quota of 1.8 million bpd. so, even though oil prices rose in 2022 because russia invaded ukraine, nigeria's energy business has had a lengthy history of missed opportunities. according to former finance minister zainab ahmed, the entire impact of high pricing has been “nil or negative”. the country's oil output has been hampered by widespread theft and vandalism, as well as decades of underinvestment in infrastructure. as a result, the state-owned oil corporation nnpc cannot reach its output objectives. mele kyari, the chairman of the nnpc, has claimed that government and security officers, as well as religious members, steal up to 600,000 barrels of oil every day. the security situation is so dire that ex-militants oversee the affairs and protect pipelines similarly, official figures suggest that nigerians now consume about 68mn litres of petrol daily, compared with about 49mn in 2015. yet there has not been a commensurate increase in population or economic activity. some believe that the numbers have been fiddled and that oil distributors sell subsidized oil in neighbouring countries at a huge profit. president bola tinubu, the new president, removed subsidies on his first day in office. nigeria's operational environment no longer supports efficient oil production. "vandalism and theft have severely constrained production, causing production shutdowns for months on end," she said, citing disruptions at major export terminals. fractious government agencies and the resulting regulatory ambiguity have also harmed investor trust, and "there's no clarity on who regulates what. “the gas industry is not doing much better. analysts believe that a price ceiling on the domestic market has constrained investment. however, the export market is stronger, particularly since the russia-ukraine crisis has forced the eu to shop for gas all over the world. study objectives 1. examine the effects of legal framework on organisational performance in the oil and gas sector 2. examine the effects of monitoring process on organisational performance in the oil and gas sector 3. ascertain the effects of price fixing process on organisational performance in the oil and gas sector mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 33 | p a g e research questions. 1. what are the effects of the legal framework process on organizational performance in the oil and gas sector? 2. how does the monitoring process affect organizational performance in the oil and gas sector? 3. what are the effects of price-fixing on organizational performance in the oil and gas sector? hypotheses ho1: legal framework process has no significant effect on organizational performance in the oil and gas sector ho2: there is no significant effect of the monitoring process on organizational performance in the oil and gas sector. ho3: price fixing process has no significant effects on organizational performance in the oil and gas sector literature underpinning the studies. conceptual review concept of regulation process the government exerts significant influence on the market economy through regulation. the extent of government rules is immense, affecting all sectors of the economy and every facet of our everyday life. merriam-webster defines regulation as: "an official rule or legislation that specifies how something should be done." dudley and brito (2012) extend on the concept and describe regulations, often known as administrative laws or rules, as the major vehicles through which the federal government implements laws and agency objectives. they are precise rules or instructions that specify what people, businesses, and other organizations may and may not do. to function correctly, market economies need clear rules. without a legislative framework establishing and enforcing what and what not, as well as the "rules of the game," a free business system or mixed economy, such as nigeria's, could not exist. the executive branch of government produces rules that affect many facets of our lives. regulations influence everything you do, from the moment you get up to the time you go to bed. however, most people are uninformed of the consequences of regulations or the process by which they are developed. (dudley & brito, 2012). regulation process the regulatory process is the process of developing rules to govern actors in a certain business. it is also commonly referred to as the "rulemaking" process (ekhator, 2016). nigeria's regulatory procedure is complicated since the country has a bicameral legislature at the national level but a unicameral legislature in the states and local governments. nigeria has a federal legislative structure; therefore, laws can be passed at the national, state, and local government levels. however, we will focus on the national level, which is relevant to our study. as previously indicated, nigeria has a bicameral legislature on the national level. this implies that the national legislative actions are divided between mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 34 | p a g e two independent assemblies: the senate and the house of representatives. the national assembly, which includes both houses, is nigeria's principal legislative body. the nigerian economy is hea0avily regulated in various sectors. the oil and gas business is one of them. while certain regulatory requirements are only applicable once, others must be renewed after a given period to continue functioning in that business. under the existing petroleum act of 1969, the minister of petroleum resources has extensive authority to set rules and grant and cancel oil licenses and leases (resolution law firm, 2021). president muhammadu buhari altered the petroleum (drilling and production) regulations, 1969 ("the 1969 regulations") while serving as minister of petroleum resources. the 1969 regulations, among other things, advise on the execution of petroleum act provisions governing applications for oil exploration and prospecting permits, as well as rules for oil drilling and extraction activities. the president is currently the de-facto petroleum minister, acting under advice from the minister for state, petroleum. the national assembly as the legislative arm of government is empowered to pass legislation on petroleum matters – which is on the exclusive legislative list. legal framework process a legal framework, also known as a regulatory framework, can be defined as a combination of constitutional, legislative, regulatory, jurisprudential, and managerial norms that collectively constitute the laws that regulate the functioning of a certain business or activity (olujobi 2012). nigeria has a variety of laws governing oil and gas. the petroleum act, which granted the federal government ownership and control of any oil discovered in nigeria, and the 1999 nigerian constitution (as amended) are two of the most important of these laws. this comprises oil discovered on nigerian territory, in the country's territorial waters, on the continental shelf, and inside its exclusive economic zone. according to the 1969 petroleum act, the nigerian government currently owns and controls all petroleum on, beneath, and inside nigerian territory. nigeria joined opec in 1971. opec was established to assist oil-producing countries by adopting a "group" approach (all resolutions passed are binding). monitoring process monitoring is the systematic gathering, analysis, and use of data to follow a program's progress toward its objectives and assist management in making decisions. monitoring often focuses on processes, such as when and where activities take place, who delivers them, and how many people or organizations they contact (cage and dunn 2009). acting on the advice of the minister of state petroleum, the president is now the de facto petroleum minister. the national assembly, as the government's legislative arm, has the jurisdiction to pass legislation on petroleum-related topics that are contained on the exclusive legislative list. price fixing process the word "price fixing" comes from economics and is commonly defined as an agreement (written, verbal, or implied by action) among rivals to raise, reduce, or stabilize prices or competitive terms. price mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 35 | p a g e fixing regulation, on the other hand, is when the government or its agency sets the price of a product or service rather than allowing it to be established spontaneously by free-market forces. in other words, it occurs when the government establishes the price at which something should be sold by its policy. although there is law that prohibits firms from fixing their prices in some instances, there is no legal protection against government price fixing (hayes, 2018). price fixing regulation refers to regulatory strategies for determining and applying limitations on businesses or sectors (dunne, 2017). the term "regulatory" refers to the degree to which the public is involved in the price formulation process. the immediate goal of most price fixing legislation is obvious: to limit independent price-setting; in other words, to prohibit regulated enterprises from charging higher or, more unusually, lower prices for goods or services. this might include a fixed price or rate of return, a maximum price ceiling or minimum price floor, or more ambiguous types of control. conceptual framework independent variables dependent variable regulation process fig 2.1: conceptual model source: researcher’s field survey (2024) legal framework process and organizational performance of the oil and gas sector before 1965, local petroleum product requirements were met by importation in a controlled system, with the private sector solely responsible. however, the organisation of petroleum exporting countries (opec) resolutions of 1960 and 1971 ushered in a substantial shift in nigeria's petroleum industry ownership structure. resolutions pushing member states to engage in oil operations by acquiring concessions owned by foreign businesses prompted the nigerian government to develop a more uniform downstream approach. in 1971, the government established the nigerian national oil corporation (nnoc), now the nigerian national petroleum corporation (nnpc), under decree number 33. the nigerian government authorized the nnoc to purchase any asset or liability in existing oil organizations, as well as to operate in all phases of the petroleum business. the first nigerian government-owned refinery was established in 1978 in response to the need to participate in legal framework process monitoring process price fixing process organizational performance mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 36 | p a g e downstream sectors. following it, there were three further refineries, twenty-one (21) depots, and around 5001 kilometres of strategically essential pipeline. monitoring process and organizational performance of the oil and gas sector the federal ministry of petroleum oversees the establishment and executing of government policies. the nigerian midstream and downstream petroleum regulatory authority (nmdpra) is the regulatory body for the oil and gas industry. the power to supervise activity in the petroleum downstream industry has puzzled the nmdpra. the lack of adequate control in the petroleum downstream sector has caused significant damage to the industry (ogunjubi, 2011). the midstream and downstream petroleum regulatory authority (nmdpra) oversees day-to-day petroleum industry monitoring and supervision, including monitoring oil company operations, setting and enforcing environmental standards, collecting royalty and rents, supervising and ensuring compliance with oil industry regulations, issuing licenses and permits, and protecting all oil and gas investments. governments take involvement in oil and gas operations through the nigerian national petroleum corporations employ a range of contractual forms to develop oil and gas resources. price fixing process and organisational performance of the oil and gas sector the government subsidy system had the direct consequence of boosting consumption, resulting in nigeria's unreliable refineries seldom producing enough to meet local demand. furthermore, large volumes of petroleum goods made their way into adjacent markets, where petroleum product prices were up to fifteen times higher. the subsidy plan imposed a substantial strain on the nigerian economy. a petroleum argus assessment from 1993 estimated that the damage to the nigerian economy was usd 1,606 million. this accounted for around 17% of the country's oil export revenues (wapner, 2017). price fixing, also known as price ceiling, is a type of price control/regulation that "sets a level above which prices are not allowed to rise," according to taylor (2005). this type of law can prevent prices from achieving equilibrium, resulting in a situation in which the amount offered does not equal the quantity requested. price limits are frequently employed to protect clients from circumstances in which they may be unable to get necessities. (bobai, 2012). theoretical framework resource curse theory this study was based on the resource curse theory, also known as the paradox of plenty or the poverty paradox, which was developed by richard auty in 1993. it refers to the paradox that countries with an abundance of natural resources, particularly oil and gas, have lower economic growth and worse development outcomes. the resource curse concept, often known as the paradox of plenty, refers to many resource-rich countries' failure to fully capitalize on their natural resource abundance, as well as their governments' inability to appropriately respond to public welfare needs (nrgi, 2015). according to the resource curse theory, the presence of minerals and fuels in less developed countries (ldcs) results in negative development consequences such as poor economic performance, growth collapses, high levels of corruption, ineffective governance, and increasing political violence. this simply means mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 37 | p a g e that natural resources are viewed as a "burden" rather than a "gift" in most poor countries. while the discovery of natural resources may lead to better development outcomes, resource-rich nations have higher rates of conflict and authoritarianism, as well as worse rates of economic stability and growth, than their non-resource-rich neighbours (nrgi, 2015). this explanation also suited the research since the petroleum industry, which should be the driving force behind the long-term development of other sectors of the economy, has an albatross around its neck despite the government's numerous laws empirical review ekeinde, adewale, diepiriye, and dumbili (2022) investigated the deregulation of the downstream sector of the nigerian oil industry and its influence on pump prices of petroleum products. the oil sector is certainly the cornerstone of the nigerian economy, accounting for more than 80% of the country's foreign exchange and gdp. the significance of the petroleum sector to nigeria's growth and economic strength cannot be overstated. this article covers the deregulation of the downstream sector of the nigerian petroleum industry, with a focus on petroleum products' pump prices. over the years, it has been noticed that, despite the massive quantities of income generated by the petroleum sector, the price of petroleum products in nigeria continues to climb, despite large sums of money being spent on subsidizing product prices to make them affordable to nigerians. the study examines the notion of deregulation and how a well-planned deregulation strategy may be implemented to accomplish the desired objectives of product availability and low pump costs. it posits that a totally and completely deregulated downstream will not always result in product pump prices that are cheaper than the existing ones both in the short and long periods, but in a competitive market with many firms competing, it will result in product availability and competitiveness. it proposes that the government implement steps to combat corruption and collusion, which might undermine the subsector's successful deregulation. it proposes that if downstream deregulation is to produce the best results, particularly in terms of product pump prices, then having an effective domestic refining capacity is critical, which would include revamping state-owned refineries, issuing licenses for the construction of new refineries, and operating them efficiently. it advises that the deregulation of the downstream be gradual to accomplish the intended aims. olujobi (2021) carried out a study on deregulation of the downstream petroleum industry: an overview of the legal quandaries and proposal for improvement in nigeria. the study investigates the necessity for deregulation of the downstream petroleum sector to tackle shortfalls and to enhance quantities of petroleum commodities in nigeria. the goal is to improve industry competency through governance, legislative changes, and fierce commercial rivalry by benefiting from the expertise of other advanced nations in transforming and strengthening downstream oil sector rules. the study takes a conceptual legal approach, drawing on existing materials to support a doctrinal legal research method. the study also draws on primary and secondary sources of law, such as the constitution and case law. the research discovered that the government's absolute authority in the industry, as well as incongruent valuing of oil commodities, made the industry unappealing to financiers seeking to establish private mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 38 | p a g e refineries that would ensure adequate supply of petroleum and reasonable profits on their investments, due to the government's excessive regulation of the industry. the research devised a methodology to limit the constant rise in petroleum prices while still ensuring the proper operation of the downstream petroleum industry. the study concludes with recommendations, such as the need for a high-tech fusion of policies and incentives for downstream investment to help speed up the enactment of the pending petroleum industry governance bill 2017 and complete deregulation of the industry to encourage private investment and stop subsidy disbursements from becoming a new source of corruption. abdurrahman, and shuaibu, (2021), the long-run and short-run dynamics of petroleum downstream deregulation: an ardl approach. this paper investigates the application of ardl technique to determine “the long-run and short-run dynamics of petroleum downstream deregulation spanning the period 1991-2014: secondary data were used, and econometrics models were analyzed through the application of augmented dickey-fuller in testing the stationarity of the time series. based on the findings of the study, the results of the unit root indicate that the variables have mixed degree of integration i(0), i(1); the bound test cointegration procedure revealed the presence of long-run relationship among the variables. the study revealed that importation of refined premium motor spirit (pms) grossly affects the gdp of the economy negatively both in short and long run; the study therefore recommends total deregulation of the downstream sector must be gradually and consistently pursued to deliver maximum result to all stakeholders and the nation. while that is being pursued, adequate infrastructure, especially refineries, should be put in place. tools and materials the research design method that was adopted for this study was the survey research design method. the population was drawn from registered major petroleum marketers and tank farm owners in southern part of nigeria as listed below. from informal interviews on the company’s website sources and with key personnel who are privy to the employees’ registers in their respective companies, the population figure is estimated at six thousand eight hundred (6,800). table 1: distribution of the population s/n names of firms population per firm 1 con oil and gas 840 2 rain oil and gas 720 3 oando oil and gas 1220 4 ascon oil and gas 860 5 dozzy oil 1410 6 geo links 760 7 forte oil and gas 990 total 6800 source: researcher’s field survey (2024) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 39 | p a g e the research's sample size is a fraction of persons recruited from the population to investigate the impact of the regulation management approach on the organisational performance of the enterprises chosen for the study. krejcie and morgan's (2017) statistical table for estimating sample size from a given population, where n is the population and s is the sample size, was used. in the krejcie and morgan table, each population figure corresponds to a sample size figure. for a population of 6,800, the sample size (s) is 362. as a result, this study's population-based sample size is 362 workers. to allocate the sample size of 362 to the firms and their location, the study adopts the stratified sampling method to give a fair representation to the selected firms. the bowley`s proportional allocation formula was used the formula is as stated below nh = nnh n where: nh = number of units allocated to each firm nh = number of employees in each firm stratum in the population n = total sample n = the total population size under study con oil and gas nh = 362 * 840 6800 = 45 rain oil nh = 362 * 720 6800 = 38 oando oil and gas nh = 362 * 1220 6800 = 65 ascon oil and gas nh = 362 * 860 6800 = 46 dizzy oil nh = 362 * 1410 6800 = 75 geo oil and gas nh = 362 * 760 6800 = 40 fort oil and gas nh = 362 * 990 6800 = 53 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 40 | p a g e table.2 sample size distribution s/n names of firms sample size per firm 1 con oil and gas 45 2 rail oil 38 3 oando oil and gas 65 4 ascon oil and gas 46 5 dozzy oil 75 6 geo links oil and gas 40 7 fort oil and gas 53 total 362 source: researcher’s field survey (2024) the respondents to the research were selected using probability sampling procedures. specifically, stratified sampling was used in the study. a five (5) point likert scale was used to measure the respondents' opinions, as supplied. internal consistency analysis (cronbach's alpha) and item-to-total correlation were used to determine the reliability of the research instrument's constructs. ca offers an estimate of the indicator intercorrelations; an appropriate score for ca is 0.7 or greater, whereas less than 0.7 indicates poor dependability (seckaran, 2003). according to the data below, the reliability coefficients are above the 0.7 threshold. overall, all items received favourable and dependable assessments. the estimate showed adequate internal consistency. table 3 reliability coefficients of study constructs dimension of study constructs number of items cronbach’s alpha coefficient legal framework process 4 0.751 monitoring process 4 0.811 price fixing 4 0.822 firm performance 4 0.842 source: output of pilot survey data, 2024. descriptive statistics, pearson correlation, and multiple regression analytical methods were utilized to determine the nature of the link between the regulating process and company performance of the downstream sector in nigeria's petroleum industry. multiple regressions were employed to predict outcomes; they not only reveal a positive, negative, or no association, but also the strength of the link (jonson and kuby, 2007). this statistical method is considered acceptable since it provides a link between the independent and dependent variables. the hypotheses provided in this study were examined using multiple regression analysis. the statistical analysis was chosen because it helps the researcher make sense of the data and reach reliable findings that lead to smart decisions. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 41 | p a g e model specification the following model specification was developed; fper= f(lfp, mp, pf, ev) fper = α + β1lfp+ β2mp+ β3pf+ β4ev+ε where: fper: firm performance lfp legal framework process mp monitoring process pf price fixing ε: error term. results and discussions table 4: legal framework process and organisational performance s/n statements scale mean (x) standard deviation sa 5 a 4 u 3 d 2 sd 1 1 government policies do not affect performance of firms in the petroleum downstream sector. 67 (23.5) 69 (24.2) 47 (16.5) 47 (16.5) 55 (19.3) 4.415 .6855 2 subsidy has no significant effect on firm performance in the nigeria petroleum downstream sector 117 (41.1) 67 (23.5) 22 (7.7) 42 (14.7) 37 (13) 4.586 .6531 3 product importation by nnpc has no impact on firm performance. 82 (28.8) 92 (32.3) 42 (14.7) 37 (13) 32 11.2 4.540 .5654 4 partial deregulation of the petroleum downstream sector has no effect on firm performance 111 (38) 101 (35.4) 46 (16.1) 27 (9.5) 4.347 .7705 source: analysis of field survey, 2024. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 42 | p a g e table 4, depicts the extent to which the legal framework process affects corporate performance. statement 1 found that 135 respondents (47.7%) agreed that government policies had little effect on the performance of enterprises in the petroleum downstream industry. 47 (16.5%) were indecisive, while 102 (35.8%) disagreed. in statement 2, 184 (64.6%) of respondents agreed that subsidies had no substantial impact on business performance in nigeria's petroleum downstream industry. 22 (7.7%) were unsure, while 79 (27.7%) disagreed. in statement 3, 174 respondents (61.1%) agreed that nnpc's product importation had little influence on business performance. 42 (14.7%) were indecisive, while 69 (24.2%) disagreed. in statement 4, 212 (74.4% of respondents) agreed that partial deregulation of the petroleum downstream sector had little impact on organizational effectiveness. 46 (16.1%) remained unsure, whereas 27 (9.5%). table 5: monitoring process and organisational performance s/n statements scale mean (x) standard deviation sa 5 a 4 u 3 d 2 sd 1 5 monitoring in the petroleum downstream sector has no impact on organization’s performance in the petroleum downstream sector 107 (37.5) 77 (27) 42 (14.7) 27 (9.5) 32 (11.3) 4.396 .7272 6 price disparity due to lack of monitoring does not affect the performance of organizations in the petroleum downstream sector 67 (23.5) 101 (35.4) 50 (17.5) 36 (12.6) 31 (11) 4.468 .6791 7 observation and checking do not affect organizational performance 112 (39.3) 97 (34) 22 (7.7) 27 (9.5) 27 (9.5) 4.477 .5538 8 control of petroleum products does not affect the organization's performance 127 (44.5) 82 (28.7) 28 (10) 27 (9.5) 21 (7.3) 4.235 .7674 source: analysis of field survey, 2024. table 5, demonstrates the extent to which the monitoring process influences organizational performance. according to statement 5, 184 respondents (64.5%) agreed that monitoring in the petroleum downstream industry had little influence on business performance. 42 (14.7%) were mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 43 | p a g e indecisive, while 59 (20.8%) disagreed. in statement 6, 168 respondents (58.9%) agreed that price disparities caused by a lack of monitoring had little influence on business performance in the petroleum downstream industry. 50 (17.5%) were unsure, while 67 (23.67%) disagreed. in statement 7, 209 respondents (73.3%) agreed that observation and checking had little effect on organizational performance. 22 (7.7%) were unsure, while 54 (19%) disagreed. in statement 8, 209 respondents (73.3%) agreed that control of petroleum products had little effect on company performance. 28 (10%) were unsure, while 48 (16.8%) disagreed. t table 6, price fixing and organisational performance s/n statements scale mean (x) standard deviation sa 5 a 4 u 3 d 2 sd 1 9 pppra price ceiling does not affect firm performance in the downstream sector 69 (23.5) 67 (24.2) 47 (16.5) 47 (16.5) 55 (19.3) 4.551 .5769 10 incessant price hikes of petroleum products do not affect firm performance 100 (35.1) 97 (34.8) 43 (15.1) 14 (4.9) 29 (10.1) 4.435 .7828 11 lack of uniform prices in depots does not affect firm performance 93 (33) 73 (25) 42 (15) 36 (12.6) 41 (14.4) 4.516 .6586 12 price fixing does not have any effect on firm performance 88 (30.9) 83 (29.1) 48 (17) 28 (10) 38 (13) 4.540 .6561 source: analysis of field survey, 2024. table 7, depicted the extent to which price fixing influences business performance. statement 9 found that 136 respondents (47.7%) agreed that the pppra price ceiling did not influence company performance in the downstream sector. 47 (16.5%) were indecisive, while 102 (35.8%) disagreed. in statement 10, 197 (69.9%) of respondents agreed that constant price increases for petroleum items had little influence on company performance. 43(15.1%) were unsure, while 43(15%) disagreed. in statement 11, 166 (58%) of respondents agreed that the lack of standardized pricing in storage depots has no impact on business performance. 42 (15%) were indecisive, and 77 (27%) disagreed. in statement 12, 171(60%) of the respondents agreed that price fixing does not have any effect on firm performance. 48(17%) were undecided while 66(23%) disagreed. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 44 | p a g e organisational performance s/n statements scale mean (x) standard deviation sa 5 a 4 u 3 d 2 sd 1 17 my company generates adequate returns on its assets 83 (29.1) 88 (30.9) 48 (17) 28 (10) 38 (13) 4.477 .5538 18 my company’s shareholders’ value has improved 98 (35.1) 97 (34.8) 41 (14.4) 22 (7.7) 27 (10.1) 4.235 .7674 19 my company delivers on its value proposition to customers 69 (23.5) 67 (24.2) 47 (16.5) 47 (16.5) 55 (19.3) 4.291 .7141 20 my company’s customer retention rate has improved 73 (26) 93 (33) 42 (15) 36 (12.6) 41 (14.4) 4.392 .6754 source: analysis of field survey, 2024. table 7, . statement 17 found that 171 respondents (60%) agreed that my organization delivers acceptable returns on assets. 48 (17%) were unsure, while 66 (23%) disagreed. in statement 18, 195 (69.9%) of respondents agreed that my company's shareholder value has increased. 41 (14.4%) were unsure, while 49 (17.8%) disagreed. in statement 19, 136 (47.7%) of respondents agreed that my organization meets its value offer to customers. 47 (16.7%) were indecisive, while 102 (35.8%) disagreed. in statement 20, 166 (59%) of respondents agreed that my company's client retention rate had increased. 42 (15%) were indecisive, and 77 (27%) disagreed. table 8, correlation matrix studied variables firm performance legal framework process monitoring process price fixing process evaluation process firm performance pearson correlation sig.(2-ailed) no. 1 285 legal framework process pearson correlation sig.(2-ailed) no. .507** .000 285 1 285 monitoring process pearson correlation sig.(2-ailed) no .222** .000 285 .450** .000 285 1 285 price fixing process pearson correlation sig.(2-ailed) no .349** .000 285 .218** .000 285 .294** .000 285 1 285 **correlation is significant at the 0.01 level (2-tailed) *correlation is significant at the 0.05 level (2-tailed) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 45 | p a g e the above table 8, showed positive correlation coefficients for the metrics of company performance, indicating that they are good measurements of the regulatory process. the results showed that the legal framework process linked favourably with company success (r=.507**, 0.01). the second component, the monitoring process, is linked favourably with business performance (r=.222**, 0.01), followed by the legal framework process (r=.450**, 0.01). the third variable, the price-fixing process, had a positive correlation with firm performance (r=.349**, 0.01), the legal framework process (r=.218**, 0.01), and the monitoring process (r=.294**, 0.01). the fourth variable; evaluation process correlated positively with firm performance (r= .479**, 0.01), with legal framework process (r= .249**, 0.01), with monitoring process (r= .359**, 0.01) and lastly with price fixing process (r= .146**, 0.01). multicollinearity test table 9: collinearity statistics of independent variables independent variable tolerance vif legal framework .946 4.057 monitoring process .773 3.294 price fixing .930 2.076 mean 3.429 source: computed from spss analysis of field survey data, 2024 the result in table 9: shows the variance test inflation factor test (vif); the mean vif value reported is 3.429 which is less than the benchmark value of 10 points to the absence of multicollinearity. table 10: multiple regression analysis of coefficients a model unstandardized coefficients standardized coefficients t sig b std. error beta 1 (constant) legal framework monitoring process price fixing process 6.678 .143 .266 .143 1.875 .066 .068 .071 .136 .259 .130 3.562 2.155 3.892 2.016 .000 .001 .000 .001 a. dependent variable: firm performance table 10: model summary model r r square adjusted r square std. error of the estimate 1 .978a .956 .914 1.8948 .a predictor: (constant) legal framework, monitoring process, price fixing process, evaluation process .b dependent variable: organisational performance the multiple regression analysis was adopted to test the relationship of the legal framework, monitoring process, price fixing process, evaluation process and firm performance. the results are shown in table mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 46 | p a g e 10: from the data shown, the correlation r=.978 means that the four (4) factors have a high relationship with firm performance. in this regression, the independent variables at 91.4% (r square= 0.914), and anova statistics (f=10.702, p<.05) indicated that the overall model is statistically significant and has std. error of the estimate at ± 1.8948. when considering the regression data of independent variables, i found that legal framework (b=.143, seb1= .066, β= .136, t=2.155, p=.001), monitoring process (b=.226, seb1= .068, β= .259, t=3.892, p=.000), price fixing process (b=.076, seb1=. 065, β= .075, t= 1.159, p=.002) and evaluation process (b=.143, seb1= .071, β= .130, t=2.016, p=.001) predicted firm performance with a statistically significant at 0.05. therefore, i accept ho1, ho2, ho3 and ho4 which means that the legal framework, monitoring process, price fixing process and evaluation process are positively related to firm performance. the structural equation model reveals the following regression equations for analyzing the firm performance based on four (4) dimension regulation processes. unstandardized score y= -6.678 + .143(lfp) + .266(mp) + .076(pf) + .143(ev) standardized score zr = .136(lfp) + .256(mp) + .075(pf) + .130(ev) table 11: anova a model sum of squares df mean square f sig. regression l residual total 176.330 925.733 1102.063 4 280 284 38.423 3.590 10.702 .000 b . a. dependent variable: firm performance . b. predictors (constant), legal framework, monitoring process, price fixing process, evaluation process source: spss version 23, 2024 the f-ratio in the anova table tested whether the overall regression model is a good fit for the data. the table showed that the independent variables (legal framework, monitoring process, price fixing process, evaluation process) significantly predict the dependent variable (firm performance), since f(4, 280) = 10.702, p<.005, the regression model is good for the data. test of research hypotheses the multiple regression analysis was adopted as an analytical tool for testing the hypotheses. hypotheses’ testing is really a systematic way for testing claims or ideas about any given parameter in a population using data measured in a sample. the p-values reported in the regression coefficient table are used for testing the study hypotheses. the decision rule the null hypothesis is the central part of research and is the hypothesis that is usually tested. if the probability value calculated is greater than the critical level of significance, then the null hypothesis will be accepted while the alternate hypothesis is rejected and vice versa. if the probability value is .000 is mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 47 | p a g e smaller than the critical value of 5% (ie .000 < 0.05), we conclude that the given parameter is statistically significant. in this situation, it is accepted that there is need to reject the null hypothesis and to accept the alternate. gujarati & porter (2009) observed that when we reject null hypotheses, we say that our findings are statistically significant and vice versa. gujarati & porter (2009) also posited that it is preferable to leave it to the researcher to decide whether to reject the null hypotheses at the given value. note, the p-value is also known as the observed or exact level of significance or the exact probability of committing a type 1 error. more technically, the p-value is the lowest significance level at which a null hypothesis can be rejected (gujarati & porter, 2009). thus, the p-value is at 0.05 (5%). hypothesis one ho1: legal framework process has no significant effect on the organisational performance of the downstream sector in the nigerian petroleum industry. from the coefficient table 4.8 legal framework process exhibited positive with organisational performance given the beta value (β=136, p<.001). the regression analysis for legal framework process and firm performance on the test of hypothesis one, table 4.8 indicated that the exact level of significance calculated (.001) is less than the probability of committing a type one error (.05). giving the result, the null hypothesis is rejected to accept the alternate hypothesis thereby implying that there is significant positive relationship between legal framework process and firm performance. hypothesis two ho2; there is no significant effect of the monitoring process on organizational performance of the downstream sector in the nigerian petroleum industry. the coefficient table 4.8 shows the extent to which the monitoring process positively affects firm performance. given the beta value (β=259, p<.000), the regression analysis for monitoring process and firm performance on the test of hypothesis one, table 4.11 indicated that the exact level of significance calculated (.000) is less than the probability of committing a type one error (.05). giving the result, the null hypothesis was rejected to accept the alternate hypothesis thereby implying that there is a significant positive relationship between monitoring process and firm performance. hypothesis three ho3: price fixing process has no significant effects on the organisational performance of the downstream sector in the nigerian petroleum industry. the coefficient table 4.8 shows the extent to which the price fixing process positively affects firm performance. given the beta value (β= .075, p<.002), the regression analysis for price fixing process and firm performance on the test of hypothesis one, table 4.8 indicated that the exact level of significance calculated (.002) is less than the probability of committing a type one error (.05). giving the result, the null hypothesis was rejected to accept the alternate hypothesis thereby implying that there is significant positive relationship between price fixing process and firm performance. discussion of results legal framework process and organisational performance from the results of data analyzed in table 4.7 it was reported that the overall positive correlation coefficient values among variables of the legal framework process are indicative that they are appropriate indicators and dimensions of the legal framework process. it showed the extent to which mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 48 | p a g e the legal framework process accounted for the change in firm performance (β= .136, p< 0.01). this shows that there is a significant positive relationship between the legal framework process and firm performance. table 4.9 shows that the adjusted r2 reported 545 (54.5%) of the change in firm performance is explained by the legal framework process. this result agreed with the finding of the petroleum products pricing regulatory agency (pppra) act, 2003 which established the petroleum products pricing regulatory agency to determine the pricing policy of petroleum products and to regulate supply and distribution by setting benchmark prices through modulation mechanisms to promote stability in the oil sector. the inefficiency in the product transportation system has impeded the efficiency of the agency through ageing petroleum pipelines, pipeline vandalization activities, poor road networks and poor remuneration of most petroleum truck drivers which have occasioned sharp practices, inefficiency and corruption in the sector. monitoring process and organizational performance the result obtained from table 4.7 portrayed overall positive correlation coefficient values among variables that measure the monitoring process, and this points out the fact that they were all appropriate measures of the monitoring process. it showed that the (β= .259, p< 0.00) indicates that the monitoring process has a significant positive relationship and accounted for variance in firm performance. also, table 4.9 showed that the adjusted r2 reported 545 (54.5%) of the change in firm performance is explained by the monitoring process. this supports the findings of odigure, abdulkareem and adeniyi (2020) as their study finds that the slow development witnessed in the petroleum downstream sector was due to government regulation which does not give room for the forces of demand and supply to determine the prices of petroleum product. they also argue that the lack of proper monitoring has caused a lot of price differences in some parts of the country. price fixing process and organizational performance the result from the regression on table 4.8 revealed that the price fixing process has a significant positive effect on firm performance. the (β= .075, p< 0.02) shows the extent to which price fixing process accounted for the change in firm performance. in table 4.9, it showed that the adjusted r2 reported 545 (54.5%) of the change in firm performance is explained by price fixing process. more so, the result of the hypothesis tested showed that there is significant positive relationship between price fixing process and firm performance. the study is in support of oyefusi (2002) who also asserts that price controls do impose cost on both agents and create inefficiencies of preventing market prices from rising to competitive equilibrium; quantity demanded exceeding quantity supplied by marring price from upward adjustment as well as market forces struggle expressed in other ways. summary the main objective of the study was to assess the effects of the regulatory management process on organizational performance of the oil and gas sector in nigeria. a cross-sectional research design was adopted and krejcie and morgan table was used to determine a sample size of 362 employees. cronbach’s alpha (α) coefficient was used for testing the reliability of the research instrument (questionnaire) and the findings from this test revealed that the items were reliable and valid at an mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 49 | p a g e overall cronbach’s alpha value of 0.80. the values were above 0.70 exceeding the threshold of cronbach’s alpha value recommended by (sekeran, 2003). the analyses of the background profile of the respondents showed that 59.3% of the respondents were male and 40.7 were female. regarding the age bracket, the age distribution of respondents which was spread across various age brackets shows that the highest concentration of respondents fell within the age bracket of below 30 years with 111 (39.0%) of respondents. the categories of respondents between 31–40 years account for 87 (30.5%). 87 (30.5%) of the respondents fell under 40 years and above. under educational qualification, ond/nce holders account for 97(34%), of those respondents that possess hnd/b.sc were 113 (40%). 59(21%) of the respondents indicated that they were masters holders and those other educations accounted for 16(5%) of the respondents. it indicates the marital status of the respondents; it was observed that 182 (63.9%) of the respondents were married while 103 (36.1%) were single. the result revealed that legal framework, monitoring process and price fixing process has a significant positive effect on organisational performance in the oil and gas sector. the results of the regression analyses of the variables revealed that regulation process dimensions have positive effects on organisational performance and the strength of the positive effect is as follows, from the highest; monitoring process (β = .259, p < 0.00), legal framework process (β = .136, p < 0.01), and lastly price fixing process (β = .075, p < 0.02). the result of the hypotheses testing revealed that indeed, a general view of the regulation process accounted for organisational performance. therefore, the adjusted r2 reported 545 (54.5%) of the change in firm performance is explained by the regulation process. conclusion the legal framework process and its reform will turn nnpc into a fully commercial, viable legal entity that is profit-driven with opportunities to raise cash from the capital markets through the provision of the petroleum industry governance act. the monitoring process through the lack of working refineries and heavy pressure on infrastructure from resultant importation has been a key cause of supply shortages. when the price fixing process if the sector is fully deregulated, it will enable market forces to determine petroleum products prices, rather than the federal government fixing them. recommendations 1. the deregulation policy of the federal government is not associated with challenges, rather it is a policy option available for improved performance meant to remove the bottlenecks that have characterised the sub-sector, such as the sorry state of the four refineries, inefficiencies in distribution and pricing of petroleum products and the negative effects of monopolistic structure of the downstream sub-sector. 2. the government should also increase the quantity of crude for domestic refining to target some refineries as exporting refineries. this way, the country could meet the refined products needs of neighbouring economic community of west africa states officially, this is important, given the need to mitigate the smuggling of petroleum products across the nation’s borders mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 50 | p a g e 3. that government should in effect provide broad guidelines for the operation of refineries and allow private initiative in their running with good tax reliefs. author information kingsley akeni is a researcher specializing in industrial management and regulatory frameworks in the oil and gas sector. his work focuses on the intersection of regulation and employee performance, aiming to provide insights that can help improve operational efficiency and workforce productivity in heavily regulated industries. references abdurrahman, b. y., & shuaibu, m. 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(2014). regulatory issues in the downstream gas sector and emerging electricity supply industry in nigeria. international association for energy economics, 3(4), 33-37. mailto:contact@americaserial.com mailto:contact@americaserial.com http://www.pricewaterhousecoopers.com/ american research journal of economics, finance and management volume 12 issue 2, april-june 2024 issn: 2836-9416 impact factor: 5.57 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 54 | p a g e oyefusi, a. (2007). oil-dependence and civil conflict in nigeria. centre for the study of african economies, university of oxford, wp 2007-09. retrieved from http://www.csae.ox.ac.uk/workingpapers/pdfs/2007-09text.pdf pricewaterhousecoopers. (2015). matters arising from government’s review of pioneer status incentive: is the holiday over? retrieved from www.pwc.com resolution law firm. (2021, january 25). regulatory compliance in oil and gas industry in nigeria. retrieved from www.resolutionlawfirm.com richard, o. z., & howard, e. m. (1999). the failure of market failure. journal of policy analysis and management, 18(4), 558-578. sekaran, u. (2003). research methods for business: a skill-building approach. john wiley & sons, incorporated, usa. taylor. (2005). price ceiling types, effects, and implementation in economics. retrieved august 30, 2022, from http://investopedia.com timothy, g. j. (2019). three gas monetization companies still enjoy nigeria pioneer’s incentive status. africa oil+gas report. retrieved from www.oilandgasreport.com udo, e. (2014). the regulation of the petroleum industry in nigeria: an assessment. oil and gas journal, 3(2), 23-54. vonortas, n. s., & anger, r. n. (2011). assessing industrial performance. journal of economic literature, 33(4), 1931-1964. wapner, a. (2017). downstream beneficiation case study: nigeria. columbia center on sustainable investment policy paper, 1-11. winston, c. (2006). government failure versus market failure. macroeconomics policy research and government performance. aei-brookings joint center for regulatory studies, the american enterprise institute for public policy research, washington, d.c. mailto:contact@americaserial.com mailto:contact@americaserial.com http://www.csae.ox.ac.uk/workingpapers/pdfs/2007-09text.pdf http://www.pwc.com/ http://www.resolutionlawfirm.com/ http://investopedia.com/ http://www.oilandgasreport.com/ american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 212 | p a g e venture capital financing and performance of small and medium scale enterprises in nigeria dr. amakor, ifeoma chinelo and chimarume blessing uba 1department of banking and finance nnamdi azikiwe university, awka email: ic.amakor@unizik.edu.ng / chimarume@gmail.com phone: 08036222388 / 08168097651 / +15066398890 doi: https://doi.org/10.5281/zenodo.15296429 abstract: this study examined the relationship between venture capital financing (vcf) and performance of small and medium-scale enterprises (smes) in nigeria from 2011 to 2023. the study used smes profitability, job creation of smes and the number of smes to proxy performance of sme’s. the relevant data was sourced from central bank of nigeria (cbn) statistical bulletin and world bank database and analysed using unit root test and least square regression. the result revealed that smes profitability and number of sme’s, exhibit significant relationship with venture capital financing, while non-significant relationship exist between venture capital financing and sme performance in terms of job creation. the growth in profitability and number of sme’s without growth in job creation is viewed as lopsided growth pattern. the study advocates for sme’s extensive and sustainability growth policies from the federal government of nigeria in order to enhance job creation among the sme’s. keywords: venture capital financing, sme’s profitability, number of sme’s, job creation introduction the pursuit of long-term economic growth and development has reemphasized the importance of financial access, particularly for small and medium-sized enterprises (smes), which are regarded as critical drivers of economic growth, employment generation, and innovation in both developed and developing economies small and medium scale enterprises (smes) are businesses or enterprises that operate on a smaller scale, with limited investment and turnover (aremu & adeyemi, 2011). these enterprises typically have fewer personnel and generate lower revenues compared to larger enterprises (organization for economic cooperation and development oecd, 2021). as defined by cbn small and medium scale enterprise is any enterprise with a maximum asset base of n500 million (excluding land and working capital). this decline has severely impacted key sectors such as wholesale and retail, ict, and manufacturing, affecting employment and overall economic growth. (pwc 2020) https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:ic.amakor@unizik.edu.ng mailto:chimarume@gmail.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 213 | p a g e small and medium scale enterprises are considered to be one of the principal driving forces in economic development of both developed and developing nations, as they generate employment, help in diversifying the economic activity and makes a significant contribution to export trade through utilization of locally available resources, absorbing labour, penetrating new market and generally expanding the economy in creative and innovative way (usman, isah &tanko, 2018). however, if sme’s will remain relevant in achieving social economic development in any economy, they need productivity increase which can be achieved through financing (akingnnola, 2011). nevertheless, one of the major challenges faced by the sme’s in nigeria is inadequate funding, characterized by their inability to access credit from many financial institutions due to their stringent lending policies, making most of them to rely on their retained earnings for their investment, hence difficult to achieve growth and sustainable development (mboto, offiong and udoka 2018). to that effect, venture capital finance has emerged as a crucial source of funding for smes, allowing them to innovate, grow, and compete in a more globalized environment. venture capital financing are capital provided by firms who invest alongside management in young companies or early start-up businesses that are not quoted on the stock market in exchange for stock or shares in the future (biney 2018). the origins of venture capital can be traced back to the post-world war ii era, when investors began to realize the potential of funding high-risk, high-reward projects (daramela, 2012). the first vc firm, american research and development corporation (ardc) was founded in 1946 by georges doriot. ardc’s most notable investment was in digital equipment corporation, which provided a massive return on investment and helped establish the potential of vc funding (mike mc peak 2023). these institutions are designed to provide medium and long term financing, with provision of technical and managerial services, in addition to monitoring effectively the progress of the investee firms (effiom & edet, 2018). if properly managed, venture capital has the tendency to encourage entrepreneurship, job creation, and diversification of the economy (nigeria corporate finance, 2024). though the role of vcs is well documented in western developed economies, limited attention has been paid to it by smes in emerging markets like nigeria (jiang et al, 2014), thus the need for this study. again, previously, researchers like ojo and adegboye (2020) focus primarily on the financial benefits of venture capital investments, while eniola (2021) considers the role of vc in providing financial backing to smes, without thoroughly investigating its impact on job creation, and operational sustainability and profitability. thus, this study seeks to fill these gaps by ascertaining the effect of venture capital financing on smes profitability, examining the effect venture capital financing on job https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 214 | p a g e creation of smes and determining the effect of venture capital financing on the number of smes in nigeria from 2011 to 2023. review of literature venture capital financing venture capital (vc) financing refers to investment provided by venture capitalists to startups and small businesses with high growth potential but high risk. venture capitalists typically provide funding in exchange for equity in the company, offering not only financial resources but also strategic guidance and managerial support. this funding is vital for startups that lack access to traditional forms of financing, such as bank loans or public equity offerings (davies & king, 2018). the venture capital process generally involves several stages, beginning with seed capital and progressing through early-stage and growth-stage investments. seed capital is the initial funding provided to help startups develop their business idea into a viable product or service. early-stage investments support companies that have developed a prototype and are beginning to enter the market, while growth-stage investments are intended to scale operations and expand market reach (chemmanur & fulghieri, 2019). each stage involves different levels of risk and return, with venture capitalists carefully evaluating potential investments based on a company's growth prospects, market potential, and management team (zhang & jang, 2020). one of the important aspects of venture capital financing is the evaluation process. venture capitalists use a combination of quantitative and qualitative criteria to assess potential investments. financial metrics such as projected revenue growth, profit margins, and return on investment are critical factors, but qualitative aspects such as the entrepreneur's experience, market opportunity, and competitive landscape are also significant. this comprehensive evaluation helps venture capitalists identify promising startups with the potential for substantial returns (black and gilson, 2019). venture capitalists often take an active role in the companies they invest in, providing strategic advice, mentoring, and access to their networks. this involvement can significantly enhance the likelihood of a startup's success by improving its business model, market strategy, and operational efficiency. furthermore, venture capitalists may also influence key business decisions, including hiring practices, product development, and market entry strategies (emerah et.al, 2020). the impact of venture capital financing extends beyond individual startups to the broader economy. venture capital-funded companies are often at the forefront of technological innovation and economic growth. firms backed by venture capital are more likely to introduce new products and services, create jobs, and contribute to economic development. the presence of a robust venture capital sector can stimulate entrepreneurial activity, attract additional investment, and foster a culture of innovation (hsu, 2020). https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 215 | p a g e venture capital investments are inherently risky, with a significant proportion of startups failing to achieve their growth targets. additionally, the expectations and demands of venture capitalists can sometimes lead to conflicts over business direction and control. effective communication and alignment of goals between investors and entrepreneurs are crucial for mitigating these risks and ensuring successful outcomes (baldwin and rafiqzzaman, 2020). effects of venture capital financing on smes profitability venture capital financing often provides the necessary capital for smes to scale their operations, invest in research and development, and expand their market reach. this increased capacity for growth can lead to higher revenues and improved profitability. venture capital-backed smes tend to experience faster revenue growth compared to non-vc-backed firms, primarily due to the substantial investment in innovation and market expansion. additionally, venture capitalists often bring valuable expertise and networks to the table (achugbu, 2017). the active involvement of venture capitalists in strategic decision-making, management practices, and operational improvements can positively influence sme performance. this support includes mentorship, business development advice, and connections to potential customers, partners, and suppliers. such involvement can enhance the efficiency and effectiveness of sme operations, thereby contributing to higher profitability (black & gilson, 2019). vc investors typically require detailed reporting and performance monitoring, which encourages smes to adopt best practices and focus on key performance indicators. this rigorous approach to performance management can lead to improved operational efficiency and profitability by ensuring that smes are aligned with their business goals and market demands (eke, 2019). venture capital financing and smes job creation venture capital financing aids smes, particularly those in their early stages, as it provides the necessary capital to scale operations and pursue growth opportunities that might be inaccessible through traditional financing sources. this type of financing involves equity investments made by venture capitalists in exchange for ownership stakes in high-potential startups. venture capital funding enables smes to expand their operations, develop new products, and enter new markets, all of which contribute to job creation (egu et.al, 2024). one of the primary ways venture capital financing impacts job creation is by supporting business expansion. smes receiving venture capital funding often use the capital to increase their production capacity, enhance their technological capabilities, and expand their market reach. these growth activities typically require hiring additional staff, which directly creates new jobs. venture capitalbacked smes tend to experience faster growth in employment compared to non-vc-backed firms, primarily due to their enhanced capacity for scaling operations (biney and gan, 2018). https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 216 | p a g e the presence of venture capital financing has a broader impact on the job market beyond the individual sme. successful venture capital-backed smes can stimulate job creation within their local economies and industries by fostering innovation and driving economic growth. this ripple effect can create additional employment opportunities in related sectors, such as supply chains, service providers, and ancillary businesses (aman, 2023). venture capital financing contributes to job creation through its focus on high-growth sectors and industries, such as technology and biotech. these sectors often have high potential for innovation and expansion, leading to significant job creation opportunities. venture capital-backed firms are more likely to introduce new products and technologies, which can create a wide range of jobs, from research and development positions to manufacturing and sales roles (john, 2023). venture capital financing and sustainability of smes the availability of venture capital financing can significantly influence the existence of smes by enabling them to undertake various business activities that are vital for their sustainability. for instance, venture capital funding often supports research and development (r&d) initiatives, which are essential for innovation and product development. by investing in r&d, smes can develop new products and services, improve their competitive edge, and adapt to changing market conditions, thereby increasing their chances of long-term survival (manyani, 2014). the influence of venture capital financing on sme existence also extends to market expansion and scaling efforts. venture capital funding enables smes to enter new markets, increase production capacity, and explore additional revenue streams. these activities can help smes diversify their business operations and reduce dependency on a single market or product line, thereby strengthening their position and resilience in the market (kauffman & lee, 2019). the dependency on venture capital can also pose risks for smes. the need to meet the expectations of venture capitalists can sometimes lead smes to adopt aggressive growth strategies or make short-term decisions that may not align with their long-term goals. this pressure can affect the stability and sustainability of the business, potentially impacting its existence in the long run (achugu, 2017). challenges of venture capital financing however, venture capitalists usually expect rapid returns on investment, which can put undue pressure on smes to prioritize short-term gains over long-term growth, often resulting in unsustainable business practices as smes accepting venture capital often means giving up significant equity and control in their company, which can limit decision-making flexibility and affect profitability. again, founders might prioritize the venture capitalist’s agenda over what is best for the company (adedeji and yusuf, 2018) https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 217 | p a g e venture capitalists may push for automation and lean staffing to increase profitability at the expense of job creation (olaniyi and olayemi, 2020). the formal application and vetting process for receiving venture capital is often complicated, making it difficult for small-scale entrepreneurs to access funds. this reduces the overall number of smes that could benefit from venture capital (adekunle, 2021). the high expectations and pressures from venture capitalists can sometimes lead to conflicts over business strategies and priorities. these conflicts can affect decision-making processes and potentially impact profitability if not managed effectively. additionally, the need to meet aggressive growth targets and financial performance expectations can place significant pressure on smes, which might affect their overall stability and profitability (gikomo, 2013). the focus of venture capitalists on achieving high returns can lead to short-termism, where smes prioritize immediate financial gains over long-term sustainability. this emphasis on short-term performance might drive smes to pursue high-risk strategies that could compromise long-term profitability and business viability. therefore, while vc financing can provide significant benefits, it is essential for smes to balance the pursuit of rapid growth with sustainable business practices (david, 2023). theoretical review the resource based theory the resource based theory of entrepreneurship, propounded by birger wernerfelt in the year (1984), argues that access to resources by founders is an important predictor of opportunity-based entrepreneurship and new venture growth. this theory stresses the importance of financial, social and human resources as cited by kwabena nkansah simpeh (2011). financial, social and human capital represents three classes of theories under the resource-based entrepreneurship theories. this theory suggests that people with financial capital are more likely to acquire resources to effectively exploit entrepreneurial opportunities and set up a firm to do so. if venture capital (vc) financing provides smes with access to critical financial resources, which are often scarce and difficult to obtain through traditional financing methods, according to the resource based theory, these financial resources can be considered valuable and rare, giving smes a competitive edge in their respective markets. the infusion of capital allows smes to invest in growth opportunities, innovate, and expand operations, directly impacting their performance. for example, the ability to finance research and development, marketing, and scaling operations can differentiate an sme from its competitors, contributing to superior performance (barney, 2011). empirical review aman (2020) explored the impact of venture capital funding on the performance of small and medium-sized enterprises (smes) in russia using correlation matrix and focusing on internal https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 218 | p a g e organizational structuring and human resources management. the findings affirmed that venture capital funding significantly and positively influences the growth and performance of smes. john (2023) conducted a study investigating the influence of venture capital financing on start-up success through a comprehensive review articles, conference papers, and relevant academic publications. the study concluded that venture capital financing substantially contributes to start-up success by providing not only financial resources but also valuable managerial expertise, industry connections, and guidance. david (2023) examined the relationship between venture capital and other sources of finance through a literature review of both qualitative and quantitative studies. the findings highlighted the significance of venture capital financing in conjunction with other financial sources. baldwin & rafiquzzaman (2020) explored the role of financial management skills in the performance of smes in malawi using ols method. the study revealed that proficiency in financial management supports various aspects such as capital raising, profitability, investor confidence, risk mitigation, strategic decision-making, access to credit and financing, and tax compliance. effective financial management contributes to long-term sustainability while balancing growth objectives with profitability. biney and gan (2018) investigated the impact of venture capital financing on small and medium enterprises’ growth and development in ghana using both propensity score matching and difference-in-difference estimation techniques. the result showed a positive and significant correlation between venture capital financing and smes’ growth in the context of employment and sales in ghana. achugbu (2017) investigated the impact of venture capital (vc) financing on the growth of innovative 30 start-up companies in nigeria using content analysis method. it was found that venture capital financing had an impact on the growth of innovative start-ups. manyani (2014) investigated effect of venture financing on small and medium scale enterprises in bindura urban, zimbabwe using content analysis and the results indicated that the majority of smes in bindura used their own savings, family and friends to finance their businesses. this is because, the financing options available to bindura smes are impracticable to support the capital required for their operation because of stringent requirements and lack of collateral security. gikomo (2013) investigated the effect of venture capital financing on the growth of top 100 medium sized smes in kenya using cross sectional research design. using a regression model the study found out that there was a positive and significant relationship between growth in smes and venture capital financing. memba, gakure & karanja (2012), studied the impact of venture capital on growth of small and medium enterprises (sme) in kenya and the findings revealed that venture capital had an impact on growth of sme they financed and that use of venture capital can be profitable in kenya even in an inauspicious political and economic climate. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 219 | p a g e dalberg global development advisors (2012) assessed the impact of multilateral investment fund’s venture capital program in latin america using time-series data. the study examined impact of venture capital on companies’ revenue and job growth using a pre and post analysis. the result revealed that venture capital-backed firms in the sample under. afua (2011) studied the impact of venture capital financing on smes in the tema metropolis in ghana using primary data and frequency counts and percentages as main statistical techniques. it was generally observed that sme‟s prefer self-financing and occasionally received support from financial institutions. while firms that had benefited from venture capital financing stated that they did not only receive capital inflow but was accompanied with monitoring, technical skills and expertise, access to management, marketing and distribution and reputation for attracting further finance. juha (2010) examined the effect of venture capital investment on small and medium enterprises in finland using regression analysis. the result showed that venture capitalists have a positive effect on smes in finland. yap (2009) analyzed the effect of venture capital firm's reputation on its start-up company's long term operating performance and survivorship in singapore. using cross sectional data and regression method. the result showed that venture capital companies’ market share and ipo share have strong and positive association with the post-ipo long-term performance metrics, and the effects are statistically significant even after accounting for self-selection bias. dagogo & ollor (2019) examined the effect of venture capital financing on the economic value added profile of nigerian smes using paired t-tests and multiple regression analysis. the result showed that the percentage growth of average economic value added of venture capital -backed smes from 2003 to 2007 was 1,678 percent, whereas there was a reduction in the average of economic value added of non vc-backed smes by 3.3 percent. the result of the multiple regression analysis indicated that management support was the major driver in the high performance of vc-backed smes. egu et.al (2024) examined the effect of venture capital financing on the net sales, net profit and return on assets of smes in cross river state, nigeria. data was collected from smes in cross river state that registered with corporate affairs commission and have used venture capital and analyzed using descriptive statistics of mean and standard deviation. the findings revealed that there was significant difference in net sales, net profit and return on assets after using venture capital financing. emerah et.al (2020) explored the effect of venture capital on the performance of small and medium scale enterprises which have received assistance from vc in nigeria using primary data and linear regression. the results showed that venture capital had a significant positive effect on the performance of small and medium scale enterprises in nigeria. methodoloy research design https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 220 | p a g e this study adopts an ex-post facto research design to explore the relationship between venture capital financing and performance of smes. this approach allows for the analysis of historical data to understand how venture capital financing influences the performance of smes. the study utilized secondary data sourced from world bank database and cbn statistical bulletin from 2011-2023. model specification the study adapted regression model of emerah et.al (2020) which states thus; profit = bo +b1na+b2s+ut………………………..eq 2 where: profit= performance (dependent variable). na= net assets (independent variable) s = sales (independent variable vc = venture capital the model was modified based on the objectives of this study as follows: smep = β0 + β1vcf + ε jc = β0 + β2vcf + ε nsme = β0 + β3vcf + ε where: pfr = performance of smes vcf = venture capital financing smep = small and medium scale enterprises (smes) profitability jc = job creation nsmes = number of smsall and medium scale enterprises (smes). β0 is the intercept, β1, β2 and β3 are the coefficients of the models explanatory variables, and ε is the error term, capturing other factors that influence sme performance not included in the model. method of data analysis data was analyzed using correlation matrix, unit root test and simple regression analysis with the help of e-views 19 statistical software to ensure robustness and accuracy of results. 4. data presentation and analysis in this section, the descriptive statistics for the independent and dependent variables under consideration are analysed in table 1 in terms of its mean, median, maximum, and minimum values. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 221 | p a g e table 1: descriptive statistics of the model variables tvf smep empr nsme mean 341.1000 75.48801 56.45291 93596.64 median 104.1000 44.82284 56.65900 86309.00 maximum 893.7000 355.0400 57.59100 129980.0 minimum 24.40000 10.74789 55.02600 70441.00 std. dev. 366.1616 100.7340 0.801387 24904.86 skewness 0.569576 2.126215 -0.313778 0.673362 kurtosis 1.488715 6.612544 2.049998 1.774567 jarque-bera 1.641590 14.26958 0.594152 1.519538 probability 0.440082 0.000797 0.742988 0.467775 sum 3752.100 830.3681 620.9820 1029563. sum sq. dev. 1340743. 101473.3 6.422219 6.20e+09 observations 11 11 11 11 source: e-views 11 key: tvf-total venture financing ($’ million); smep-sme profitability (n’ billion); empremployment rate; nsme-number of smes. table 1 shows that total venture financing (tvf) had a mean value of $341.1 million, indicating the average level of venture financing across the 11 observations. the median value, at $104.1 million, is significantly lower than the mean, suggesting that the data is skewed by a few higher values, which is confirmed by a positive skewness of 0.57. the standard deviation of 366.16 highlights considerable variability in venture financing amounts, with the maximum reaching $893.7 million and the minimum being as low as $24.4 million. the jarque-bera test value of 1.64 and the probability of 0.44 indicate that the data is not significantly different from a normal distribution. sme profitability (smep) displays a mean of ₦75.49 billion, with a median value of ₦44.82 billion, showing that the profitability figures are positively skewed, as indicated by the skewness value of 2.13. this positive skewness, coupled with a maximum value of ₦355.04 billion, suggests a small number of highly profitable periods significantly influence the average. the standard deviation of 100.73 indicates substantial variation in sme profitability across the observations. the jarque-bera statistic for smep is 14.27 with a probability of 0.0008, which suggests that the distribution is not normal. employment rate (empr) showed a mean value of 56.45%, with a median of 56.66%, indicating that the data is closely clustered around the https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 222 | p a g e central value, with a narrow range between the maximum (57.59%) and minimum (55.03%). the standard deviation is relatively small at 0.80, showing minimal variation in the employment rate. a negative skewness of -0.31 suggests a slight skew towards lower values. the jarque-bera statistic is 0.59, and the associated probability of 0.74 indicates a normal distribution. the number of smes (nsme) has a mean value of 93,596.64, with a median of 86,309, indicating that the data is moderately skewed, with a skewness of 0.67. the maximum value is 129,980 smes, while the minimum is 70,441, resulting in a relatively large standard deviation of 24,904.86, showing significant variability in the number of smes across the periods. the jarque-bera statistic of 1.52 and a probability of 0.47 imply that the number of smes is normally distributed. correlation matrix to examine the association among the variables, the pearson correlation coefficient is used and the results shown below. table 2: correlation analysis of the model variables tvf smep empr nsme tvf 1.0000 0.3926 -0.2089 0.6879 smep 0.3926 1.0000 -0.0148 0.7026 empr -0.2089 -0.0148 1.0000 -0.3163 nsme 0.6879 0.7026 -0.3163 1.0000 source: e-views 11 tvf has a moderate positive correlation with sme profitability (smep) at 0.3926, suggesting that higher levels of venture financing are somewhat associated with improved profitability in smes. additionally, there is a strong positive correlation between tvf and the number of smes (nsme) at 0.6879, implying that increased venture financing is linked to a rise in the number of smes. however, tvf is weakly and negatively correlated with the employment rate (empr) at -0.2089, indicating that higher venture financing does not directly translate to improvements in employment. sme profitability (smep) exhibits a moderate positive correlation with tvf (0.3926) and a strong positive correlation with the number of smes (0.7026). this indicates that higher profitability fosters the expansion of smes. the correlation between smep and employment rate (empr) is near zero (0.0148), suggesting no significant relationship between sme profitability and employment levels. the employment rate (empr) shows a weak negative correlation with most variables in the model. it has a slightly negative correlation with tvf (-0.2089) and nsme (-0.3163), indicating that increases in venture financing and the number of smes might not directly improve employment rates. the correlation of smep with empr (-0.0148) further supports the lack of a significant relationship. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 223 | p a g e the number of smes (nsme) has a strong positive correlation with both tvf (0.6879) and smep (0.7026), showing that more smes are associated with higher venture financing and profitability. however, it is negatively correlated with empr (-0.3163), suggesting that an increase in the number of smes may not necessarily lead to higher employment rates, and could be related to other economic factors. unit root test null hypothesis (ho): the variable x has a unit root alternate hypothesis (h1): the variable x has no unit root table 3: adf test for model variables variable adf prob tvf level 1(0) -2.241621 0.2031 first difference 1(1) -3.544585 0.0335 smep level 1(0) 0.824572 0.9894 second difference 1(2) -5.160095 0.0051 empr level 1(0) -1.804293 0.3593 second difference 1(2) -3.828532 0.0225 nsme level 1(0) 0.001716 0.9367 second difference 1(2) -4.540349 0.0133 source: e-views 11 the data was subjected to unit root test through augmented dickey-fuller (adf). the result in table 3 below showed that tvf is stationary at first difference while others were stationary after the second differencing test of hypothesis one h0: there is no significant effect of venture capital financing on smes’ profitability. h1: there is a significant effect of venture capital financing on smes’ profitability. the robust regression output for the test of hypothesis one is shown below as follows: table 4: regression output for the test of hypothesis one dependent variable: smep method: ml arch (bfgs / marquardt steps) date: 10/04/24 time: 21:16 sample: 2011 2023 included observations: 13 method: m-estimation https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 224 | p a g e m settings: weight=bisquare, tuning=4.685, scale=mad (median centered) huber type i standard errors & covariance variable coefficient std. error z-statistic prob. c 13.62293 6.640446 2.051508 0.0402 tvf 0.088560 0.014787 5.989167 0.0000 robust statistics r-squared 0.516273 adjusted r-squared 0.472298 rw-squared 0.891493 adjust rw-squared 0.891493 akaike info criterion 39.54740 schwarz criterion 41.92473 deviance 4187.662 scale 10.66823 rn-squared statistic 35.87012 prob(rn-squared stat.) 0.000000 non-robust statistics mean dependent var 66.14179 s.d. dependent var 94.74549 s.e. of regression 94.08482 sum squared resid 97371.49 source: e-views 11 the r-squared value of 0.516273 implies that the model explains about 51.6% of the variability in sme profitability. the adjusted r-squared value of 0.472298 accounts for the number of predictors, slightly lowering the explained variability to 47.2%. the r-squared value of 0.891493 indicates that the model’s robustness check shows a very high degree of fit when considering the robustness adjustments (e.g., mestimation). the constant term (c) is 13.62293, with a standard error of 6.640446 and a z-statistic of 2.051508, which is statistically significant at the 5% level (p-value = 0.0402). the coefficient for tvf is 0.088560, with a very low standard error of 0.014787 and a highly significant z-statistic of 5.989167 (p-value = 0.0000). this indicates that for every 1-unit increase in venture financing, sme profitability increases by approximately 0.089 units. the highly significant relationship between tvf and smep underscores the importance of venture financing in driving sme profitability, making it a critical factor. decision rule: the results of the robust model provide valuable insights into the relationship between total venture financing (tvf) and sme profitability (smep). since the p-value is less than .05; we reject the null https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 225 | p a g e and accept the alternate; thus, “there is a significant effect of venture capital financing on smes profitability”. test of hypothesis two h0: there is no significant relationship between venture capital financing and sme performance in terms of job creation. h1: there is a significant relationship between venture capital financing and sme performance in terms of job creation. the robust regression output for the test of hypothesis two is shown below as follows: table 5: regression output for the test of hypothesis two dependent variable: empr method: ml arch (bfgs / marquardt steps) date: 10/04/24 time: 21:26 sample: 2011 2023 included observations: 13 method: m-estimation m settings: weight=bisquare, tuning=4.685, scale=mad (median centered) huber type i standard errors & covariance variable coefficient std. error z-statistic prob. c 57.08170 0.366898 155.5792 0.0000 tvf -0.001062 0.000817 -1.299791 0.1937 robust statistics r-squared 0.144681 adjusted r-squared 0.066925 rw-squared 0.197117 adjust rw-squared 0.197117 akaike info criterion 18.13191 schwarz criterion 19.28805 deviance 7.770636 scale 0.740841 rn-squared statistic 1.689456 prob(rn-squared stat.) 0.193673 non-robust statistics mean dependent var 56.68923 s.d. dependent var 0.933489 s.e. of regression 0.914156 sum squared resid 9.192498 source: e-views 11 the r-squared value of 0.144681 indicates that the model explains only 14.5% of the variability in the employment rate. the adjusted r-squared of 0.066925 suggests that after accounting for the number https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 226 | p a g e of predictors, the model’s explanatory power drops to about 6.7%. the r-squared value of 0.197117 indicates a slight improvement in model fit when robust methods are applied, but the overall fit remains modest. the constant term is 57.08170, with a very small standard error of 0.366898 and an extremely high z-statistic of 155.5792 (p-value = 0.0000). this indicates that when tvf is zero, the employment rate is expected to be around 57.08%. the coefficient for tvf is -0.001062, indicating a small negative effect of venture financing on the employment rate. however, the z-statistic of -1.299791 and p-value of 0.1937 indicate that this relationship is not statistically significant. this suggests that venture financing does not have a meaningful direct impact on the employment rate in this model, as the negative coefficient is not strong enough to infer a clear effect. decision rule: the model results provide insights into the relationship between total venture financing (tvf) and empr. since the p-value is greater than .05; we reject the alternate and accept the null; thus, “there is no significant relationship between venture capital financing and sme performance in terms of job creation”. test of hypothesis three h0: there is no significant effect of venture capital financing on the number of smes in nigeria. h1: there is a significant effect of venture capital financing on the number of smes in nigeria. the robust regression output for the test of hypothesis three is shown below as follows: table 6: regression output for the test of hypothesis three dependent variable: nsme method: ml arch (bfgs / marquardt steps) date: 10/04/24 time: 21:43 sample (adjusted): 2013 2023 included observations: 11 after adjustments method: m-estimation m settings: weight=bisquare, tuning=4.685, scale=mad (median centered) huber type i standard errors & covariance variable coefficient std. error z-statistic prob. c 73557.91 5183.673 14.19031 0.0000 tvf 70.70524 10.62025 6.657585 0.0000 https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 227 | p a g e robust statistics r-squared 0.405339 adjusted r-squared 0.339266 rw-squared 0.920088 adjust rw-squared 0.920088 akaike info criterion 27.84287 schwarz criterion 27.20228 deviance 7.87e+08 scale 5928.051 rn-squared statistic 44.32344 prob(rn-squared stat.) 0.000000 non-robust statistics mean dependent var 93596.64 s.d. dependent var 24904.86 s.e. of regression 21646.35 sum squared resid 4.22e+09 source: e-views 11 the model addresses heteroskedasticity concerns and provides both robust and non-robust statistics to evaluate the strength and significance of the variables. the r-squared value of 0.405339 means that the model explains about 40.5% of the variation in the number of smes. the adjusted r-squared value of 0.339266 shows that after accounting for the number of predictors, i.e., 33.9%. the r-squared value of 0.920088 demonstrates a very strong fit when robustness adjustments are applied. the model appears to explain 92% of the variability in the number of smes. the constant term is 73,557.91, with a standard error of 5,183.673 and a z-statistic of 14.19031 (p-value = 0.0000), which is highly significant. this implies that when tvf is zero, the number of smes is expected to be around 73,558. the significance of this constant shows that, independent of venture financing, there is a baseline number of smes. the coefficient for tvf is 70.70524, with a small standard error of 10.62025 and a very high z-statistic of 6.657585 (p-value = 0.0000). this indicates, that for every $1 million increase in venture financing, the number of smes increases by about 70.71. decision rule: the model results provide insights into the relationship between total venture financing (tvf) and the no. of smes. since the p-value is less than .05; we reject the null and accept the alternate; thus, “there is a significant effect of venture capital financing on the number of smes in nigeria”. conclusion and recommendation from the result of the analysis, the was revealed that venture capital financing plays a crucial role in enhancing the performance of small and medium-sized enterprises (smes) through increment in profitability and number of sme’s though, no significant relationship exited between venture capital financing and job creation. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 228 | p a g e the study concludes that non-existence of significant relationship between vcf and job creation in sme’s in nigeria despites the existence of positive significant relationship that exist between vcf and sme’s profitability and number of sme’s is an indication of lopsided growth pattern, as economically, increase in number of sme’s and profitability supposed to create more job opportunities. based on the findings, the study recommends for an intensive and sustainability growth rate policies in favour of sme’s in nigeria that will bring significant and sustainable growth in sme’s which will lead to job creation. references adedeji, m., & yusuf, a. 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(2020). venture capital investment and entrepreneurial success: an empirical study. entrepreneurship theory and practice, 44(5), 946–965. https://doi.org/10.1177/1042258719874106 appendices i year early stage later stage seed stage total venture financing nsme empr smep 2011 10.2 5.2 3.5 18.9 58.133 15.61 2012 15.8 8.4 4.8 29 57.845 13.86 2013 20.5 12.6 7.2 40.3 72838 57.591 15.35 https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com https://smedan.gov.ng/ https://doi.org/10.11648/j.jfa.20180601.15 https://doi.org/10.1002/smj.4250050207 https://data.worldbank.org/ https://doi.org/10.1177/1042258719874106 american research journal of economics, finance and management volume 13 issue 1, january -march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/ arjefm, email: contact@americaserial.com 233 | p a g e 2014 25.6 15.2 8.6 49.4 72838 57.341 16.07 2015 30.2 18 9.9 58.1 70441 57.054 12.95 2016 32.4 21.4 11.1 64.9 75380 56.659 10.75 2017 701.5 124.1 10.1 835.7 73081 56.293 10.75 2018 20 0 4.4 24.4 86309 56.006 44.82 2019 224.1 0 23.3 247.4 90748 55.805 123.93 2020 44.9 56.6 2.6 104.1 97988 55.026 62.51 2021 81.3 781.6 30.8 893.7 129980 55.507 83.74 2022 60.3 703 27.5 790.8 129980 56.703 94.46 2023 80.5 551 11.8 643.3 129980 56.997 355.04 source: statistics database/world bank database/cbn statistical bulletin https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 79 | p a g e effect of board characteristics on carbon emission disclosure: a study of oil and gas firms in nigeria 1ezekwere uzochukwu (phd) and 2bennee emmanuel (phd) 1department of accounting, kingsley ozumba mbadiwe university, ideato, imo state 2department of accounting, ignatius ajuru university of education, port harcourt, river state e-mail: uzochukwu.ezekwere@komu.edu.ng; emmanuelbennee@gmail.com doi: https://doi.org/10.5281/zenodo.15737742 abstract: this study determined the effect of board characteristics on carbon emission disclosure of oil and gas firms in nigeria from 2013-2023, using gender diversity, and board independent as the independent variables, while carbon emission disclosure was the dependent variable of the study. data were extracted from the annual reports and account of the sampled firms. descriptive statistics of this study was applied, while panel least square regression analysis was employed to test the hypotheses. the study indicates that gender diversity has significant and positive effect on carbon emission disclosure while board independence has a significant but negative effect on carbon emission disclosure. in conclusion, board characteristics have a significant effect on carbon emission disclosure of oil and gas firms in nigeria. based on the study findings, the study recommended that since there is a positive relationship between gender diversity and environmental disclosure, the management of firms should sustain a gender mix that is likely to have improved financial performance. keywords: gender diversity, board independent and carbon emission disclosure introduction a board of directors is a set of those who jointly supervise the activities of a corporation, which can be both a for-profit enterprise, nonprofit enterprise, and a central authority employer. the sort of board's powers, duties, and responsibilities are decided with the aid of government policies (along with the jurisdiction's organization’s law) and the employer's own constitution and bylaws. these authorities may specify the number of participants of the board, how they're to be chosen, and the way often they are to fulfill (li, qizi, shahab, wu, & ntim, 2023). as a feature, board members must be committed and devoted to their roles. they need to attend conferences often, put together earlier, and be willing to invest effort and time in their obligations. a secondary function is responsibility. an mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:uzochukwu.ezekwere@komu.edu.ng mailto:emmanuelbennee@gmail.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 80 | p a g e excessive-appearing board holds itself responsible for its selections and actions. different characteristics of a board consist of board length, board independence, and having a lady director. the boards of directors are agents to the corporation. they may be made from people who oversee the sports of a corporation. the primary purpose of the board is to display and advise the top management within the discharge in their obligations to the owners (louziri, & oubal, 2025). climate alternate is one of the maximum complicated environmental issues posing threats and providing opportunities for companies in all sectors. from a business point of view, corporate attitudes in the direction of weather alternate have modified considerably nowadays. in the early 1990s, agencies are frequently observed to cover up or ignore climate exchange issues. over time, the aim of business has modified from an emphasis on shareholder satisfaction alone closer to mutual benefits for business and societies. companies, as part of society, at the moment are faced with the task of a way to reduce emissions to mitigate weather trade. in addition, they may be worried with how weather trade will impact upon their operations, because the growth in atmospheric temperature has given rise to an accumulation of greenhouse fuel (ghg) emissions, especially of carbon dioxide. the political context wherein specific international locations have exceptional positions concerning the destiny of international climate policies exposes groups to a totally excessive stage of regulatory uncertainty (nie & wang, 2019; okafor, 2018). in the absence of a global regulatory framework for weather exchange, many firms now take into account a climate approach, a crucial enterprise exercise for competitive reasons. furthermore, even within the absence of presidency law, several companies have determined to constrain their impact on the worldwide weather and publicly adhere to a specific carbon norm, inclusive of carbon neutrality or carbon labels, to show their dedication to weather exchange mitigation on a voluntary foundation or in response to stakeholder stress from buyers, providers, or customers (naciti & centorrino, 2022). as a consequence, an increasing number of firms around the sector cautiously don't forget create and enforce carbon control method to mitigate carbon emissions. the inconsistencies of findings from the reviewed literatures showed that there may be a gap in literature which this study sought to fill. in an attempt to ultimate the variable gap, this gift look at targeted on carbon emission disclosure as towards prior research that predominantly targeted on financial performance. the main objective of this study is to ascertain the effect of board characteristics on carbon emission disclosure of listed oil and gas firms in nigeria. the specific objectives were to: i. determine the effect of gender diversity on carbon emission disclosure of listed oil and gas firms in nigeria. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 81 | p a g e ii. assess the effect of board independence on carbon emission disclosure of listed oil and gas firms in nigeria. conceptual review board characteristics board characteristics is the concept derived from the attributes or incentives variable that performs a good sized function in monitoring, controlling managers and may be described as a bridge between company management and shareholders (ogbulafor, alpheaus & azubuike, 2025; araoye & olatunji, 2019). to understand the role of the board, board’s characteristics encompass a group of people, who combine their talents and capabilities that together constitute the pool of social capital for their firm that is contributed toward executing the governance function (bekiaris, 2021). for this reason, the board traits means directors and bosses in a vastly more complicated environment, an increasing number of accountable to and encouraged by using multiple stakeholders and compelled from all sides for better reporting on corporate fitness and behaviors (emeka-nwokeji, & agubata, 2019). the capability of an employer so that you can resist financial demanding situations and perform nicely is thought to be depending on the particular attributes of its board of directors. the board is the ideally suited decision-making unit inside the organization, as the board of directors has the obligation to safeguard and maximize shareholder’s wealth, oversee company performance, and investigate managerial performance (awad, gharios, abu-khalaf & seissian, 2024). board gender diversity board gender diversity is the share of female directors to the full number of directors at the board (bekiaris, 2021). board gender variety is a widespread aspect of corporate governance; it is defined because the presence of female administrators at the board of administrators of corporations (amahalu, okoye, obi & iliemena, 2019). gender diversity specializes in the percentage and number of ladies on forums (zalata, ntim,choudhry, hassanein & elzahar, 2019). board gender diversity approach equal or balanced representation of people from different genders in the place of work or different contexts and/or businesses. the quantity to which someone’s gender identity, role, or expression differs from the cultural norms prescribed for human beings of a selected intercourse (dinh, dang & trinh, 2025; mofijul & maksudur, 2019). mnif and cherif (2021) reported that it is the share of men to females in an enterprise that can affect the way in which they have interaction and behave with one another at the work location, and thereby affect the social and cultural surroundings. board gender range consists of an honest and equitable representation of people of various genders, generally known as an equitable ratio of males and females. gender diversity on company boards studies and promotes gender diversity in fields mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 82 | p a g e historically ruled by male. it helps firms attracting and keeping gifted female, being especially relevant as more women be part of the hard work pressure all around the international (somathilake, 2018). in the view of arioglu (2020), female on board show extra duties, greater philanthropically incline and much more likely to alternate monetary overall performance for company social duties. appointments of ladies at the board are expected to bring about variety of reviews and attitude to board deliberations; especially when it pertains to sustainability disclosure (magomaa, ernest & kasheshi, 2024; onyali & okerekeoti, 2018). board independence board of director (bod) is considered an internal governance mechanism. many preceding research have shown that the independence of bod has an influence on the overall performance of the organization (shah, et al., 2022; thuy, 2020). board independence can be defined as the independence between bod and board of control (raza, et. al., 2023). corporate boards are the number one and dominant inner corporate governance mechanism and play a key position in monitoring control and aligning the interests of shareholders with management (ali, et al., 2021). boards are responsible for care and diligence, consisting of making sure that economic controls are effective. board may also give management strategic pointers and may even act to study and ratify control proposals (khatib, & nour, 2021). boards also spot issues early and can work out a whistle-blower characteristic (bansal, et al., 2023). enterprise boards ought to have an impartial majority. an independent majority at the board is much more likely to take into account the quality pursuits of shareowners first. it is also likely to foster impartial decision-making and to mitigate conflicts of hobby which can get up (alqatan, chbib & hussainey, 2019). hussain, rigoni & orij (2023) showed that board’s independence changed into now not associated with earning control even though the percentage of independent directors on the board become one-0.33 of the total majority, which means even though the employer had many impartial directors at the board, it would now not increase shareholders’ return (kanakriyah, 2021). carbon emissions disclosure global bank report (2019) reported that carbon pricing is “an instrument that captures the external expenses of greenhouse gasoline (ghg) emissions the fees of emissions that the general public pays for, which include damage to vegetation, health care costs from warmth waves and droughts, and loss of belongings from flooding and sea degree upward thrust and ties them to their assets thru a fee, commonly in the form of a price at the carbon dioxide (co2) emitted. a charge on carbon enables shift the burden for the damage from ghg emissions backs to those who are responsible for it and who can avoid it. instead of dictating who ought to reduce emissions in which and the way, a carbon mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 83 | p a g e rate presents an economic signal to emitters, and permits them to decide to either rework their sports and lower their emissions, or continue emitting and paying for their emissions. in this way, the overall environmental aim is completed within the maximum bendy and least-price manner to society. putting a good enough price on ghg emissions is of essential relevance to internalize the outside value of climate alternate within the broadest viable variety of monetary decision making and in setting financial incentives for smooth improvement. it may assist to mobilize the monetary investments required to stimulate smooth era and market innovation, fueling new, lowcarbon drivers of financial growth. governments and agencies have come to agree at the fundamental function of carbon pricing in the transition to a decarbonized economy. empirical studies abiad, abraham, el-chaarani and binsaddig (2025) determined the influence of corporate governance characteristics on bank financial performance in gulf cooperation council countries from 2019 to 2023 using two-stage least squares and generalized method of moment’s econometric methods. the study showed that ceo duality increases return on equity, with a non-significant impact on return on assets. the study also showed that bank size moderates the impacts of board size, board independence, and gender diversity in boards on the financial performance of banks. bunyaminua, yakubu and oumarou (2025) ascertained the association between corporate governance mechanisms and firm market value using data from listed firms on the ghana stock exchange spanning 2008 to 2018. generalized method of moments (gmm) regression technique was employed. the study indicates significant linkages between specific governance variables and mva. notably, outside directors, gender diversity, frequency of board meetings, and audit committee size are found to significantly reduce firm value. johennesse and budidarma (2022) ascertained the effect of corporate governance characteristics on bank performance. data were extracted from data stream database, which included bank data from 34 countries of g20. the results showed that board size, gender diversity and board independence positively affected roa but negatively and non-significantly affected price earnings ratio (per). mititean (2022) examined the effect of board’s characteristics on the financial performance of firms operating in the energy industry in romania from 2018 to 2021. the spss statistical program was used to run the regression model on the selected sample. this study found that ceo duality and board’s meetings were negatively correlated with roe, but positively correlated with roa. islam, pervej and lee (2022) analyzed the effect of characteristics of board on the financial outcomes of firms in bangladesh from 2016 to 2020. regression analysis was conducted, and found that, except the number of directors in the executive committee, no other independent variables have a significant impact on return on asset (roa). enofe and igbinoba (2020) determined mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 84 | p a g e the effect of board characteristics on audit quality in nigeria from 2014-2018. descriptive and inferential statistics were employed to summarize the data and to draw inference on the population studied. result from the binary probit regression revealed that board independence and diligence had positive relationship on audit quality. jan-endrikat, charl de villiers and guenther (2020) analyzed the association between board characteristics and corporate social responsibility (csr) in germany from 2011-2018, using a meta-analytic path model that accounted for the potential interplay between board characteristics in determining csr and tests whether the presence of a csr committee played a meditating role. augustine (2020) investigated the effect of corporate board characteristics on the financial performance of nigerian quoted firms 2011-2016. the study employed the random‐effects and fixed‐effects generalized least squares (gls) regression to test the six hypotheses formulated for the study, while controlling for firm size and firm age. the study found that board size, ceo duality and gender diversity were negatively linked with return on capital employed (roce). isa usman, zakariya'u gurama and sirajo-murtala (2019) examined the effect of board characteristics on firm performance of non-financial listed companies in nigeria from 2014-2015.the statistical instrument used was the fixed effect panel least square regression. findings of this study showed that board independent has a positive but not significant relationship with return on equity (roe) and return on asset (roa). chukwu and nwabochi (2019) tested the impact of the board size on the financial performance of 136 nigerian manufacturing firms for data from 2002-2012. robust estimator developed by beck-katz (1995) was used for analysis. the results found positive relation between the board size and return on asset and z altiman score. che-ahmad and chandren (2018) ascertained the effect of board structure on the financial performance of 348 firms quoted on australian stock exchange from 2012 to 2017. multiple regression models was employed and found that there is a positive and statistically significant relation between board composition and revenue growth. alnajjar (2018) ascertained the effect between market value added (mva) and the performance of companies measures (earnings per share ratio, company size and investment of the companies listed in tehran stock exchange for eight-year period (from the beginning of fiscal year 2005 by the end of fiscal year 2018). correlation multiplier scatter diagrams and multiple regressions were employed and the study results indicated a significant relation between company size, earnings per share ratio, investment and market value added. methodology ex-post facto research design was employed in this study. this study was treated as ex-post facto research since it relied on historical data. the population of the study consists of all the nine (9) oil and gas firms listed on the nigerian exchange group (ngx). data to be used in this study was mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 85 | p a g e collected mainly from secondary source. these data were obtained for eleven (11) year’s annual reports and account and sustainability report from 2013-2023 of the sample oil and gas firms. this study employed descriptive statistics and panel least square (pls) regression analysis. model specification this study modified the model of okocha, okoye, amahalu, & obi, (2022): erd = βo + β1gdvίt + β2bdszίt + β3acfe ίt +µίt ….i where: erd = environmental remediation disclosure gdv = gender diversity bdsz = board size acfe = audit committee financial expertise consequent upon the adapted model, the following regression equations were constructed: ced = βo + β1bgdίt + β2bidίt + β3alev ίt +µίt …ii where: βo = constant term (intercept) βίt= coefficients of board characteristics for firm ί in period t µίt = error term/unexplained variable(s) of firm ί in period t cedit = carbon emission disclosure of firm ί in period t bgdit = board gender diversity of firm ί in period t bidit = board independence of firm ί in period t levit = leverage of firm ί in period t decision rule accept the null hypothesis (ho) if the p-value of the test is greater than 0.05, otherwise reject and accept the alternate hypothesis (h1). data analysis and result ced bgd bid lev mean 0.818182 7835.636 0.545455 0.127324 median 1.000000 5400.000 1.000000 0.133536 maximum 1.000000 47546.00 1.000000 0.230298 minimum 0.000000 0.000000 0.000000 0.032253 std. dev. 0.387657 12968.60 0.500464 0.066987 skewness -1.649916 2.573287 -0.182574 0.044830 kurtosis 3.722222 8.199958 1.033333 1.800592 jarque-bera 47.06829 220.7980 16.50458 5.967301 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 86 | p a g e probability 0.000000 0.000000 0.000261 0.050608 sum 81.00000 775728.0 54.00000 12.60512 sum sq. dev. 14.72727 1.65e+10 24.54545 0.439754 observations 99 99 99 99 from table 1, it could be observed that the mean values of the carbon emission disclosure (ced) stood at 0.818. furthermore, the mean value of board gender diversity (bgd) value of showed an average value of 7835.64. also, the mean values of board independent disclosure (bid) showed a value of 0.545. on firm leverage (lev), the mean values stood at 0.127 the kurtosis of 3.722222, 8.199958, 1.033333, and 1.800592 for ced, bgd, bid, and lev showing a distribution that is strong, suggesting a concentration of values around the mean with potential outliers. the jarque-bera probability of 0.000000, 0.000000, 0.000261 and 0.050608 confirms that the ced, bgd, bigd, and lev data is significantly non-normally distributed showed that traditional parametric analyses may need to be approached with caution. on the jarque–bera test of goodness-of-fit, the result suggested that only the data on firms in the nigerian oil and gas firms. theorem revealed that the violation of the normality assumption posed no major problem in panel data analysis, especially with large firm-year observations (ghasem and zahediasl, 2012). test of hypotheses table 1: panel least square regression analysis testing the effect of bgd,bid, lev on ced dependent variable: ced method: panel least squares date: 06/24/25 time: 10:02 sample: 2013 2023 periods included: 11 cross-sections included: 9 total panel (balanced) observations: 99 variable coefficien t std. error t-statistic prob. c 0.357148 0.084789 4.212218 0.0001 bgd 1.12e-05 2.03e-06 5.504575 0.0000 bid -0.138831 0.060574 -2.291926 0.0241 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 87 | p a g e lev 3.528034 0.450712 7.827684 0.0000 r-squared 0.574266 mean dependent var 0.818182 adjusted rsquared 0.560822 s.d. dependent var 0.38765 7 s.e. of regression 0.256903 akaike info criterion 0.159326 sum squared resid 6.269901 schwarz criterion 0.264179 log likelihood 3.886628 hannan-quinn criter. 0.20175 0 f-statistic 42.71468 durbin-watson stat 2.387128 prob(f-statistic) 0.00000 0 in table 2, a simple least square regression analysis was conducted to test the effect between board gender diversity (bgd), board independent (bid), firm leverage (lev) and carbon emission disclosure (ced). the r-squared is coefficient of determination which tells us the variation in the dependent variable due to changes in the independent variable. the value of r squared was 0.57, showing that there was variation of 57% on ced due to changes in bgd, bid and lev. this implies that 57% changes in ced could be accounted for by bgd, bid and lev, while 43% was explained by unknown variables that were not included in the model. the durbin-watson statistic of 2.387 suggests that the model does not contain serial correlation. the f-statistic of the regression is equal to 42.71468. the associated f-statistic probability is 0.000. test of hypothesis one ho1: gender diversity has no significant effect on carbon emission disclosure of listed oil and gas firms in nigeria h1: gender diversity has significant effect on carbon emission disclosure of listed oil and gas firms in nigeria the table showed that bgd is positively and significantly affect the ced of oil and gas firms in nigeria. the beta coefficient of the variable; β1 = 1.120; the slope coefficient shows that p-value = 0.000 < 0.05. thus, a significant and positive effect exists between bgd and ced. the overall regression result with p-value = 0.000 provides a basis for accepting the alternative hypothesis, which mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 88 | p a g e states that board gender diversity has a significant and positive effect on carbon emission disclosure of oil and gas firms in nigeria. hypothesis two ho2: board independence has no significant effect on carbon emission disclosure of oil and gas firms in nigeria h2: board independence has significant effect on carbon emission disclosure of oil and gas firms in nigeria the table showed that bid is negatively and significantly affect the ced of oil and gas firms in nigeria. the beta coefficient of the variable; β1 = -0.139; the slope coefficient shows that p-value = 0.024 < 0.05. thus, a significant and negative effect exists between bid and ced. the overall regression result with p-value = 0.024 provides a basis for accepting the alternative hypothesis, which states that board independent has a significant but negative effect on carbon emission disclosure of oil and gas firms in nigeria. discussion of findings the regression output shows that a significant and positive effect exists between bgd and ced. the regression result with p-value = 0.000 provides a basis for accepting the alternative hypothesis, which states that board gender diversity has a significant and positive effect on carbon emission disclosure of oil and gas firms in nigeria. this result agreed with ogunmodede, ibukun-falayi and alake (2024) reports, but disagrees with the result of okoye, oranefofor and agu (2024). the regression output shows that a significant and negative effect exists between bid and ced. the overall regression result with p-value = 0.024 provides a basis for accepting the alternative hypothesis, which states that board independent has a significant but negative effect on carbon emission disclosure of oil and gas firms in nigeria. the result of this study is in line with pereira, monteiro, silva and lima (2023) but negates that of the study of nguyen, pham, truong, phi, le and vu (2023). conclusion and recommendations this study determined the effect of board characteristics on carbon emission disclosure of oil and gas firms in nigeria from 20132-2023, using gender diversity, and board independent as the independent variables, while carbon emission disclosure was the dependent variable of the study. data were extracted from the annual reports and account of the sampled firms. descriptive statistics of this study was applied, while panel least square regression analysis was employed to test the hypotheses. the study indicates that gender diversity has significant and positive effect on carbon emission disclosure while board independence has a significant but negative effect on carbon emission disclosure. in mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 89 | p a g e conclusion, board characteristics have a significant effect on carbon emission disclosure of oil and gas firms in nigeria. on the premise of these study findings, the following recommendations were made: i. since there is a positive relationship between gender diversity and environmental disclosure, the management of firms should sustain a gender mix that is likely to have improved financial performance ii. the positive relationship between board independence and carbon emission disclosure is an indication that board independence should be increased through creativity and innovation in order to manage the relationship between the boards and stakeholders leading to an improvement in the firm financial performance and disclosure activities. references abiad, z., abraham, r., el-chaarani, h., & binsaddig, r. o. (2025). the impact of board of directors’ characteristics on the financial performance of the banking sector in gulf cooperation council (gcc) countries: the moderating role of bank size. journal of risk and financial management, 18(1), 40. ali, s., hussain, n., & iqbal, j. (2021). corporate governance and the insolvency risk of financial institutions. the north american journal of economics and finance, 55, 101311 al-najjar, n. (2018). market value added and the performance of companies measures on the companies listed on tehran stock exchange. research journal of finance and accounting, 7(8), 211-219. alqatan, a., chbib, i., & hussainey, k. (2019). how does board structure impact on firm performance in the uk? corporate board: role, duties, and composition, 15(2), 18-27. amahalu, n.n., okoye, p.v., obi, j.c., & iliemena, r.o. 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(2019). board meetings and financial performance of insurance companies in nigeria. european journal of accounting, auditing and finance research, 7(9), 1-16. arioglu, e. (2020). the affiliations and characteristics of female directors and earnings management: evidence from turkey. managerial auditing journal, 35(7), 927–953. augustine, g. (2020). impact of corporate board characteristics on the financial performance of nigerian quoted firms 2011-2016. international journal of business & law research, 8(1), 144155. awad, a.b., gharios, r., abu-khalaf, b., & seissian, l.a. (2024). board characteristics and bank stock performance: empirical evidence from the mena region. risks 12(3), 81. bansal, a., samontaray, d. p., aljalahma, a. k., & khadim, m. d. (2023). does the board influence the bank’s performance? an islamic & commercial banking experience. international journal of professional business review, 8(3), e01080-e01080. bekiaris, m. (2021). board structure and firm performance: an empirical study of greek systematic banks. journal of accounting and taxation, 13(2), 110-121. bunyaminua, a., yakubu, i.n., & oumarou, s. (2025). the impact of board attributes and ownership concentration on firm market value: empirical evidence from an emerging market. cogent business & management, 12(1), 2437147. che-ahmad f., & chandren, f. (2018). board structure on the financial performance of 348 firms quoted on australian stock exchange for 2012-2017. academic journal of interdisciplinary studies, 4(1), 283-290. chukwu, g.t & nwabochi, n. (2019). audit committee characteristics and timeliness of corporate financial reporting in the nigerian insurance industry. international journal of managerial studies and research, 7(4), 86-95. dinh, p.h., dang, t.h., & trinh, n.m. (2025). the impact of board characteristics on business performance in the 4.0 era: empirical research from banks listed on the vietnamese stock exchange. 6th international conference on industry 4.0 and smart manufacturing mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 91 | p a g e emeka-nwokeji, n.a., & agubata s.n. (2019). board attributes and corporate performance: evidence from non-financial firms in nigeria. journal of economics and business, 2(2), 205-217. enofe, a., & igbinoba, w. (2020). impact of board characteristics on audit quality in nigeria. international journal of academic research in accounting, finance and management sciences, 8(3), 101-115. hussain, n., rigoni, u., & orij, r. (2023). ceo duality and corporate sustainability performance: empirical evidence from europe. sustainability accounting, management and policy journal, 14(1), 56-77. isa-usman, n., zakariya'u, e., & murtala, h. (2019). impact of board characteristic on firm performance of non-financial listed companies in nigeria. business and economic horizons, 14(3), 587-614. islam, k.m. pervej, s., & lee, y. (2022). the impact of board characteristics on firm’s financial performance: a study on non-bank financial institutions of bangladesh. international journal of science and business, 12(1), 58-69. jan, e., charl de villiers, r., & guenther, l. (2020). board characteristics and corporate social responsibility in germany from 2011-2018. iimb management review, 28(3), 160-169. johennesse, l.c., & budidarma, g.m. (2022). board characteristics and bank performance: which factor is more important? indonesian journal of business analytics (ijba), 2(1), 1-12. kanakriyah, r. (2021). the impact of board of directors’ characteristics on firm performance; a case study in jordan. journal of asian finance, economics and business, 8(3), 03410350. khatib, s. f., & nour, a. n. i. (2021). the impact of corporate governance on firm performance during the covid-19pandemic: evidence from malaysia. journal of asian finance, economics and business, 8(2), 0943–0952. li, b., qizi, z., shahab, y., wu, x., & ntim, c.g. (2023). high-speed rail network and earnings management techniquesusage trade-off: the moderating effects of governance and religion. managerial auditing journal, 39(1), 26–49. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 92 | p a g e louziri, r., & oubal, k. (2025). characteristics of the chairman of the board of directors and their impact on dividend payments in the moroccan stock exchange. journal of risk and financial management, 18(2), 70. magomaa, a., ernest, e., & kasheshi, e., (2024). board characteristics and financial performance of banks listed on frontier stock markets in east africa. a panel analysis. cogent business & management, 11(1), 2400615 mititean, p. (2022). is the financial performance affected by board characteristics during covid-19? evidence from the energy industry. oradea journal of business and economics, 7(special issue), 100-110 mnif, y., & cherif, i. (2021). female board directorship and earnings management. pacific accounting review, 33(1), 114–141. naciti, v., & giovanna, c. (2022). effectiveness of business practices related to climate change as a driver for improving environmental performance. american journal of applied sciences, 19, 21-33. nguyen, s.l., pham, c.d., truong, t.v., phi, t.v., le, l.t., & vu, t.t. (2023). relationship between capital structure and firm profitability: evidence from vietnamese listed companies. international journal of financial studies, 11(6), 45. ogbulafor, l., alpheaus, o.e., & azubuike, j.u. (2025). effect of board characteristics on the financial performance of listed deposit money banks in nigeria. alvan journal of social sciences (ajss). faculty of social and management sciences alvan ikoku federal university of education, owerri, 2(1), 1-22. ogunmodede, e.o., ibukun-falayi, o.r., & alake, s.f. (2024). firms attributes and sustainability disclosures a study of less sensitive environmental sector in nigeria. european journal of accounting, auditing and finance research, 12(6), 17-31. okafor, t.g. (2018). environmental costs accounting and reporting on firm financial performance: a survey of quoted nigerian oil companies. international journal of finance and accounting, 7(1), 1-6. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 93 | p a g e okoye, n.c., oranefofor p.c., & agu, s.i. (2024). empirical study of the effect of sustainability accounting disclosures on financial performance of brewery firms in nigeria: evidence from nigerian breweries plc. european journal of accounting, auditing and finance research, 12(4), 109-123. onyali, c.i., & okerekeoti, c. u. (2018) board heterogeneity and corporate performance of firms in nigeria. international journal of academic research in accounting, finance and management sciences, 8(3), 101-115. pereira, c., monteiro, a., silva, d., & lima, a. (2023). do the levels of environmental sustainability disclosure and indebtness affect the quality of earnings? sustainability, 15, 2871. raza, m. m., tahir, s. h., raza, h., ali, a. f., & alvi, a. r. (2023). board characteristics and firm performance: a configurational analysis. jisr management and social sciences & economics, 21 (1), 69-91. shah, a.a., ahmed, w., iqbal, m.. & abid, m.a. (2022). impact of attributes of audit committee on productivity of intellectual capital (empirical evidence rom pakistan). review of applied management and social sciences, 5(4), 557-572. somathilake, h. (2018). effect of board characteristic on firm financial performance. global scientific journal, 6(5), 117-127. thuy, c. t. (2020). the impact of board characteristics on financial performance of joint stock companies listed on vietnam stock market. asian journal of economic and business research, 31(3), 43-60. world bank. (2019). the world bank’s approach to grievance redress in projects. world bank, washington, dc. zalata, a.m., ntim, c.g., choudhry, t., hassanein, a., & elzahar, h. (2019). female directors and managerial opportunism: monitoring versus advisory female directors. the leadership quarterly, 30(5), 101309. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 129 | p a g e board of directors’ independence on bankruptcy risk of deposit money banks in nigeria okeke onyekachi nathaniel and akaegbobi tochukwu nkem department of accountancy nnamdi azikiwe university awka. email; on.okeke@unizik.edu.ng; tn.akaegbobi@unizik.edu.ng doi: https://doi.org/10.5281/zenodo.16927526 abstract: the study ascertained the effect of board of directors’ independence on bankruptcy risk in deposit money banks in nigeria. ex-post facto research design was adopted for the study. a sample of eight deposit money banks was purposively selected while other banks were inevitably excluded for unavailability of data. data were generated from the annual reports and accounts of the selected banks in nigeria. panel data were analyzed with descriptive statistics, and panel regression analysis was used to test the hypothesis. the study shows that the board of directors’ independence had a negative and significant effect for nigerian deposit money banks, while that of south african showed a positive and has a significant effect on bankruptcy risk. based on this, there is need to strengthen the board of director’s independency, such as having more independent directors so as to monitor management decisions and prevents opportunistic behaviour, reducing the risk of bankruptcy. keywords: directors’ independence, bankruptcy risk and deposit money banks introduction the more board independence, the more the investment and the higher the financial performance, board independence could lead to better decisions that are in the best interest of the organization and good decisions assist towards achieving an improved financial performance. despite the importance of the financial growth to businesses, it could be influenced by the board characteristics. board characteristics are every attributes and features of a firm’s board that permits the successful and efficient pursuit or full realization of the interests of the various stakeholders (augustine, & juliet, 2022). the attributes could be quantitative or qualitative, the quantitative (tangible) variables include audit committee independence, remuneration committee, board gender diversity, and board of director’s independence and on the other hand, the qualitative or intangible variables include quality decisions, production of positive values (kamaludin, et al 2020). financial distress is a broad concept used to describe situations in which firms face financial difficulty. the most common terms used interchangeably for financial distress are ‘failure’, ‘default’, mailto:on.okeke@unizik.edu.ng mailto:tn.akaegbobi@unizik.edu.ng american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 130 | p a g e ‘insolvency’, and ‘bankruptcy’ (geng, et al, 2015). however, bankruptcy is the extreme and irredeemable outcome of financial distress and as such many financially distressed firms escape bankruptcy due to early reconstruction of operations. there are many definitions of financial distress because different countries have different accounting procedures and rules. it is generally believed that it is a situation where operating cash flow does not exceed negative net assets (li et al., 2014). geng et al. (2015) stated that some of the methods that have been used for financial distress prediction include discriminant analysis, logit or probit regression model, linear conditional probability models, neural network, decision trees, case based reasoning, genetic algorithm, rough sets, support vector machine, and others. however, the assumptions underlying the majority of these methods are far from real world situation. extant research has focused on the discovery of better models for financial distress prediction (ayoola & obokoh, 2018). in nigeria, okoye and okoye (2022); ayoola and obokoh (2018) investigated the effect of board characteristic on bankruptcy prediction in nigerian banks which data ended in 2020, thereby created a periodic gap. this study therefore, sought to assess the effect of board of directors’ independence on bankruptcy risk of deposit money banks in nigeria. conceptual review board independence committee independent directors are the non-executive directors appointed into the board to represent the shareholders. board independence is by and large influenced by how it is composed. a board is said to be independent if made up of more nonexecutive directors. the independent outside director brings to fruition the desired neutrality and minimalize bias in the board process (bhakat & black, 2002). in line with this, elshandidy et al. (2013) argued that having a good number of independent directors on the board would foster greater disclosure by the company. however, gul and leung (2004) documented that the presence of independent directors may not likely address the issue of disclosure as a result of complex board structure, hence, hypothesized that independent board of directors does not have significant effect on risk disclosure of nigerian banks. the global economy appears to have become caught up in what might be described as outside directors, euphoria (dahya & connell, 2017). olubunmi (2021) study the effect of diversity on the financial performance of the board of directors of nigerian citation companies. the results revealed that board independence, board gender diversity, and board size have a positive impact on the aftertax profits of selected listed companies in nigeria. similarly, oyewale et al. (2019) study the relationship between board independence and the financial performance of listed manufacturing companies in nigeria was investigated in this study. the result confirms that there is a significant positive linear relationship between board independence and financial performance of listed manufacturing companies in nigeria. american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 131 | p a g e to this end different studies have established negative result, jibril and maikano (2022) and akpan and amran. (2017) examine the relationship between board characteristics and company performance in nigeria. the studies established that there is no relationship between boards’ equity, board independence, and board age. bankruptcy prediction in addition, a prediction (latin præ-, "before," and dicere, "to say"), or forecast, is a statement about a future event. a prediction is often, but not always, based upon experience or knowledge. there is no universal agreement about the exact difference between the two terms; different authors and disciplines ascribe different connotations. although future events are necessarily uncertain, so guaranteed accurate information about the future is in many cases impossible, prediction can be useful to assist in making plans about possible developments; howard h. stevenson writes that prediction in business "... is at least two things: important and hard (stevenson, 2008). bankruptcy prediction has been one of the most challenging tasks in accounting since the study of fitzpatrick in 1930’s and during the last 60 years an impressive body of theoretical and especially empirical research concerning this topic has evolved (zavgren, 1983). the altman models have been challenged by approaches directly producing probabilities of bankruptcy, such as the logit model, as well as by more advanced machine-learning methods. direct application of the z-score or its variants has proved problematic in other countries, under other legal regimes (accounting principles), and in other time frames. however, indirect applications (e.g., models with the same variables estimated for a new data set) are still acceptable. let us cite here the paper by altman et al. (2017) that shows the validity of the z-score approach internationally with large data sets, also compared to logit models that performed similarly or better. it is also worth referencing the paper by barboza et al. (2017), which compares several machine-learning methods to discriminant analysis and logistic regression in predicting bankruptcy. it turns out that the altman z-score variables fare relatively well in other setups and models. today a large area of finance is dedicated to forecasting financial distress or bankruptcy, employing appropriate methodology. nonetheless, it seems that the finance profession in academia still does not recognize this new methodology as staple content in core corporate finance and accounting courses. the notable exceptions are textbooks by damodaran (applied corporate finance, 5th ed., damodaran, 2015) and berk and demarzo (corporate finance, 4th ed., berk & demarzo 2017). the methodology of bankruptcy modelling may be attributed to financial micro econometrics and more recently, to advanced data analysis. financial micro econometrics “emerges as a natural consequence of applying statistical and econometric methods to corporate finance, accounting, and other fields of finance; the applied edge of research in accounting and corporate finance is inevitably https://en.wikipedia.org/wiki/latin https://en.wikipedia.org/wiki/forecasting https://en.wikipedia.org/wiki/event_(probability_theory) https://en.wikipedia.org/wiki/connotation https://en.wikipedia.org/wiki/uncertainty https://en.wikipedia.org/wiki/planning american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 132 | p a g e linked with the use of notions such as statistical sample, population, and the operation on sets of microdata” (gruszczy´ nski 2018). empirical dalia (2023) examined the relationship between corporate governance and intellectual capital from 2017 to 2021. the modified altman z score model was used to measure bankruptcy risk, and the value-added intellectual coefficient (vaic) model was used to measure intellectual capital. the results also show an insignificant influence of board independence and audit committee size on intellectual capital efficiency. moreover, this study finds that companies with intellectual capital efficiency are less likely to go bankrupt. furthermore, the results indicate that board size, independence, and meetings have a significant negative effect on bankruptcy risk. keerthana and balagobei (2022) examined the impact of board characteristics on the financial distress of listed companies in sri lanka from 2019 to 2021. panel regression analysis was employed, and 36 listed companies representing the consumer service sector in sri lanka were selected as the sample. this research focuses on five aspects of board characteristics consisting of board size, board composition, ceo duality, board meetings, and directors' ownership while financial distress was measured using altman's z score model. the results reveal that board size, board composition, and directors' ownership have a significant positive impact on financial distress whereas ceo duality has a significant negative impact on financial distress. maina (2020) established the relationship between board characteristics and financial distress of listed commercial banks in kenya. correlation research design was adopted. a census study of 11 listed commercial was adopted. secondary data was collected from years 2011 to 2018. inferential analysis and descriptive statistics were used to analyze data which was presented in tables, graphs and figures. the study further found a positive and insignificant relationship between independent directorship and financial distress. governance disclosure had a positive and significant effect on financial distress. governance disclosure has a positive and significant moderating effect on relationship between ownership structure, board structure and financial distress. partha, et al (2019) assessed the effect of audit committee characteristics on the relationship between financial distress and income maximization actions. the study collected data among 37 companies that were listed in indonesia securities exchange from 2015 to 2018. regression modelling analyzed the data. study findings documented that the committee financial expertise weakened the relationship between financial distress and income maximization actions. audit committee independence had positive and significant moderating effect on the relationship between financial distress and income maximization actions. alkilani, hussin and salim (2019) studied the effect of audit committee characteristics on audit opinion of jordan companies. judgemental sampling was adopted in selection of 117 companies listed in amman stock exchange. accounting committee characteristics examined were expertise, independent directorship, meetings and size. logistics regression modelling was fitted. it was american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 133 | p a g e documented that audit committee characteristics had significant influence on modified audit opinion. salloum, azzi and gebrayez (2019) explored the effect of audit committee characteristics on financial distress of financial institutions in middle east. a sample of 54 lebanese banks was examined for periods 2009 to 2011. financial distress was operationalized through evaluation of profitability. regression findings revealed an inverse and significant relationship between frequency of audit committee meetings and financial distress. aman (2019) sought to assess the determinants of financial distress in ethiopian banking sector. quantitative research design was applied, and data collected from 15 banks from 2012 to 2016. univariate and multivariate statistics analyzed the data. study findings documented that profitability and liquidity had positive and significant influence on financial distress (debt service coverage). further, inflation, solvability, firm size had inverse significant effect on debt service coverage. the model had higher odds of being spurious since there was a mix of time series and panel data. khurshid, et al (2018) evaluated the impact of corporate governance on likelihood of financial distress of non-financial companies in pakistan. particularly, the study examined the effect of board composition, ownership structure, audit quality, board size, ceo’s duality, board independence, insider’s directorship, institutional investment and financial distress. binary logistics model was fitted on secondary data gathered from 2009 to 2016. study findings documented that there was significant negative impact on likelihood of financial distress between board size, insider director’s ownership and audit quality. fashan and fitriana (2018) undertook a study to identify the impact of corporate governance and intellectual property rights on financial distress of listed manufacturing companies from 2014 to 2016 in indonesia securities exchange. purposive sampling was adopted in selected of 249 manufacturing companies. univariate, bivariate and multivariate data analysis procedure were adopted. study findings documented that there was no significant association between corporate governance and financial distress of manufacturing companies. fuad (2017) sought to assess the impact of audit committee characteristics on financial distress of listed companies in indonesia securities exchange. judgemental sampling was adopted in selection of 123 service-based companies listed from 2013 to 2015. financial distress was operationalized as firms which had recorded losses of two consecutive years. binary logistics regression model was fitted. study findings documented that there was an inverse effect of audit committee competence and financial distress. further, there was an inverse and insignificant effect of audit committee meeting and financial distress. jalan, kale, and meneghetti (2016) examined the effect of leverage and bankruptcy risk on corporate incentives to shelter income from taxes. their empirical tests provide evidence that is consistent with these theoretical predictions. they show that leverage and bankruptcy risk relate negatively to sheltering and that the negative effects of bankruptcy risk and debt on sheltering are stronger for riskier firms; and weaker for larger, better governed, more profitable firms, and for firms that are in the “public eye”. masoumeh (2016) american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 134 | p a g e investigated the relationship between earnings management and quality of earnings for the bankrupt and non-bankrupt firms listed in the tehran stock exchange from 2007 to 2012. also, the future profitability was measured by each of the three variables, future change of earnings, future cash flow from operation, and future non-discretionary earnings. the results of estimating unbalanced panel data technique for 55 firms subjected to bankruptcy of altman's model, and 198 non-bankrupt firms, shows that the bankrupt firms tend to use opportunistic earnings management, and the non-bankrupt choose efficient earnings management. ahmadpour and shahsavari (2014) investigated the earnings quality management and impact on the profitability of future profits of tehran’s stock exchange bankrupt companies. the results with the technique panel data for 55 companies subject to the verge of bankruptcy altman’s model, stating that these companies have a disproportionate composition and proceeded to increased profit management. the results of opportunistic theory of earnings management support and show that the future profitability of earnings quality work. campa, del mar and miñano (2014) conducted a study on the response to the question whether spanish companies go bankrupt, compared to their counterparts, during the years prior to the procedure of bankruptcy law tend to manage earnings or not? in the analysis of a sample matched bankrupt companies, it became clear that earnings management of bankrupt companies is more than those in non-bankrupt them. they achieved this accomplishment of accrual and manipulation of actual items. findings showed that management tools profit operates by industry in which the company and the years of prebankruptcy are changed. ezejiofor, nzewi and okoye (2014) determined the effect of altman model to predict possibility on corporate bankruptcy/ failure in nigerian banking sector. data were collected from annual reports and accounts of the banks. altman prediction was applied. findings show that the model was capable of measuring accurately the failure potential of sound and healthy banks. methodology research design ex-post-facto research design was used for the study. this involves use of financial accounts of the banks under assessment for the period, 2012-2024 to generate the financial ratios that discriminated the most in prediction of healthy banks using altman model. the population of the study comprised of listed banks in the nigeria. given the above, the study population is made up of twenty eight (28) banks in nigeria. as a result, the "purposive sampling technique was applied (non-random sample). the study employed eight nigerian deposit money banks licence with international authorization. source of data data were generated from from the annual reports and accounts of the selected banks in sub-sahara africa. the statement of financial position and comprehensive incomes provided data will use in computing the selected ratios from 2013-2024. hence, the decision to select 2012 year which is based on the most recent year of adoption as evidenced in nigeria. american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 135 | p a g e model specification the data required were those of the dependent variable that include: altman prediction model (working capital, retained earnings, earnings before interest and tax, equity as well as total assets and total book debts) and independent variable, board independence. this was obtaining from the audited reports and accounts of the banks under assessment. the study used altman model given as zeta “z” z=1.2x1 + 1.4x2+ 3.3x3 + 0.6x4 + 1.0 x5, where: x1 = working capital to total assets x2 = retained earnings to total assets x3 = earnings before interest and taxes to total asset x4 = value of equity to total book debt x5 = gross earnings to total assets the decision rule is that: (i). for z<1.81 bankruptcy region (ii). for 1.81<z>2.675 high bankruptcy potential (iii). for 2.675<z<2.99 low bankruptcy potential (iv). for z>2.99 strong (no sign of bankruptcy at all). the altman model will be modified thus to incorporate corporate governance: atmnit = a0 + β1bindit urt …………….......................i where; atmn= altman prediction model bind = board independence method of data analysis data were analyzed with descriptive statistics, and the hypotheses will be tested with pearson correlation, and multiple regression analysis. since the focus of the study is to examine the effect of asset composition on financial performance, regression analysis becomes appropriate tool for it. descriptive statistics employed to summarily describe the mean, median, standard deviation, kurtosis and skewness of the study variables. inferential statistics will also be utilized with the aid of e-views 9 using: i. coefficient of correlation: which is a good measure of relationship between two variables that tell us about the strength of relationship and the direction of the relationship as well? ii. panel regressions analysis: regression analysis predicts the value the dependent variable based on the value of the independent variable and explains the impact or effect of changes in the values of the variables. american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 136 | p a g e decision rule accept the alternative hypothesis, if the probability value (p-value) of the test is less than 0.05 (5%). otherwise reject. data analysis and results data analysis table 1: descriptive statistics atmn bind mean 54.87547 13.76923 median 0.210044 16.00000 maximum 652.9549 17.00000 minimum 0.055106 9.000000 std. dev. 174.1820 3.528609 skewness 3.132913 -0.490033 kurtosis 10.90951 1.347170 jarque-bera 441.2242 16.00030 probability 0.000000 0.000335 sum 5707.049 1432.000 sum sq. dev. 3124955. 1282.462 observations 104 104 source: e-views 9 (2025) from table 1, it could be observed that the mean values of the bankruptcy risk (atmn) stood at 54.875. considering that the scientific value of nigerian firms. the board independent (bind) has the mean values stood at 13.769 nigerian banks which implied that banks in nigeria maintained optimum board independence. the kurtosis of 10.90951 and 1.347170 for nigerian banks atmn and bind showing a distribution that is strong, suggesting a concentration of values around the mean with potential outliers. the jarque-bera probability of 0.000000 and 0.000335 confirmed that the atmn, and bind data is significantly non-normally distributed showed that traditional parametric analyses may need to be approached with caution. on the jarque–bera test of goodness-of-fit, the result suggested that only the data on firms in the nigerian sample banks followed a normal distribution. test of hypothesis ho: board of directors’ independence has no significant effect on bankruptcy of risk deposit money banks in nigeria. table 2: regression analysis between bind and atmn dependent variable: atmn american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 137 | p a g e method: panel least squares date: 06/11/25 time: 07:57 sample: 2012 2024 periods included: 13 cross-sections included: 8 total panel (balanced) observations: 104 variable coefficient std. error t-statistic prob. c 345.9983 62.75989 5.513048 0.0000 bind -21.14300 4.416612 -4.787153 0.0000 r-squared 0.283457 mean dependent var 54.87547 adjusted r-squared 0.275451 s.d. dependent var 174.1820 s.e. of regression 158.1654 akaike info criterion 12.98420 sum squared resid 2551661. schwarz criterion 13.03506 log likelihood -673.1785 hannan-quinn criter. 13.00481 f-statistic 22.91684 durbin-watson stat 2.720898 prob(f-statistic) 0.000006 source: e-views 9 output (2025) in table 2, a simple least square regression analysis was conducted to test the effect between board of directors’ independence (bind) and bankruptcy risk (atmn) for nigerian deposit money banks. the r-squared is coefficient of determination which tells us the variation in the dependent variable due to changes in the independent variable. from the findings in the table 2, nigerian value of r squared was 0.28, an indication that there was variation of 28% on atmn due to changes in bind. this implies that 28% changes in atmn could be accounted for by bind, while 72% was explained by unknown variables that were not included in the model. the durbin-watson statistic of 2.72 suggested that the model does not contain serial correlation. the f-statistic of the regression is equal to 22.917. the associated f-statistical probability is 0.000. the hypothesis of this study stated that board of directors’ independence has no significant effect on bankruptcy risk of deposit money banks in nigeria. the evidence provided by the regression result of model showed that the variable of board of directors’ independence had a negative coefficient of 21.14300 and a p-value of 0.000 which was significant at 5% level for nigerian deposit money banks. it meant that there was a significant effect between board of directors’ independence and bankruptcy risk in nigeria. american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 138 | p a g e the regression result revealed that board of directors’ independence had a negative coefficient of 21.14300 and a p-value of 0.000 which was significant at 5% level for nigerian deposit money banks; while the outcome of model 2 showed a positive coefficient of 0.888108 (p-value 0.020) for deposit money banks in south africa, and also has a significant effect. this result affirmed the study of okoye and okoye (2022) showed that board of directors’ independence has a positive significant effect on bankruptcy risk of deposit money banks in nigeria. dalia (2023) indicate that board independence, has a significant negative effect on bankruptcy risk. also the study of mohammed and onipe (2023) found that board independence shows negative significant effects. however, the study disagreed with maier and yurtoglu (2022) who found that board independence and decrease bankruptcy risk in financially non-distressed firms, they have the opposite effect in financially distressed firms; aliyu, onipe and samuel (2023) showed that board independence show insignificant effects. conclusion this study ascertained the effect of board of directors’ independence on bankruptcy risk in deposit money banks in nigeria. data were generated from 2012 to 2024 from the audited annual reports and accounts of the sampled deposit money banks in nigeria. using regression analysis, the study discovered that board of directors’ independence had a negative and significant effect bankruptcy risk for nigerian deposit money banks. based on this, there is need to strengthen the board of director’s independency, such as having more independent directors so as to monitor management decisions and prevents opportunistic behaviour, reducing the risk of bankruptcy. references ahmadpour, a., & shahsavari, m. 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(2018). the influence of corporate governance and intellectual capital towards financial distress (empirical study of manufacturing company in idx for the period of 2014-2016). journal of applied accounting and finance, 2(2), 163-179. fuad, n. s. (2017). the impact of audit committee characteristics on financial distress. diponegoro journal of accounting, 6(2), 1-9. geng, r., bose, i. & chen, x. (2015). prediction of financial distress: an empirical study of listed chinese companies using data mining. european journal of operational research, 241, 236247. jibril, r. s., & maikano, h.a. (2022). the impact of audit committee attributes on financial performance of listed consumer industries in nigeria: tsu. international journal of accounting and finance (tsuijaf), 1(3), 260–283. american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 140 | p a g e kamaludin, k., ibrahim, i. & sundarasen, s. (2020). a middle eastern viewpoint on the moderating effects of family business on audit committee diligence and firm performance; international journal of economics and management, 14(2), 173–188: retrieved from http://www.ijem.upm.edu.my/vol14no2/1.%20moderating%20effectspdf. keerthana, g.; balagobei, s. (2022). board characteristics and financial distress: empirical evidence from sri lanka. khurshid, k. k., sabir, m. s., tahir, h. t., & abrar, a. (2018). impact of corporate governance on the likelihood of financial distress: evidence from non-financial firms of pakistan. pacific business review international, 11(4), 133-149. li, z., crook, j., andreeva, g., & tang, y. (2021). predicting the risk of financial distress using corporate governance measures. pacific-basin finance journal, 68, 101334. https://doi.org/10.1016/j.pacfin.2020.101334 maina, s. n., & omagwa,j. (2020). board characteristics and financial distress of listed commercial banks in kenya. iosr journal of economics and finance (iosr-jef). 11(5). 2233. www.iosrjournals.org. doi: 10.9790/5933-1105022233 www.iosrjournals.org 22 | page mohammed m. u. & onipe a.y. (2023). board of directors and bankruptcy risk using gmm approach. applied finance and accounting 9(1), august2023issn2374-2410e-issn23742429publishedbyredfamepublishingurl:http://afa.redfame.com okoye, n. j. & okoye p. v.c. (2022). effect of corporate governance on bankruptcy risk of deposit money banks in nigeria. research journal of management practice. 2(12) issn: 2782-7674 (december, 2022) | www.ijaar.org/rjmp partha, i. m. b., widanaputra, a. a. g. p., ratnadi, n. w. d., & mimba, s. p. s. h. (2019). effect of audit committee characteristics on relationship between financial distress and income maximization actions. international journal of social sciences and humanities, 3(3), 28-35. salloum, g., azzi, g., & gebrayez, e. (2019). audit committee and financial distress in the middle east context: evidence of the lebanese financial institutions. international strategic management review, 2(14), 41-47. stevenson, h., (1998). do lunch or be lunch. boston: harvard business school press, http://www.iosrjournals.org/ https://en.wikipedia.org/wiki/harvard_business_school_press american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 24 | p a g e portfolio diversification and operational resilience of banks in nigeria. 1oliogu, e.o. ph.d 2eyamu, f.o. and 3biwei, t. a. phd. 1, 2department of banking and finance, dennis osadebay university, delta state. 3federal college of education, delta state. correspondence e-mail: efemenaoliogu@dou.edu.ng doi: https://doi.org/10.5281/zenodo.15854079 abstract: this study investigates how different portfolio diversification strategies affect the operational resilience of nigerian banks between 2008 and 2022. the research addresses the problem of instability in the nigerian banking sector, especially during economic crises like the 2008 financial crash and the covid-19 downturn, and explores whether diversification can enhance banks’ ability to withstand such shocks. using time series data from the central bank of nigeria and the ndic, the study applied ordinary least squares (ols) regression to examine the effects of four diversification strategies: asset, deposit, investment, and product diversification. the dependent variable was operational resilience, measured by operational efficiency. findings revealed that asset and deposit diversification significantly improve resilience, with deposit diversification having the strongest positive effect. however, investment diversification had no significant impact, and product diversification had a negative effect, suggesting that expanding into too many product lines may reduce efficiency and stability. the study concludes that nigerian banks can boost their resilience through strategic asset and deposit diversification but should be cautious with product diversification to avoid operational strain. 1.0 introduction the nigerian banking sector operates in a dynamic environment characterized by economic volatility, regulatory changes, foreign exchange volatility, and technological change risk. banks being the major beneficiaries of economic boom are also at the receiving end during period of economic recession (asemota & ogedengbe, 2023). the demand for banking services during period of boom increases thus causing an increase in their profit margin. however, in times of recessions, they suffer the consequences of hostile economic policies. operating in such hostile environment leads to decline in their revenue. financial institutions therefore need strategies to mitigate risk encountered in the course of carrying out their operational activities in order to cushion the effect of the shocks arising from these changes. portfolio diversification is the veritable tool needed by banks to manage financial risks to ensure stability in the banking sector. mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:efemenaoliogu@dou.edu.ng tel:2008 tel:2022 tel:2008 american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 25 | p a g e in recent years, nigeria went through a serious economic downturn due to the effects of covid-19. however, the economy started to recover when restrictions were eased. according to a 2021 report by the world bank, the nigerian government introduced several important policy changes. these included unifying the exchange rate, removing fuel subsidies, and adjusting electricity prices to better reflect actual costs. the banking sector was also affected by these changes. banks play a key role in the growth of any country because they provide services like loans and savings that support business activities and the economy in general. according to jibrin et al. (2022), the strength of a country’s economy is closely linked to the health of its banking system. the 21st century banking sector operates in a fast-changing and competitive environment, which has pushed banks to look for new ways to grow and stay strong. (erhijakpor & eyamu, 2025). one strategy banks use to deal with uncertainty is diversification. osifo & evbayiro-osagie (2020) explained that diversification can help businesses perform better by spreading their resources across different projects or areas. this strategy allows banks to stay competitive, increase profits, and reduce risks. banks can diversify in many ways by investing in different things like stocks, real estate, and bonds. therefore, diversification of banks’ portfolio is essential for the stability of the banking system. arising from the financial crises of 2007/2008, emphasis is now placed on the need for banks to keenly measure and control their credit exposures to minimize the resultant effect of credit risk (basel committee on banking supervision, 2014). the regulatory bodies in this sector has made efforts towards mitigating risk experienced in the banking sector. following the global financial crisis of 2008/2009, the federal government of nigeria, during the tenure of sanusi lamido sanusi as cbn governor established the asset management corporation of nigeria (amcon) in july 2010 to help resolve the liquidity and solvency challenges faced by nigerian banks. amcon was charge with the responsibility of stabilizing the nigerian banking sector by acquiring banks toxic assets (non-performing loans) from commercial banks to reduce the level of credit risk and rescuing distressed banks in nigeria (ungersboeck & runkel, 2021). despite the efforts of the regulatory authorities to put measures in place to mitigate the financial risk in the banking sector in nigeria, cases of bank failure are still being recorded in the sector. a most recent case is that of heritage bank whose license to operate was revoked on june 3, 2024. as reported by the sun nigeria (2024), heritage bank had about n700 billion non-performing loan as of march, 2024. also, the banks’ tier 1 capital (reserves, equity and accumulated earnings) was in a deficit of over n1 trillion. it is therefore important for banks to put in place internal strategies to withstand shocks amidst challenges encountered. the call to action is for banks to maintain well diversified portfolios. it is on this basis we examined how portfolio diversification strategies affect operational resilience of banks in nigeria. there is therefore the need for commercial banks diversify their portfolio to mitigate credit risks and enhance performance. mailto:contact@americaserial.com mailto:contact@americaserial.com tel:2021 tel:2022 tel:2020 american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 26 | p a g e many studies have been done in other countries to see how portfolio diversification affects banks performance. some studies have also looked at nigerian banks and other businesses in africa. in sierra leone (kollie, 2024); rwanda (kamagoba & irechukwu, 2023) and serbia (radojičić, & marinković, 2023). studies in the nigerian banking sector are; amahalu, et al. (2023); ayodele, et al (2023); obaro, et al. (2022); omeni & george, (2021). octavianus & fachrudin (2022) conducted a study on internal banks; omosa, et al. (2022) tea factories in kenya; wegwu (2020) food and beverages firms in rivers state; abuh and echukwu (2020) dangote group; and njuguna, et al. (2018) non-financial firms in kenya. however, there are still gaps in the research, especially on nigerian banks. this study aims to fill that gap by examining portfolio diversification strategies and operational resilience of nigerian banks over fifteen (15) years from 2008 to 2022. specifically, the study examine how asset diversification enhances the operational resilience of nigerian banks; ascertain how deposit diversification influences the operational resilience of nigerian banks; investigate the extent to which investment diversification affect influences the operational resilience of nigerian banks; and determine the degree to which product diversification affect influences the operational resilience of nigerian banks 2. 0. review of related literature 2.1. conceptual review 2.1.1. portfolio diversification strategies ihejirika and aderigha (2021) defined portfolio diversification strategies as the spread of investor’s resources (funds) to different investment opportunities. it is a situation whereby an investors does not rely on single investment opportunities. the essence is to minimize risks while maximizing returns by spreading funds across different investment avenues. it is measured by assets diversification, deposits diversification, investments diversification and products diversification 2.1.2. assets diversification and operational resilience asserts diversification involves spreading funds across different assets category like land, capital market instruments (stocks, shares and bonds), money market instruments (treasury bills, certificate of deposits, treasury certificates, etc.), land, buildings, etc. so as to manage risk. (ayodele, et. al, 2023). a well-diversified portfolio of assets reduces the risk inherent in an investment. obaro, et al (2022) surmised that asset diversification contributes positively to the ability of financial institutions to remain resilient especially during economic downturn. 2.1.3. deposits diversification and operational resilience according to rose and hudgins (2016), deposit diversification is a way banks use their funds (deposits) to buy assets with varying level of risk elements and maturity period (long, medium or short term) depending on the account the funds are drawn from.. diversification of deposits by financial institutions will help the organization to maximize the shareholders wealth (omeni & george, 2021). 2.1.4. investments diversification and operational resilience mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 27 | p a g e according to obaro, et al (2022), putting all your investment funds in one basket is detrimental to an organization’s health. investment diversification is aimed at mitigating unexpected financial shocks and allowing operations to continue. when investments are properly diversified and risks are reduced, returns is guaranteed. 2.1.5. products diversification and operational resilience according to jayathilake (2018) expanding business offerings of a firm by delving into other market potentials of an already existing products or an addition of a new product line to the firm’s already existing products increases a firm’s market power, creating synergy in market operations and reduces bankruptcy rate and the potential of increasing returns, profitability and on the long run help the firm to be more stable and resilient during economic downturn. njugunakwaska and orwa (2018) noted that product diversification is essential for increasing a firm’s performance. 2.2. theoretical review 2.2.1. modern portfolio theory (mpt) proposed by harry markowitz in 1952, modern portfolio theory opines that risk-averse investors can construct diversified portfolios to maximize returns while minimizing risk (oladimeji & udosen, 2019). rather than assessing investments in isolation, mpt emphasizes evaluating how each asset contributes to the overall portfolio’s risk-return profile (nwafor & amahalu, 2021). diversification is key to achieving optimal investment outcomes. 2.2.3. market power theory (mpt) introduced by porter (1980), market power theory asserts that firms gain competitive advantage by differentiating themselves and influencing market dynamics through strategic positioning and diversification. key drivers of market power include limiting rivalry, reciprocal buying, and crosssubsidization—each reinforcing the others to strengthen a firm's influence (kollie, 2024) empirical review using robust least square (rls), ezeana, et al (2024) evaluated corporate diversification effect on value of listed conglomerate in nigeria. corporate diversification was gauged using product diversification (prodiv), subsidiary diversification (subdiv), regional diversification (regdiv) and sector diversification (secdiv) while the corporate value was measured by tobin’s q. the ex-post facto research design was employed for the study. a sample of five (5) listed conglomerates out of the six (6) listed conglomerates was used for the study. secondary data from the annual reports of the sampled conglomerates from 2012 to 2023 was used in analyzing data. it was discovered that prodiv and secdiv has a significant negative effect on corporate value of listed conglomerates in nigeria. conversely, subiv and regdiv has a significant positive effect on corporate value of listed conglomerates in nigeria. using descriptive research design, kollie (2024) sought to determine the effect of income diversification on the financial performance of commercial banks in sierra leone from 2018 to 2022. the study found mailto:contact@americaserial.com mailto:contact@americaserial.com tel:1952 tel:2019 tel:2021 tel:1980 tel:2024 american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 28 | p a g e that income diversification was negatively related to financial performance. also, size and capital adequacy had a positive effect, which was statistically significant, while liquidity had a negative impact on financial performance and was not statistically significant. agbesuyi, et al. (2023) delved into the nexus between investment diversification and performance of commercial banks in nigeria, from 2012 to 2021. using multiple regression models, findings revealed that investment in securities and the size of the loan portfolio has a significant positive impact on financial performance (net interest margin-nim), roa and roe). conversely, investment in associates demonstrated a notable negative association with financial performance, while bank size emerged as a positive predictor of financial performance. amahalu, et al. (2023) examined the nexus between diversification and financial performance of quoted commercial banks in nigeria between 2009 and 2022. panel least square (pls) regression analysis was employed in analyzing the data sourced. findings showed that investment in debt securities, investment in equity securities and investment in subsidiaries measures of diversification has a significant positive relationship with return on assets of quoted commercial banks in nigeria. ayodele, et al (2023) studied the effects of portfolio diversification on the financial performance of nigerian deposit money banks (dmbs). portfolio diversification was gauged using sectorial credit diversification, income stream diversification, deposit diversification, and investment diversification while financial performance measured by return on equity. the study spanned from 2000 to 2022, data were obtained from the yearly financial statements of six (6) selected nigerian dmbs. the results revealed that sectorial credit diversification and deposit diversification significantly improved the financial performance of dmbs in nigeria, whereas income stream diversification and investment diversification have the opposite effect. radojičić, and marinković (2023) explored the relationship between the diversification of bank activities and a set of bank performance indicators by running multiple regression on panel data set of 22 operating banks in serbia for a period 15 years (2007-2021). they found a positive influence of the degree of diversification, measured both by income composition and earning assets composition indicators, on the levels and stability of the banks’ return on equity. the presence of covid-19 crisis revealed the tendency to reverse the long-term relationship. the study by obaro, et al. (2022) centered on diversification strategy and performance of banks in nigeria for 22 years (1999-2020). time series data from the audited financial reports of the ten (10) banks considered were collected from cbn statistical bulletin for analysis. diversification was operationalized by asset diversification (astd), deposit diversification (depd), investment diversification (invd) and product diversification (prod) while bank performance was measured by roe. the study evidenced that astd and invd posed a high direct effects on bank performance while prod exerts direct, statistically insignificant effect on bank performance. however, depd exerted high negative effects on bank performance. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 29 | p a g e similarly, octavianus & fachrudin (2022) considered implementation of the income diversification strategy on stability of thirty-two (32) international banks indexed by forbes from 2010-2019. the generalized method of moments (gmm) was used to analyze the panel data. it was discovered that the implementation of the income diversification strategy adopted by international banks increased their stability during the reviewed periods. in nigeria, jibrin, et al. (2022) studied loan portfolio diversification effect on risks and returns of thirteen (13) banks from 2009 to 2020. using the pooled ols, it was discovered that diversification of bank’s loan does not significantly increase risk level of banks in nigeria. also, diversification of loan increases the returns of banks. omosa, et al. (2022) sought to determine the effect of product diversification strategy and performance of selected tea factories in kenya. the study purposively selected kisii and kericho highlands regions. data analysis was conducted using simple linear regression estimate. study findings indicated that product diversification strategy have positive effect on firm’s performance. salman, et al. (2020) conducted a research to investigate the relationship between investment portfolio and fourteen (14) selected banks’ financial performance in nigeria. the study spanned from 2008 to 2017. panel data analysis was conducted and it revealed that investment in bond has significant but negative effect on roa, a proxy of financial performance while cash reserve had a positive but an insignificant effect on financial performance and treasury bills has a negative and an insignificant effect on financial performance. wegwu (2020) analyzed the relationship between diversification strategies and business performance of ten (10) food and beverages firms in rivers state, nigeria. questionnaires were administered to 177 employees of selected firms. findings revealed a positive and significant relationship between diversification strategies and business performance of food and beverages firms. abuh and echukwu (2020) examined the impact of diversification on the performance of dangote group of companies. diversification was measured using product and market diversifications. the research elicited data from primary source while the respondents were reached using questionnaire. the data were analyzed using linear regression analysis. the findings revealed that diversification is a strategy for firms’ survival. in addition, diversification strategy increases market share of the organization as well as minimizing risk of operations. njuguna, et al. (2018) investigated the influence of product diversification strategy on performance of forty-five (45) non-financial firms listed at the nairobi securities exchange in kenya. descriptive correlational survey design was employed. both primary and secondary data was collected. secondary data was obtained from the audited annual reports of these companies for a period of five years (2011 to 2015). the study established that there was a significant positive relationship between product diversification and firm performance. regression analysis revealed that 15.2% of changes in firm performance were attributed to use of this strategy. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 30 | p a g e 3.0. methodology this study adopted the expost-facto research design. time series data were culled from the central bank of nigeria (cbn) statistical bulletin (2022) and nigerian deposit insurance commission (ndic) report. the study adopted the ordinary least squares (ols) regression. prequel to using the ols to test the research hypotheses formulated earlier (in section one), the model was subjected to various preestimation tests (such as descriptive statistics, correlation analysis, and normality test) and other diagnostic tests. this is with a view to ensure that the model is suitable for policy formulation. the modified model of obaro, et al. (2022) was adopted for the study and stated as: opef= 𝛽0 + 𝛽1astd + 𝛽2 depd + 𝛽3 invd + 𝛽4prod + ut …………………1 table 1: operationalization of research variables variable proxies measurement reference expected sign dependent variable: operational resilience operational efficiency (opef) 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑝𝑒𝑛𝑠𝑒 eyamu, and onuorah, (2024). nil independe nt variables: portfolio diversificatio n strategy asset diversification (astd) 1 [[ net loans/total earning assets ] 2 + [ other earning +assets/total earning assets]2 ] kamagoba, and irechukwu (2023). positive deposit diversification (depd) (demand/∑deposits)2 +(savings/∑deposits)2 + (time/∑deposits)2 + (cds/∑deposits)2 + (banks/∑deposits)2 onuorah, (2021). positive investment diversification (invd) δp 2 = c1 2 δ1 2 + c2 2 δ2 2 + 2c1c2δ1δ2 ρ where; δ1 and δ2 are standard deviations of the two underlying assets, obaro, et. al. (2022). negative mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 31 | p a g e c1 and c2, ρ is correlation between the assets, c1 and c2 are the respective proportions of the two assets in the portfolio. product diversification (prod) average measurement of the product mix offered by sampled banks obaro, et. al. (2022). positive source: author’s compilation (2025) 4.0 result and discusisons table 2: descriptive statistics oper astd depd invd prod mean 54.77333 0.039653 0.381227 0.542553 0.836467 maximum 66.87000 0.310900 0.570900 0.861300 0.993300 minimum 18.46000 0.001700 0.335500 0.500000 0.506700 std. dev. 15.00622 0.076198 0.071490 0.096727 0.201984 observations 15 15 15 15 15 source: author’s compilation (2025) the descriptive statistics for nigerian banks' operational resilience (oper) reveal an average value of 54.77 and standard deviation of 15.01, suggesting a moderate variation. the maximum value of 66.87 reflects periods of stability and regulatory improvements, while the minimum value of 18.46 highlights the adverse effects of the 2008–2009 global financial crisis. the standard deviation of 15.01 indicates moderate variability. astd has a low mean of 0.0397, reflecting limited diversification efforts for much of the period. the maximum value of 0.3109 in 2022 indicates recent improvements, while the minimum of 0.0017 underscores earlier concentration in asset classes. a high standard deviation of 0.0762 points to significant variability. depd shows a mean of 0.3812, reflecting relative consistency in banks' deposit mobilization strategies. the maximum value of 0.5709 in 2010 corresponds to aggressive efforts during the financial crisis, while the minimum value of 0.3355 occurred more recently. the standard deviation of 0.0715 indicates moderate variability. invd has a mean value of 0.5426, showing stability in investment strategies. the maximum value of 0.8613 in 2008 reflects higher risk-taking, while the minimum value of 0.5000 signifies a shift to safer investments. a standard deviation of 0.0967 indicates moderate variation. prod stands out with the highest mean value of 0.8365, reflecting consistent efforts by nigerian banks to diversify their product offerings. the maximum value of 0.9933 in 2017 and 2018 marks peak diversification, while the minimum value of mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 32 | p a g e 0.5067 in 2010 represents limited product scope during challenging periods. the standard deviation of 0.2020 suggests moderate variability. 4.1 correlation analysis the correlation analysis tells the direction and degree of relationship between and among variables. table 3 accounts for the correlation analysis: table 3: pearson correlation analysis oper astd depd invd prod oper 1.000000 astd -0.339286 1.000000 depd -0.260714 -0.053571 1.000000 invd -0.077475 -0.185940 0.337017 1.000000 prod -0.148347 0.187936 -0.061305 -0.011793 1.000000 source: author’s compilation (2025) the result of the pearson correlation analysis depicts negative relationship between oper and astd (-0.3393), depd (-0.260714), invd (-0.077475) and prod (-0.148347). these negative relationship indicate an increase in operational resilience (oper) will lead to a decline in astd, depd, invd and prod. the negative correlation implies that efforts to enhance operational resilience might come at the expense of further diversifying assets, banks not prioritizing expansion of their deposit base, paying less attention to diversifying their product offerings. overall, these correlations show that operational resilience has weak to moderate negative relationship with the diversification strategies of nigerian banks, suggesting that a focus on resilience may limit other diversification efforts, though the relationships are not strong enough to assert a definitive pattern. 4.2. regression result and discussions table 4.7 present the main regression result having confirmed that the model is homoskedastic, and devoid of multicolinearity problem table 4: regression estimate dependent variable: oper date: 01/16/25 time: 06:19 sample: 2008 2022 included observations: 15 variable coefficien t std. error t-statistic prob. c 1.545100 0.221618 6.971914 0.0001 astd 0.356640 0.099540 3.582887 0.0050 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 33 | p a g e depd 0.590817 0.049744 11.877240 0.0000 invd 0.080841 1.456458 0.055505 0.9571 prod -0.341690 0.104027 -3.284634 0.0111 r-squared 0.939370 mean dependent var 54.77333 adjusted rsquared 0.893898 s.d. dependent var 15.00622 s.e. of regression 4.888018 akaike info criterion 6.323937 sum squared resid 191.1418 schwarz criterion 6.65436 0 log likelihood -40.42953 hannan-quinn criter. 6.320417 f-statistic 20.65810 durbin-watson stat 2.04994 9 prob(f-statistic) 0.000184 source: author’s compilation (2025) from table 4, the model reported an r-squared value of 93.94% suggesting that bank diversification strategies collectively explain a substantial proportion of variations in operational resilience. to further substantiate this, the study reported an adjusted r² value of 63.82%, indicating that the model explains a significant proportion of the variation in oper. additionally, the global statistics reveal that bank diversification proxies jointly affect banks’ operational efficiency significantly. lastly, the durbinwatson statistic of 2.049949 indicates that the model is not serially auto-correlated. these findings highlight that while diversification is essential for building resilience, focusing on specific areas, particularly deposit and asset diversification, is more effective, whereas caution is warranted in overextending product offerings. from the regression output, the coefficient of astd was 0.356640 with p-value of 0.0050, demonstrated a significant positive impact on operational resilience. this suggests that when banks diversify their assets across different categories or sectors, they reduce the risks associated with overconcentration in specific asset classes. this finding underscores the importance of strategic asset allocation in ensuring long-term stability. this finding aligns with several studies that emphasize the importance of diversification in improving financial stability and managing risk. for instance, obaro et al. (2022) found that asset diversification (astd) has a positive effect on bank performance. similarly, kamagoba and irechukwu (2023) highlighted that diversified asset portfolios in rwanda help lower portfolio volatility and improve financial performance, suggesting that asset diversification contributes to operational stability in banks. in the same vein, depd reported coefficient value of 0.590817 and p-value of 0.0000. this symbolizes a positive significant relationship between depd and oper. this indicate that a well-diversified mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 34 | p a g e deposit base is critical to maintaining operational stability. diversification in deposits ensures that the banks are not overly reliant on any single source of funding, reducing vulnerability to sector-specific or regional economic downturns. this finding aligns with studies conducted by agbesuyi et al. (2023) emphasizing that investment diversification, which includes managing a diverse deposit base, significantly improves financial performance. also, ayodele et al. (2023) found that deposit diversification had a positive effect on the financial performance of nigerian banks. on the contrary, studies by obaro et al. (2022) noted that deposit diversification (depd) had a negative effect. also, kamagoba and irechukwu (2023) observed that diversification strategies in banks should be carefully managed, indicating that the benefits of deposit diversification may be contingent on factors such as market conditions and the nature of customer segments. invd as reported in table 4, with a coefficient of 0.080841 and a p-value of 0.9571, shows positive but statistically insignificant relationship with operational resilience. this implies that diversifying investments alone may not directly contribute to the stability of a bank’s operations. the finding aligns with the findings of agbesuyi et al. (2023) and ayodele et al. (2023) but in contrast with the findings of obaro et al. (2022) and kamagoba and irechukwu (2023). as indicated in table 4, prod has a negative significant relationship with oper. this indicates that excessive diversification into multiple product lines can be counterproductive, potentially diluting managerial focus, overextending resources, and introducing inefficiencies. the significant negative relationship between product diversification and operational resilience, with a coefficient of -0.341690 and a p-value of 0.0111, aligns with the findings of ezeana, et al (2024); agbesuyi et al. (2023) and amahalu et al. (2023) emphasize the importance of aligning diversification strategies with the core competencies of an institution to prevent operational strain. studies such as kollie (2024) and ezeana et al. (2024) also found that while diversification can enhance performance, misaligned diversification strategies, such as expanding into non-core or unfamiliar product lines, can overwhelm management and operational resources, leading to decreased resilience. 5.0. conclusion and policy recommendations the findings from this study demonstrate that asset diversification and deposit diversification exert a significant positive effect on operational resilience, with deposit diversification having the highest impact. in contrast, investment diversification shows no significant effect, and product diversification exerts a negative but statistically significant effect, implying that an expanded product mix may introduce inefficiencies or vulnerabilities. while the study reveals a mixed effect of diversification strategies on operational resilience, it concludes that banks in nigeria can benefit from strategic diversification, particularly in assets and deposits, to enhance their operational resilience. however, careful attention must be paid to product diversification to mitigate potential adverse effects. this underscores the importance of a balanced and well-planned diversification approach for optimal bank performance in nigeria. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 35 | p a g e arising from the findings of the study, we recommended that banks should continue to diversify their asset portfolios by investing in a variety of high-performing and low-risk asset classes. this can include a balanced mix of loans, securities, and other income-generating assets to enhance operational resilience and reduce exposure to specific risks. also, nigerian banks should focus on expanding their deposit base by introducing innovative products and targeting diverse customer segments, regions, and industries. references abuh, a. p. & echukwu, i. j. (2020). diversification strategy and performance of manufacturing firms in nigeria. international journal of public administration and management research (ijpamr), 5(4), 54-67. agbesuyi, o. k., samuel, o. e., olumuyiwa, o. & adeuja, n. (2023). effect of investment diversification on nigerian bank performance. african development finance journal, 6(1), 176-195. http://journals.uonbi.ac.ke/index.php/adfj. amahalu, n.n, okudo, c. c. & ezechukwu, b. o. (2023). diversification and financial performance of quoted commercial banks in nigeria. international journal of management studies and social science research, 5(3), 396-406. asemota, g. o. & ogedengbe, e. d. (2023). corporate diversification and firm performance: evidence from the nigerian banking sector. journal of technology management and business, 10(1), 6578. doi: https://doi.org/10.30880/jtmb.2023.10.01.006 ayodele, t. d., olagunju, i. l., akintayo, a., abdulrahman o. s. (2023). effect of portfolio diversification on financial performance of deposit money banks (dmbs) in nigeria. international journal of scientific research and engineering development, 6(6), 290-301. basel committee on banking supervision. (2014). supervisory framework for measuring and controlling large exposures. available at: http://www.bis.org/publ/bcbs283. erhijakpor, a. e. o. & eyamu, f. o. (2025). financial institutions’ regulation, banking sector competitiveness and stability of the banking sector in nigeria. journal of accounting, finance and fintech advancements, 1(1), 1-12. eyamu, e.o. & onuorah, a.c. (2024). cash flow management and operating efficiency of listed oil and gas companies in nigeria. british international journal of applied economics, finance and accounting, 8(5), 70-88. mailto:contact@americaserial.com mailto:contact@americaserial.com http://journals.uonbi.ac.ke/index.php/adfj https://doi.org/10.30880/jtmb.2023.10.01.006 http://www.bis.org/publ/bcbs283 american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 36 | p a g e ezeana, k.s., ezeagba, c.e. & ndubuisi, c.j. (2024). corporate diversification and value of quoted conglomerates in nigeria, journal of global accounting, 10(3), 139 163. https://www.google.com/amp/s/thesun.ng/how-bad-loans-poor-due-diligence-sank-heritage-bank/ ihejirika p.o., & aderigha a.g., (2021). portfolio diversification and performance of deposit money banks: analysing the nigerian banking industry. asian journal of economics, business and accounting, 21(15). jibrin, s.g., dosumu, f. & mujahid, g. m. (2022). effect of loan portfolio diversification on risks and returns: a study of selected banks in nigeria. ndic quarterly, 37(3&4), 104-126. kamagoba, s. & irechukwu, e. n. (2023). diversification strategies and competitive advantages of banking sector in rwanda. case of bank of kigali (2017-2022). the strategic journal of business & change management, 10 (4), 1098 – 1113. http://dx.doi.org/10.61426/sjbcm.v10i4.2807. kollie, j. l. s. (2024). effects of income diversification on financial performance of commercial banks listed in sierra leone. european journal of management and marketing studies, 9(1), doi: 10.46827/ejmms.v9i1.1702. njuguna, v. n., kwasira, j. & orwa, g. (2018). influence of product diversification strategy on performance of non-financial firms listed at the nairobi securities exchange, kenya. international journal of economics, commerce and management, 6(6), 60-83. nwafor, p.u., & amahalu, n.n. (2021). auditors’ independence and audit quality of quoted deposit money banks in nigeria. american research journal of humanities social science (arjhss), 04(09), 77-85 obaro, v. c., onuorah, a. c., evesi, h.o. & ehiedu v.c. (2022). diversification and the performance of quoted banks in nigeria. journal of research in business and management, 10(10), 46-54 octavianus, h. & fachrudin, k. a. (2022). income diversification strategy on bank stability: international banks evidence. jurnal keuangan dan perbankan, 26(3), 538-551. oladimeji, m. s. & udosen, i. (2019). the effect of diversification strategy on organizational performance. journal of competitiveness, 11(4), 120–131. https://doi.org/10.7441/joc.2019.04.08. mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.google.com/amp/s/thesun.ng/how-bad-loans-poor-due-diligence-sank-heritage-bank/ http://dx.doi.org/10.61426/sjbcm.v10i4.2807 https://doi.org/10.7441/joc.2019.04.08 american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 37 | p a g e omeni, i. p. & george, a. a. (2021). portfolio diversification and performance of deposit money banks: analysing the nigerian banking industry. asian journal of economics, business and accounting, 21(15), 12-27. omosa, h. m., muya, j., omari, s., momanyi, c. (2022). role of product diversification strategy on performance of selected tea factories in kenya. international academic journal of innovation, leadership and entrepreneurship, 2(2), 279-296. onuorah, a. c. (2021). bank diversification strategies and financial performance in nigerian economy. international journal of intellectual discourse (ijid), 4(3), 153-164. osifo, o., & evbayiro-osagie, e. i., (2020). foreign diversification and performance of quoted deposit money banks in selected sub-sahara african countries. oradea journal of business and economics, 5(special), 82-93 radojičić, j. & marinković, s. (2023). impact of income and assets diversification on bank performance in serbia. economic themes, 61(2), 197-214. salman, a.d., mata, b.a.k., kurfi, a.k., ado, a.b. (2020). the relationship between the investment portfolio and banking financial performance in nigeria. asian people journal, 3(1), 141151 ungersboeck, p. & runkel, c. n. (2021). asset management corporation of nigeria (amcon): asset management. the journal of financial crises, 3(2), 618-640. https://elischolar.library.yale.edu/journal-of-financial-crises/vol3/iss2/27. wegwu, m. e. (2020). diversification strategies and business performance in a competitive industry. journalnxa multidisciplinary peer reviewed journal, 6(8), 190-199. world bank group (2021) resilience through reforms. nigeria development update june 2. view this report online: www.worldbank.org/en/country/nigeria. mailto:contact@americaserial.com mailto:contact@americaserial.com https://elischolar.library.yale.edu/journal-of-financial-crises/vol3/iss2/27 http://www.worldbank.org/en/country/nigeria american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 118 | p a g e effect of leverage on financial performance: a study of listed fast-moving consumer goods companies in nigeria bright moses oseni & olufemi oghonogho gina department of accounting wellspring university, benin city email: mosesbright17@yahoo.com/atugina18@gmail.com doi: https://doi.org/10.5281/zenodo.14888290 abstract: this study examines and compares the impact of financial leverage on the financial performance of listed fast-moving consumer goods companies in nigeria. an ex-post facto research design was adopted, short-term leverage ratio (slr), long-term leverage ratio (ll), with return on equity (roe) serving as the dependent variable to measure financial performance. panel data were analyzed using a fixed effect model to control for individual firm-specific factors and to capture variations within the data. the results revealed that slr significantly improves roe in fast consumer goods companies, emphasizing the importance of short-term financial management. the long-term leverage ratio showing a statistically significant negative impact on performance. the study concludes that financial leverage plays a critical role in determining the financial performance of fast-moving consumer goods companies. these findings suggest the companies should therefore consider increasing their use of short-term debt to capitalize on immediate growth opportunities and enhance returns. however, this strategy requires careful monitoring to avoid liquidity risks and ensure that debt obligations are met. keywords: short-term leverage ratio, long-term leverage ratio and return on equity introduction in nigeria's rapidly evolving business landscape, the strategic use of financial leverage has become a crucial determinant of corporate success (olokoyo, 2016). by utilizing debt to fund operations strategically, entities can enhance their financial leverage, which offers various advantages including stable interest rates, increased financial flexibility, and tax deductions (santos, silva & martins 2023). firms face numerous challenges in their pursuit of sustainable growth, profitability, and competitive advantage. one critical aspect of corporate strategy is the optimal utilization of financial leverage, which can significantly influence firm performance. financial leverage, defined as the strategic use of debt financing to amplify shareholder returns and enhance financial efficiency (frank & goyal, 2019), has been a topic of intense debate and research in corporate finance. while some studies suggest that mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 119 | p a g e judicious use of financial leverage can improve firm performance and create shareholder value (kayhan & titman, 2007), others argue that excessive debt can lead to financial distress, increased risk, and diminished firm value (almeida, campello &weisbach 2019). financial leverage can also provide firms with enhanced financial flexibility, enabling them to respond swiftly to changing market conditions and capitalize on new opportunities (almeida et al., 2019). by utilizing debt financing, firms can rapidly raise capital to invest in new projects, acquire competitors, or respond to unexpected expenses, thereby facilitating strategic growth initiatives (graham & harvey, 2001). moreover, financial leverage can enable firms to take advantage of investment opportunities that may arise unexpectedly, such as acquiring a competitor or investing in a new technology (merton, 2013). according to a study by almeida et al. (2019), firms with higher debt levels are more likely to invest in research and development (r&d), indicating that financial leverage can facilitate innovation and growth. another study by aghion, howitt & murtin (2019) finds that debt financing can enable firms to invest in new projects and expand their operations, leading to increased innovation and entrepreneurship. financial leverage can provide firms with the flexibility to adjust their capital structure in response to changing market conditions. for example, firms can use debt financing to reduce their equity base and increase their financial leverage during periods of high growth, and then reduce their debt levels during periods of slow growth (welch, 2011). financial leverage can provide firms with the financial flexibility to respond to changing market conditions, capitalize on new opportunities, and facilitate innovation and growth. fast-moving consumer goods companies sectors are essential to nigeria’s economy. the fastmoving consumer goods companies is vital for providing essential consumer goods, while the logistics industry plays an important role in ensuring efficient supply chain operations, enabling goods to move from manufacturers to consumers. while financial leverage has been studied extensively in other sectors, the fast-moving consumer goods companies industries have unique characteristics that make them particularly sensitive to leverage decisions. the fast-moving consumer goods companies, deals with high product turnover, requiring efficient working capital management, while the logistics industry is capital intensive, often relying on debt for infrastructure development. exploring the impact of financial leverage on these specific sectors will provide industry specific insights, helping managers and policymakers to develop strategies that optimize financial performance in these industries. existing literature on the impact of financial leverage on firm performance reveals several gaps. these include a lack of comparative analysis across different sectors or regions, limited focus on specific variables like interest coverage ratios, absence of longitudinal studies tracking long-term trends, neglect of industry dynamics in influencing leverage effects. addressing these gaps could lead to more comprehensive research that provides insights into the relationship between financial leverage and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 120 | p a g e firm performance across diverse contexts and over extended periods. however, this study is unique in that, it empirically examined the most crucial measure of financial leverage. specifically, examine and compare the impact financial leverage has on the financial performance of listed fast-moving consumer goods companies in nigeria. the main objective of this study is to examine and compare the impact financial leverage has on the financial performance of listed fast-moving consumer goods companies in nigeria. specifically, the study sought to: 1. ascertain the impact of short-term leverage ratio on the financial performance of listed fastmoving consumer goods companies in nigeria. 2. determine the impact of long-term leverage ratio on the financial performance of listed fastmoving consumer goods companies in nigeria. conceptual review financial leverage moreover, financial leverage can impact the company’s flexibility in managing its operations and pursuing new opportunities. high levels of debt may limit the company’s ability to take on additional financing or invest in new projects, as it may already be burdened with significant fixed obligations. this lack of financial flexibility can be particularly problematic in volatile industries or during economic downturns, where the ability to adapt and respond to changing market conditions is crucial (brealey et al., 2020). while financial leverage can be a powerful tool for increasing returns on equity and providing tax benefits, it also introduces substantial risks related to financial stability and operational flexibility. companies must carefully consider these factors when deciding on the appropriate level of leverage to use in their capital structure, balancing the potential for higher returns with the increased risk of financial distress (ross et al., 2019). long-term leverage the use of long-term leverage varies across sectors. in the fast-moving consumer goods (fmcg) sector, firms may use long-term leverage to finance expansion, new product development, or capitalintensive production facilities (harris & raviv, 2019). however, the sector's focus on rapid turnover and market fluctuations means that high long-term leverage needs to be managed carefully to avoid financial strain (brigham & ehrhardt, 2019). in the logistics sector, companies often use long-term debt to finance large-scale infrastructure investments, such as warehouses and fleets (chung, 2022). given the capital-intensive nature of the logistics industry, long-term debt can provide necessary funds but also adds financial obligations that must be managed over time (berger & udell, 2021). long-term leverage provides essential funding for significant investments and expansion, offering stability and potential tax benefits. however, it also entails risks related to interest rate fluctuations, financial distress, and reduced operational flexibility. effective management of long-term debt is crucial to balance these benefits and risks. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 121 | p a g e short term leverage short-term leverage refers to a company's reliance on short-term debt instruments to finance its operational needs or to bridge temporary gaps in cash flow. this type of leverage typically includes obligations that are due within a year, such as short-term loans, credit lines, trade credit, and commercial paper. according to brigham and ehrhardt (2021), businesses often utilize short-term loans or revolving credit lines to maintain liquidity, especially during periods of low cash flow or increased operational expenses. trade credit, which is credit extended by suppliers, also plays a significant role in short-term leverage, as companies can defer payment for goods and services, providing flexibility to manage working capital (brealey, myers, & allen, 2020). while short-term leverage can be advantageous due to its lower interest rates and easier retirement compared to long-term debt, it also carries risks. short-term obligations must be repaid or refinanced quickly, and failure to manage them properly can lead to liquidity problems, as noted by ross, westerfield, and jaffe (2019). firms that over-rely on short-term debt may find themselves vulnerable to fluctuations in cash flow or changes in market conditions. therefore, companies must carefully balance their short-term leverage to avoid financial strain while still taking advantage of its benefits for operational flexibility and working capital management. roe however, while a high roe is generally favourable, it is essential to consider the influence of financial leverage. high levels of debt can artificially inflate roe by reducing the equity base, which is why analysts must consider roe alongside other financial ratios, such as the debt-to-equity ratio, to get a comprehensive understanding of a company's financial stability (ibe & pibowei, 2022). additionally, industry norms play a significant role in interpreting roe, as different industries have varying standards for what constitutes a good roe (olagunju et al., 2022). despite its usefulness, roe has limitations, such as not accounting for earnings quality and being less informative for companies at different growth stages. therefore, it should be used in conjunction with other metrics to make wellrounded financial assessments. empirical studies nakamura and sato (2024) studied the impact of financial leverage on the profitability of japanese automotive companies, aiming to understand how leverage influences profitability, particularly in terms of its role in enabling higher investment in technology. the study analyzed data from 2018 to 2023 using a fixed-effects model, which controlled for firm-specific factors that might affect profitability. the findings revealed that leverage positively impacts profitability by allowing companies to invest more in technological advancements, but excessive leverage poses risks of financial distress. although the study offers valuable insights into the automotive sector, its sectorspecific focus may limit the generalizability of the findings to other industries. additionally, while the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 122 | p a g e research highlights the benefits and risks of leverage, it does not explore cross-sectoral comparisons, which could have broadened the scope of the findings and enhanced their relevance beyond the automotive industry. overall, while the study makes a significant contribution to understanding leverage in the automotive sector, its narrow focus restricts its broader applicability. hassan and ibrahim (2024) investigated the relationship between financial leverage and firm performance in nigerian agricultural firms, aiming to evaluate how leverage impacts performance. using a panel data analysis methodology with a sample of 50 firms and data from 2018 to 2023, they examined variables such as debt-to-equity ratio (leverage) and return on assets (performance). the findings revealed that financial leverage positively affects firm performance by supplying necessary growth capital, although excessive leverage increases financial risk. the study’s robust sample size and sector-specific focus were appropriate; however, it was just on a single sector and generalization cannot be made. li and zhang (2024) analyzed the effects of financial leverage on the performance of chinese pharmaceutical companies. they used financial leverage (measured by the debt-to-equity ratio) and profitability (measured by return on equity) as key variables. employing a dynamic panel data approach with data from 2019 to 2023, their research found that financial leverage positively impacts profitability by offering tax advantages and additional capital for research and development. however, they also noted that high levels of debt increase financial risk. while the study provides valuable insights specific to the pharmaceutical sector, its findings may have limited general applicability beyond this industry. the study's findings are specific to the pharmaceutical sector, which may limit their general applicability. alvarez and martinez (2023) conducted a study on the impact of financial leverage on the profitability of european smes, aiming to understand how leverage affects profitability. they utilized a randomeffects model with data from 2018 to 2022. the study found that financial leverage significantly enhances firm profitability by lowering the cost of capital and boosting investment capacity. however, it also noted that high leverage ratios are linked to increased bankruptcy risk. while the research emphasizes the need for careful debt management, it lacks a comparative analysis across different firm sizes, which could provide a broader perspective on leverage's impact. wang et al. (2023) investigated the impact of financial leverage on the performance of chinese real estate companies, aiming to assess how leverage affects performance. they employed a panel data regression analysis using data from 2019 to 2023. their findings revealed that higher leverage positively influences firm performance by utilizing tax shields and providing capital for growth opportunities. however, the study also found that excessive leverage is associated with liquidity problems and financial instability. while the research highlights the benefits of leverage within the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 123 | p a g e real estate sector, its sector-specific focus may limit the generalizability of the findings to other industries. kumar and patel (2023) analyzed the impact of financial leverage on the performance of indian manufacturing firms, aiming to understand the relationship between leverage, profitability, and growth. utilizing a panel data approach with data spanning from 2018 to 2022, the researchers found that financial leverage positively affects both profitability and growth up to an optimal point. beyond this threshold, however, increased leverage negatively impacts performance, underscoring the importance of maintaining a balanced approach to leverage. despite these valuable insights, the study does not account for the potential influence of macroeconomic variables, which could provide a more comprehensive understanding of the factors affecting firm performance in the manufacturing sector. miller and davis (2023) examined the effects of financial leverage on the profitability of australian retail firms, focusing on how leverage influences financial outcomes within this sector. utilizing data from 2018 to 2022 and employing a fixed-effects model, the researchers found that financial leverage positively impacts profitability by reducing the cost of capital, thereby enhancing operational efficiency. however, they also identified that high leverage ratios are linked to increased financial distress, highlighting the importance of careful debt management. while the study underscores the benefits of leverage in the retail sector, it does not account for the potential impact of economic cycles, which could affect the broader applicability of the findings across varying economic conditions. nguyen minh and tran anh (2022) investigated the impact of financial leverage on firm performance in the vietnamese manufacturing sector, aiming to understand how leverage affects key performance metrics. utilizing panel data from 2015 to 2021 and applying the generalized method of moments (gmm) approach, the study found that financial leverage negatively impacts both return on assets (roa) and return on equity (roe). the researchers concluded that higher levels of debt increase financial risk and diminish profitability, emphasizing the need for firms to optimize their capital structure to mitigate these adverse effects. however, the study's focus on a single sector may limit the generalizability of the findings to other industries, suggesting that further research across various sectors would be beneficial for a more comprehensive understanding of the relationship between financial leverage and firm performance. smith and jones (2022) analyzed the effects of financial leverage on the performance of u.s. technology firms, focusing on how leverage influences financial outcomes in this sector. the researchers employed a fixed-effects model on data collected from 2016 to 2021 and found that moderate leverage positively influences firm performance by providing tax benefits and essential capital for growth. however, they also identified that excessive leverage can lead to financial distress and reduced profitability, highlighting the importance of maintaining an optimal debt level. while the study emphasizes these crucial insights, it does not account for industry-specific factors that may mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 124 | p a g e affect leverage outcomes, suggesting that further research could enhance understanding by considering the unique dynamics of the technology sector. doan (2020) provided empirical evidence from vietnam regarding the impact of financing decisions on firm performance, utilizing data from 102 non-financial firms listed on the ho chi minh stock exchange. the study employed the generalized method of moments (gmm) approach and used return on assets (roa) as the primary performance metric. the findings revealed that increased debt usage negatively affects firm performance, specifically highlighting a significant correlation between financing decisions and overall firm performance. however, the study primarily focused on roa and did not provide independent results for each dimension of financial performance, suggesting that further research could explore additional metrics to gain a more comprehensive understanding of the relationship between financing decisions and performance. njoroge et al. (2020) explored the impact of financial leverage on the performance of smes in kenya. they used survey data and regression analysis to assess the relationship between financial leverage and profitability. the study found that financial leverage negatively affects the profitability of smes, with high debt levels constraining their ability to generate profits. the results highlight the challenges that excessive leverage poses to sme performance. however, the study's small sample size and exclusive focus on smes limit the generalizability of the findings to larger firms, which may experience different impacts from financial leverage. usman and zubairu (2019) explored the relationship between financial leverage and firm performance among nigerian listed companies. they utilized panel data regression analysis to assess this relationship, focusing on return on equity (roe) as a primary performance metric. their study found that financial leverage negatively impacts firm performance, with high levels of debt increasing financial risk and thereby reducing profitability. this suggests that excessive leverage can lead to diminished returns for shareholders. however, a key limitation of the study is its focus on a single performance metric roe which may not capture the full spectrum of financial impacts and could limit the breadth of insights into how leverage affects overall firm performance. incorporating additional performance metrics could provide a more comprehensive understanding of the effects of financial leverage. methodology for this study, an ex-post facto research design. the choice of this design was justified due to the reliance on historical data that researchers cannot manipulate (okoye & adeniyi, 2018). this design allows for the investigation of relationships between variables without the need for direct manipulation, aligning with the objectives of the study to analyze the impact of financial leverage on firm performance using historical data. the population study constitutes the entire fast-moving consumer goods companies listed on the nigeria stock exchange. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 125 | p a g e population of the study as at 12th of june, 2024 nigeria has a total number of fourteen (14) listed fast-moving consumer goods companies on the nigeria exchange group and this constitute the population size of this study. sample size and sampling technique four (4) of the listed fast-moving consumer goods companies where; selected on the bases of highest share prices were selected as the sample for the study. eleven years (2013 to 2023) financial statements of selected firms as also used. table 3.1 list of sampled firms fmcg nestle nigeria plc bua foods plc flour mills nigeria plc dangote sugar refinery plc source: researcher’s compilation, 2024 sources and method of data collection the data of the study have been collected from secondary sources only. the data used for the analysis were extracted from the audited financial statements and reports of the sampled firms for the period of 2014 to 2023. the various data were soured based on the parameters of the variables. the use of secondary data in this study was chosen because the study is based on the quantitative research methodology that requires quantitative data to test the research hypotheses. the method of data collection is the process adopted in collecting the first-hand data. the secondary data used includes financial reports of the sampled companies which were downloaded from the website of the companies. techniques of data analysis two data analysis techniques were used namely: descriptive statistics and panel regression method. with the aid of e-views 10 software for windows the study utilized the descriptive statistics because it summarized the collected data in a clear and understandable way using numerical approach. the descriptive statistics includes the mean, madian, standard deviation, minimum, maximum, skewness and kurtosis. the skewness and kurtosis explain the shape of the data distribution. also, panel regression method was used. the panel was developed and used for the study as it increases efficiency by combining time series and cross-section data. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 126 | p a g e each sector i.e. fast-moving consumer goods companies would be analyzed separately thereafter, the results from each sector would be used to carry out a detailed comparative analysis among the two sectors. multicollinearity – there should be no exact collinearity among predictors. from the regression results, the p-value statistics was used to test the hypotheses stated in chapter one (1.5) at 5% level of significance ( ). a p-value less than α=0.05 indicates that there is enough statistical evidence to reject the null hypothesis, and thereby accept the alternative hypothesis. model specification the model for this study is a multiple regression model. the panel methodology was adopted since the data to be analyzed has panel attributes. the model is as follows: roeit=β0+ β3slrit +β2llit+β5scrit +β6prit+eit ……………..…………....1 where: roeit = return on equity βoβ2 = coefficients of the independent variables slrit = short term leverage ratio llit = long term leverage eit = error term data analysis table 1: descriptive analysis roe c slr ll mean 0.774853 1.000000 0.196251 0.847565 median 0.215651 1.000000 0.152287 0.867869 maximum 16.16437 1.000000 0.706248 0.977973 minimum -0.88008 1.000000 0.022523 0.586081 std. dev. 2.543897 0.000000 0.154644 0.093118 skewness 5.735108 na 1.652839 -1.13933 kurtosis 35.23208 na 5.290364 3.678461 jarque-bera 1950.789 na 26.95546 9.420933 probability 0.000000 na 0.000001 0.009001 sum 30.99412 40.00000 7.850044 33.90258 sum sq. dev. 252.3850 0.000000 0.932670 0.338165 observations 40 40 40 40 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 127 | p a g e table 4.1 present the descriptive statistics of four proxies of financial leverage (slr, ll) and performance measures (roe,) containing mean, median, standard deviation, minimum and maximum. the descriptive statistics reveal significant insights into the financial performance and leverage ratios of the companies in the sample. the return on equity (roe) shows an average of 0.7749, indicating that companies generally deliver a 77.49% return on equity. however, the median roe is much lower at 0.2157, highlighting a skewed distribution where a few companies with high returns are inflating the mean. this skewness is confirmed by a high skewness value of 5.7351 and a kurtosis of 35.2321, indicating the presence of outliers. the roe distribution is non-normal, as reflected by the jarque-bera test, with a probability of 0.000000. the short-term leverage ratio (slr) reveals that, on average, 19.63% of companies' liabilities are short-term, with a median of 0.1523. the high skewness (1.6528) and kurtosis (5.2904) indicate that some companies heavily rely on short-term debt, as reflected by the maximum slr of 0.7062. the distribution is non-normal, as confirmed by the jarque-bera test probability of 0.000001. the long-term leverage (ll) ratio shows that, on average, companies have a long-term debt ratio of 84.76%, with a relatively low standard deviation (0.0931). the distribution is slightly left-skewed (1.1393), suggesting most companies have ll ratios below the mean. while the distribution is close to normal, the jarque-bera test probability of 0.0090 indicates a slight deviation from normality. test of hypotheses (a) regression result for the return on equity (roe) panel data method was used to analyse the regression result of this study. for analysis, the hausman test was used to compare the estimation method of fixed and random effects. h0: regression is based on the random effects; there is a relationship between individual effects and description variables. h1: regression is based on the fixed effects; there is no relationship between individual effects and description variables. table 2 hausman test correlated random effects hausman test equation: untitled test cross-section random effects test summary chi-sq. statistic chi-sq. d.f. prob. cross-section random 0.000000 6 1.0000 source: eviews 10 output, 2024 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 128 | p a g e results of the hausman test for the roe model was given in table 4.2 above. the hausman chisquare test for the roe model (0.000000) shows that the hausman test is significant at 5% level. the findings demonstrate the rejection of the null hypothesis; hence, the analysis is based on the results of the fixed effect estimates. the fixed effects model is used in this study because, if there are omitted variables, and these variables are correlated with the variables in the model, then fixed effects models may provide a means for controlling for omitted variable bias. table 3: regression result (panel least squares) variable coefficient std. error t-statistic prob. c -6.883889 4.603891 -1.495233 0.1453 slr 5.623473 2.682907 2.096038 0.0446 ll 7.507721 4.702655 1.596486 0.1209 effects specification cross-section fixed (dummy variables) r-squared 0.987715 mean dependent var 0.774853 adjusted r-squared 0.984029 s.d. dependent var 2.543897 s.e. of regression 0.321485 akaike info criterion 0.780587 sum squared resid 3.100579 schwarz criterion 1.202806 log likelihood -5.611733 hannan-quinn criter. 0.933248 f-statistic 267.9977 durbin-watson stat 1.762300 prob(f-statistic) 0.000000 source: eviews 10 output, 2024 the panel least squares regression analysis for fmcg companies, with return on equity (roe) as the dependent variable, provides key explanation on how various proxies affect financial performance mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 129 | p a g e over the period from 2014 to 2023. the regression model from table 3 above includes the shortterm leverage ratio (slr) and long-term leverage ratio (ll), as independent variables. the short-term liquidity ratio (slr) shows a positive coefficient of 5.623473, which is statistically significant with a p-value of 0.0446. this indicates that better short-term liquidity improves profitability for fmcg companies, possibly due to their ability to manage working capital more efficiently. the long-term liabilities (ll) variable, while having a large positive coefficient (7.507721), is not statistically significant with a p-value of 0.1209. the model has a high r-squared value of 0.987715, indicating that about 98.77% of the variation in roe is explained by the independent variables in the model. the adjusted r-squared is also high (0.984029), affirming the model's goodness of fit. the f-statistic of 267.9977, with a p-value of 0.000000, confirms the overall significance of the model. the durbin-watson statistic of 1.762300 suggests that there is no significant autocorrelation in the residuals. this result aligns with studies such as chadha and sharma (2015), which highlight the positive effect of financial leverage on firm performance, especially in industries like fmcg where liquidity and capital structure management are crucial to operational success. additionally, the inverse relationship between solvency ratios and profitability has been observed in deloof (2003), suggesting a trade-off between financial health and profitability. test of hypothesis one h03: short-term leverage ratio has no impact on the financial performance of listed fmcg companies in nigeria. decision rule: in table above the coefficient of slr is positive and statistically significant for the fmcg, it suggests that short-term leverage have a positive and significant effect on roe using the fmcg model. conversely, the impact of slr on roe is statistically insignificant for logistics companies. these can be seen in the coefficients and p-value of both fmcg and logistics sectors. slr; (fmcg: 5.623473, p-value: 0.0446; logistics: -0.073765, p-value: 0.4426). therefore, the null hypothesis would be rejected for fmcg model and accepted for logistics model. meaning that shortterm leverage (slr) has significant impact on the financial performance of listed fmcg and no significant impact on performance of logistics companies in nigeria. test of hypothesis two h05: long-term leverage ratio has no impact on the financial performance of listed fmcg and companies in nigeria. decision rule: in table above the coefficient of ll is positive and not significant for the fmcg, it suggests that long-term leverage have a positive and non-significant effect on roe using the fmcg model. conversely, the impact of ll on roe is negative and statistically significant for logistics companies. these can be seen in the coefficients and p-value of both fmcg and logistics sectors. ll; mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 130 | p a g e (fmcg: 7.507721, p-value: 0.1209; logistics: -0.073763, p-value: 0.0065). therefore, the null hypothesis would be accepted for fmcg model and rejected for logistics model. meaning that longterm leverage (ll) has no significant impact on the financial performance of listed fmcg and significant negative impact on performance of logistics companies in nigeria. the impact of short-term leverage ratio (slr) on performance for fmcg companies, the short-term leverage ratio (slr) has a strong positive and statistically significant effect on roe, with a coefficient of 5.623473 and a p-value of 0.0446. this indicates that higher short-term leverage is associated with improved profitability, possibly due to efficient working capital management. in contrast, for logistics firms, slr has a negative but statistically insignificant effect on roe (coefficient: -0.073765, p-value: 0.4426), suggesting that short-term leverage is less relevant in driving profitability in the logistics sector. the significant positive impact of slr on fmcg firms supports the view that short-term financial management is key to their operational success. the impact of long-term leverage ratio (ll) on performance for fmcg firms, the long-term leverage ratio (ll) has a large positive coefficient (7.507721) but is not statistically significant (p-value: 0.1209), suggesting that long-term debt does not significantly impact profitability in these firms. conversely, for logistics companies, ll shows a negative and statistically significant relationship with roe (coefficient: -0.073263, p-value: 0.0065). this suggests that high long-term liabilities can significantly reduce profitability for logistics companies, highlighting the risks associated with long-term debt in this sector. these findings align with akintoye (2019), who noted the detrimental effects of long-term leverage on logistics firm performance. conclusion and recommendations financial leverage is an important part in a firm’s management decision. the ability of the firm to continuously operate in longer period depends on how they deal with matter of composition of capital structure, it can be concluded that short-term leverage ratio (slr): for fmcg firms, the aggressive financial management policy is effective, as higher short-term leverage has a positive and statistically significant effect on roe. this highlights the importance of efficient short-term financial management in improving profitability. in contrast, for logistics companies, slr has a negative but statistically insignificant effect, suggesting that the use of short-term debt in an aggressive manner may not yield the same benefits in this sector, where a more conservative approach might be safer. long-term leverage ratio (ll): in fmcg firms, long-term leverage has a positive but statistically insignificant effect on roe, indicating that conservative financial management policies, which focus on long-term debt, may not heavily influence profitability. however, in logistics companies, a significant negative relationship with roe implies that relying on long-term debt under a conservative approach can reduce profitability. akintoye mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 131 | p a g e (2019) similarly found that long-term leverage hampers performance in logistics firms, suggesting that a balanced or even aggressive policy might be more beneficial here. based on the findings, the following recommendations are made for fmcg and logistics companies to enhance their financial performance: 1. for fmcg companies, an aggressive financial management policy focusing on short-term leverage is recommended, as higher short-term leverage (slr) has a positive and statistically significant effect on return on equity (roe). this suggests that efficient management of short-term debt can significantly boost profitability. fmcg firms should therefore consider increasing their use of short-term debt to capitalize on immediate growth opportunities and enhance returns. however, this strategy requires careful monitoring to avoid liquidity risks and ensure that debt obligations are met. a conservative strategy will better safeguard logistics companies from the risks associated with short-term liabilities. 2. for fmcg companies, fmcg firms should adopt a more flexible approach to long-term debt, as conservative policies centered on long-term leverage neither significantly harm nor benefit profitability. companies in this sector can continue to use long-term debt moderately without concerns about profitability loss, while focusing on other strategies to drive growth. for logistics companies, however, long-term debt hampers performance in logistics firms, implying that a balanced or even aggressive financial policy would be more appropriate. references alvarez, l., & martinez, r. (2023). financial leverage and profitability of european smes. european journal of business and management, 15(3), 200-215. almeida, h., campello, m., & weisbach, m. s. (2019). the role of financial leverage in corporate performance. journal of corporate finance, 58, 80-97. almeida, h., campello, m., & weisbach, m. s. (2019). the role of financial leverage in the risk-taking behavior of firms. journal of financial economics, 130(1), 1-23. aghion, p., howitt, p., & murtin, f. (2019). financial leverage and innovation: the case of r&d spending. american economic review, 109(2), 345-378. brealey, r. a., myers, s. c., & allen, f. (2020). principles of corporate finance (13th ed.). mcgrawhill education. brigham, e. f., & ehrhardt, m. c. (2021). financial management: theory & practice (16th ed.). cengage learning. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 132 | p a g e frank, m. z., & goyal, v. k. (2003). testing the pecking order theory of capital structure. journal of financial economics, 67(2), 217-248. graham, j. r., & harvey, c. r. (2001). the theory and practice of corporate finance: evidence from the field. journal of financial economics, 60(2), 187-243. hassan, a., & ibrahim, m. (2024). financial leverage and firm performance in nigerian agricultural firms. african journal of economic and management studies, 15(1), 112-127. ibe, u. g., & pibowei, w. e. (2022). the effect of financial leverage on corporate financial performance of dangote cement plc (2010-2021). ssrn journal, 22. kayhan, a., & titman, s. (2007). firms’ histories and their capital structures. journal of financial economics, 83(1), 1-32. kumar, p., & patel, s. (2023). financial leverage and performance of indian manufacturing firms. international journal of business and economics, 20(4), 457-470. lee, s. h., & kim, j. h. (2022). the relationship between financial leverage and firm performance in south korean listed companies. asian financial review, 15(1), 87-104. li, x., & zhang, y. (2024). financial leverage and performance of chinese pharmaceutical companies. journal of pharmaceutical economics, 21(2), 205-220. miller, t., & davis, p. (2023). financial leverage and profitability of australian retail firms. retail management journal, 28(3), 310-325. merton, r. c. (2013). financial theory and financial institutions. journal of financial economics, 108(2), 416-429. nakamura, t., & sato, h. (2024). financial leverage and profitability of japanese automotive companies. japanese journal of economics and business, 50(2), 145-160. okoye, e. i., & adeniyi, s. i. (2018). company age and voluntary corporate social disclosure in nigeria: a study of selected listed manufacturing firms on the nigerian stock exchange. academic journal of economic studies, 4(2), 138-145. olagunju, a., adeniyi, a., & abiola, o. (2022). return on assets and firm performance in nigeria. journal of financial studies, 45(3), 267-284. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 133 | p a g e hossain, t., & rahman, m. (2022). impact of capital structure on firm profitability: evidence from bangladesh. journal of business and finance, 14(3), 72-85. ross, s. a., westerfield, r. w., & jaffe, j. (2019). corporate finance: core principles and applications (12th ed.). mcgraw-hill education. santos, j., silva, p., & martins, a. (2023). the influence of financial leverage on firm profitability: a global perspective. journal of international financial management, 22(1), 78-93. smith, j., & brown, r. (2022). leverage and profitability in nigerian manufacturing firms. nigerian business review, 18(5), 119-137. wang, y., chen, h., & li, j. (2023). the influence of financial leverage on the performance of chinese real estate companies. journal of real estate finance and economics, 49(2), 345-362. welch, i. (2011). two common problems in capital structure research: the linear relationship and the endogeneity. journal of financial economics, 99(1), 109-127. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 134 | p a g e participatory management and employee performance in manufacturing firm in enugu state, nigeria emeh ndidiamaka chioma ph.d department of business administration, enugu state university of science and technology, nigeria. doi: https://doi.org/10.5281/zenodo.15024368 abstract: the study examined the effect of the participatory management on employee performance in manufacturing firms in enugu state nigeria. the specific objectives are to; examine the effect of leadership styles on employee performance in evaluating the effect of communication on employee performance in manufacturing firms in enugu state nigeria. a descriptive research survey was adopted for the study. a structured questionnaire was used to collect data for the study. data collected were analyzed using both descriptive and inferential statistics with the aid of the statistical package for social sciences (spss). while descriptive statistics was used to describe the socio-demographic characteristics of the respondents, simple linear regression analyses were used for further analysis. all the hypotheses were tested at a 0.05 level of significance. the result revealed that leadership styles significantly positively affect employee performance with a value of (f = 29.618; p = 0.002), while communication styles significantly positively affect employee performance (f = 21.371; p = 0.003). the study concluded that participatory management has a significant effect on employee performance in manufacturing firms in enugu state nigeria. the study recommended among others training programs for managers to develop inclusive leadership skills. focus on fostering empathy, active listening, and collaborative decision-making in other to improve employee performance. keywords: employee, management, participatory, performance 1.1 introduction participatory management represents a progressive shift in organizational leadership, emphasizing the involvement of employees at all levels in decision-making processes. rooted in democratic principles, this management approach seeks to create an inclusive work environment where the insights, expertise, and contributions of employees are actively solicited and valued (okiomah, 2020). unlike traditional hierarchical models, participatory management fosters a culture of collaboration and shared responsibility, aiming to leverage the collective intelligence and creativity of the workforce (beauty, & aigbogun, 2022). the essence of participatory management lies in its ability to empower employees, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 135 | p a g e making them integral to the organizational decision-making fabric. by encouraging open communication, transparency, and mutual respect, this management style helps in building trust and engagement among employees. in such an environment, employees are more likely to feel a sense of ownership and commitment to their work, driving higher levels of motivation and productivity (sigroha aand gaurav 2021). one of the key advantages of participatory management is its potential to enhance organizational performance through improved problem-solving and innovation. when employees are given the opportunity to contribute their unique perspectives and ideas, organizations can benefit from a broader range of solutions and approaches. this inclusive decision-making process not only enhances the quality of decisions but also fosters a more dynamic and adaptable organizational culture. moreover, participatory management can significantly improve job satisfaction and employee morale (jaafaru, et al 2023). by involving employees in decisions that affect their work and recognizing their contributions, organizations can create a more fulfilling and supportive work environment. this, in turn, can lead to higher retention rates, as employees are more likely to remain with organizations where they feel valued and engaged. in addition to its impact on employee performance and satisfaction, participatory management also aligns well with contemporary trends towards corporate social responsibility and ethical business practices. by promoting a culture of participation and inclusivity, organizations can enhance their reputation and build stronger relationships with stakeholders, including customers, investors, and the broader community (okiomah, 2020). enugu state, nigeria, recognized for its industrial potential, is witnessing a transformative shift towards sustainable manufacturing practices. within this context, firms' management style plays a crucial role in shaping organizational outcomes. among the various management approaches, the participatory management style has garnered significant attention for its potential impact on employee performance. the participatory management style offers a promising pathway to achieving these goals in sustainable manufacturing firms, where operational efficiency and resource optimization are paramount. the manufacturing sector in enugu state is uniquely positioned to benefit from participatory management practices. the region's evolving industrial framework, coupled with an increasing emphasis on sustainability, necessitates a workforce that is not only skilled but also highly motivated and engaged (okiomah, 2020). this study aims to explore the effect of the participatory management style on employee performance in sustainable manufacturing firms in enugu state, nigeria. it seeks to understand how this management approach influences key performance indicators such as productivity, leadership styles, communication styles, job satisfaction, and employee retention. 1.2 statement of the problem in the context of manufacturing, firms in enugu state, nigeria, face the dual challenge of maintaining operational efficiency while adhering to environmental and social sustainability standards. the management style adopted by these firms plays a critical role in addressing this challenge. participatory mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 136 | p a g e management, characterized by the active involvement of employees in decision-making processes, is posited to enhance employee performance and, by extension, contribute to organizational sustainability. however, there is limited empirical evidence on how this management style specifically affects employee performance in the sustainable manufacturing sector within enugu state. this research aims to bridge the gap in understanding by investigating the effect of participatory management style on employee performance in sustainable manufacturing firms in enugu state. the study will examine how employee involvement in decision-making processes affects their motivation, communication skills, engagement, leadership, and overall performance. additionally, it will explore the specific challenges and opportunities that arise when implementing participatory management in the context of sustainable manufacturing in this region. by addressing these issues, the research seeks to provide actionable insights for managers and policymakers aiming to enhance employee performance and achieve sustainability goals in the manufacturing sector of enugu state. 1.3 objective of the study the main objective of this study examines the effect of participatory management on employee performance in manufacturing firms in enugu state nigeria. the specific objectives are to; i. examine the effect of leadership styles on employee performance in manufacturing firms in enugu state nigeria. ii. evaluate the effect of communication styles on employee performance in manufacturing firms in enugu state nigeria. 1.4 hypotheses of the study i. leadership styles have no significant effect on employee performance in manufacturing firms in enugu state nigeria. ii. communication styles has no significant effect on employee performance in manufacturing firms in enugu state nigeria. review of related literature 2.1 conceptual review participatory management participatory management refers to the management approach where the subordinates of an organization are fully involved in the active management and decision-making processes of the organization (ogbo, et al (2016). participative style can be defined as a management style based on informing employees about important aspects of business development and their participation in decision-making and solving business problems, especially those that concern them. the main aim is to use their potential, knowledge, and motivation, increase their job satisfaction, and strengthen their identification with the company, but at the same time gain their understanding of the new measures or changes in the company. consequently, workers feel more valued and strive to achieve management objectives. participatory management focuses on empowering team members to participate in the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 137 | p a g e decision-making process. in addition, participatory management (pm) is often used interchangeably with employee empowerment or participative decision-making. when employees are empowered they are motivated since they control and make decisions on most aspects of their jobs, urban, (2011). empowerment must be followed by accountability so that caution is an exercise in spending. rolkova and farkašová (2015) observed that the stability of a team depends primarily on factors such as employees’ empowerment, involvement, satisfaction, and friendly communication between colleagues in the workplace. team structure brings together people with different skills to meet a particular objective. being part of a team permits every person in a company to perform great roles that will, in turn, create value for the organization. managers know that employees are the key facilitators who deal face-to-face and directly with the customers and satisfy their needs. to gain a competitive advantage and beat the competition in today’s business world such that decisions to stay ahead of global or domestic competitors are made, this form of management is adopted by many manufacturing organizations, (okiomah, 2020). leadership styles leadership is a social influence process in which the leader seeks the voluntary participation of subordinates to reach organizational goals. a leader can be defined as a person who delegates or influences others to act to carry out specified objectives. leaders usually exhibit a style of leadership as they motivate and inspire their followers. leadership style, therefore, refers to how a leader chooses to lead and interact with their followers (northouse, 2018). it reflects the leader's behaviors, attitudes, and actions in influencing and directing others. leadership style has a huge influence on how a leader makes decisions, communicates expectations, motivates followers, and creates a work environment. leadership style is an expression of the leader's leadership approach. it reflects the leader's preferences, values, and beliefs about how to effectively lead and influence others. there are several leadership styles and these different leadership styles can impact the dynamics, productivity, and culture within an organization or group in several different ways. today’s organizations need effective leaders who understand the complexities of the rapidly changing global environment. if the task is highly structured and the leader has a good relationship with the employees, effectiveness will be high on the part of the employees. styles of leadership transformational leadership style the transformation leader has charismatic capabilities, induces moral values, and attempts to develop employee capabilities. this leadership provides a kind of vision that elevates the followers/employees' work potential and commitment to achieving the highly valued tasks that yield maximum output (bass and avolio, 2004). transactional leadership style mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 138 | p a g e transactional leaders believe in close supervision, identifying mistakes, and application of corrective measures to rectify errors. this theory bases leadership on a system of reward and penalty, (obiwuru, 2011). additionally, shah and kamal (2015) pointed out that leaders who employ a transactional style prefer the status quo, and no diversification, they strictly adhere to stipulated parameters to attain maximum performance from subordinates. laissez-faire leadership style laissez-faire leadership is also known as delegate leadership. this is a type of leadership style in which leaders are hands-off and allow group members to make the decisions. according to northouse (2013), they do not have any exchange with their followers, and they do not help their followers to grow. the leadership of laissez-faire is the characteristic of leaders who avoid decision-making and avoid responsibility (robbins, 2007). leaders regard subordinates as fully responsible for any decision and give assistants complete freedom and power to make work decisions. autocratic leadership style in the autocratic leadership style, the leader determines policy and assigns tasks to members without consulting his subordinates (dotse & asumeng, 2014). therefore, there is a power distinct between leader and followers in an autocratic leadership style. then, leaders closely supervise employees to achieve the right performance. lewin et al., (1939) explored that autocratic leaders provide clear expectations for what needs to be done, when it should be done, and how it should be done. according to business essential (2009), the autocratic leadership style is useful in an emergency and may work in a crisis or as a last resort with a problem employee. democratic leadership style democratic leadership is a leader who achieves consensus through participation. the democratic leadership is also known as participative leadership style (cherry, 2006). mat (2008) described a participative leader as a leader who encourages the participation of staff in solving problems and decision-making in daily operational matters. he posited that the roles and contributions of staff are important. nwokocha and iheriohanma (2015) stated that in a democratic style, the leader will gather opinions, suggestions, and feedback from staff before making decisions or issuing instructions to the team. thus, the direction of the team is influenced by the staff’s involvement. this style builds trust, respect, and commitment and works best when wanting to receive input or get employees to achieve consensus. it is a leadership style that encourages employees to participate in the decision-making process in the organization. charismatic leadership charismatic leadership is one of the most successful trait-driven leadership styles. they are visionary leaders who exhibit a personality that motivates their subordinates to execute that vision. because of their level of success and motivation, charismatic leaders have been one of the most valued and cherished leaders. they provide a fertile group for innovation and creativity, and more often, they are mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 139 | p a g e highly motivational. when a charismatic leader is at the helm of organizational affairs, the subordinates simply want to follow suit, (michael, 2010). bureaucratic leadership bureaucratic leaders create policies and rely on them to meet organizational goals and policies that drive objectives, execution, strategy, and outcomes. they comfortably rely on given policies and can convince their subordinates to get on board (michael, 2010). also, they believe that policies dictate the direction, and they are strongly committed to processes and procedures in place of people; thereby, they seem aloof. communication styles communication plays a vital role in every organization. with the help of communication an employee shares his feelings, emotions, thoughts, ideas, policies, goals, and much more to his employer. every organization has a different style of communication. with a better communication style employers not only boost employee morale, and job performance but also enhance the workplace. a good communication style creates higher job satisfaction, better employee engagement, lower turnover of employees, and stronger long-term commitment. the need for workplace communication is to achieve the organizational goal. clear communication is most important for a successful organization. by good communication, a team can succeed. it doesn’t matter that can be a family, a company a ministry, or a club. the members of an effective team have strong communication that enhances commitment and connection. open, honest, and strong communication keeps the employee motivated. effective communication is an intentional goal-oriented cohesive force for organizational strategies (garcia, 2012). effective communication in the workplace is part and partial of a successful organization. managers with good communication skills can share their ideas clearly so that subordinates can understand what to perform. on the contrary bad communication can lead the employee frustration, absenteeism lower productivity, and a greater turnover rate. an effective style of communication means respecting yourself and other people. it is a great ability to clearly express your ideas, thoughts, and feelings through open, direct, and honest communication. having a more assertive type of communication doesn’t mean that you will get whatever you want but it can help you to achieve a better understanding. it will help you to handle the situation well and give a sense of satisfaction to both parties. effective communication at the workplace leads to a better management style because it enhances the morale of employees and employers. it also creates a positive climate and fosters equality, (sigroha and gaurav, 2021). styles of communication there are four styles of communication. they are as follows: 1. passive communication style mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 140 | p a g e unusually passive communicators are very quiet. these types of people do not express their feelings and opinions and they just to listen others. they are misunderstood because they are not expressive and behave humbly and softly. most of the time they say no even if they fail to predict further circumstances. they do not stand for their rights which is why they are manipulated by others for their interest. but when someone crosses their limits, they react a lot. these people are emotionally dishonest because they always hide their feelings. these people behave meek and humbly and always avoid conflict. their identifications are soft voice, poor posture, humbly behavior, inability to say no, and fidgeting. 2. aggressive communication style these types of people are often loud and tend to blame others for their mistakes. they show a bossy nature, mean-spirited, and lacking gratitude. they speak rudely demand respects from others and advocate their need only. this style of communication is very expensive. it creates a lot of problems in the workplace. an aggressive person assumes that their needs are most important and they think that their rights are more important as compared to others; they have contributed more than other people. it is an ineffective style of communication because the contents of this communication are too rude and adamant. their identifications are intense eye contact, harsh tone, gestures like crossing arms, frowns, criticizing others, and pointing figures, 3. passive-aggressive communication style these types of people fall right between being passive and aggressive. they communicate subtly and indirectly. they are frustrated and try to be cooperative but they are not. in this style of communication, people appear passive on the ground level but act out their anger in indirect or workplace communication. in simple words, they are stubborn or adamant but never create conflicts with others. the saying “cut off your nose to spite your face” is a good description of this type of person. they are isolated and never annoy others. their identification is mumming, showing denial, showing happy face, frequent sarcasm, body language that does not match, 4. the assertive style the assertive communication style is a healthy and effective way to express. this type of person vocalizes their need but respects the needs of others. during a conflict, they try to find a solution so that everyone can maintain their dignity. assertive styles of communication have high self-esteem at both ends. it is known as the most effective style of communication; it is the sweet spot between being too aggressive and too passive. when we are assertive, we have a sense of confidence to communicate without games or a sense of manipulation. the communicator knows his/ her limits and cannot cross them. but this style of communication is used less in the workplace. their identifications are extensive gestures, good eye contact, clarity of voice, and using the word i, (sigroha and gaurav, 2021). employee performance mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 141 | p a g e employee performance is defined differently by different scholars. employee performance is a term typical to the human resource field where employee performance can refer to the ability of employees to achieve organizational goals more effectively and efficiently. employee performance can be described as what an employee does or does not do such as the quantity of output, timeliness of production, presence at work, and cooperativeness (gungor, 2011). it is worth noting that, the organization itself determines the nature of the performance. on the other hand, employees are of vital importance in the achievement of any organization. employee performance is generally characterized as the conduct demonstrated by an employee during the execution of a specific task delegated by the employer. it also pertains to the results yielded by an individual worker within an organization. according to fuertes et al. (2020), employee performance is tied to the accomplishments of each employee aligning with the distinct guidelines, policies, or anticipations of the organization or employer. as stated by jiang et al. (2020), employee performance characterizes the competencies and capacities of individual employees within an organization. in such instances, highly skilled and proficient employees often display elevated proficiency and dedication to their roles, resulting in superior employee performance compared to those with fewer skills and expertise. organizations need high-performing employees to achieve their goals, deliver the products and services they specialize in, and achieve competitive advantage. the performance of employees is the successful completion of tasks by individuals or individuals to pre-defined acceptable standards as set and measured by a supervisor or organization while efficiently and effectively utilizing available resources in a changing environment (jaafaru et al, 2023). as affirmed by fuertes et al. (2020), exceptional employee performance plays a pivotal role in delivering high-quality services to customers and enhancing the organization's profitability. these advantages stemming from improved employee performance tend to establish a sustainable competitive advantage over the long term. the enthusiasm and dedication of employees are commonly heightened when fellow employees or managers within the organizations are effectively fulfilling their respective roles. how the organization engages with and communicates with its employees significantly contributes to enhancing employee performance, serving as a wellspring of motivation and the acquisition of fresh insights and abilities (jiang et al., 2020). 2.2 theoretical review fiedler’s contingency theory the theory of contingent leadership developed by fiedler (1967) as cited in armstrong (2009) stated that the type of leadership exercised depends to a large extent on the situation and the ability of the leader to understand it and act accordingly. this is sometimes called situational leadership. this leadership style depends on the readiness of the followers because it is their action that determines effectiveness. fiedler wrote: “leadership performance depends as much on the organization as on the leader’s attributes”. fiedler pointed out that the performance mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 142 | p a g e of a group is related both to the leadership style and to the degree to which the situation provides the leader with the opportunity to exert influence (armstrong, 2009). fiedler considered a person’s leadership style is relatively fixed and difficult to change; therefore, the basic idea is to grow the leader’s style with the situation most favourable for his or her effectiveness. by diagnosing leadership style and organizational situation, the correct fit can be arranged (daft, 2013). porter et al., (2006), effective group performance relies upon the correct balance between the leader’s style of interacting with the staff and how much influence and control the situation gives the leader. systems theory because of its origins in multiple disciplines, systems theory is meant to apply to organisms and human behaviors in different disciplines (kast & rosenzweig, 1972). when applied to communication, the systems theory is meant to understand the interconnectedness of human communication and not just focus on one aspect of it (scott, 1974). according to systems theory, components of each system are structured in a hierarchical ordering, and components are interdependent with one another in the system to the extent that one component cannot function without the support of other components. at the organizational level, the organizations and other organizations in the environment are also interdependent on one another. the outcome of an organization’s communication has consequences on its functioning and hence it can be seen in its overall performance. various theories have attempted to explicate this contingency view of organization-environment relationships. 2.3 empirical review idowu (2019) conducted a study to examine the impact of leadership styles on employees’ work performance in some selected southwestern nigerian private universities. the study aims to study the impact of the different leadership styles on employees’ work performance in some selected southwestern nigerian private universities. the survey research design was used for this study. the results revealed that universities driven by the desire to achieve better performance from his/her employees should try to exhibit more transformational and transactional leadership styles and less laissez-faire and autocratic leadership styles. sigroha and gaurav (2021) conducted a study to evaluate the relationship between styles of communication and their impact on employees’ performance in public and private hospitals of the national capital region of india. the study aims to evaluate four styles of communication (passive, passive-aggressive, assertive, and aggressive) predicting the different dimensions of employees’ performance in the hospitals. the survey research design was used for this study. the results revealed that an assertive style of communication is best for employees’ performance, it is much more productive for hospitals as well as for patients and it creates standards for hospitals and helps to achieve the goals of the hospitals mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 143 | p a g e beauty and aigbogun (2022) conducted a study to examine the impact of styles of leadership on employees’ performance at turn-all holdings ltd, harare, zimbabwe. the study aims to evaluate the impact of styles of leadership on employees’ performance, mainly the impact of transformational, transactional, and laissez-faire leadership styles at turn-all holdings ltd, harare. a quantitative approach, a descriptive survey research design, and a structured questionnaire were used for this research. the results revealed that transformational and laissez-faire styles significantly positively impact employee performance, whilst, transactional leadership is found to have a negative impact. jaafaru et al, 2023) conducted a study to examine the effect of communication on employee performance of fazim global concept in gombe, nigeria. the study aims to assess the significant relationship between forms of communication and employee performance of the fazim global concept. a survey research design was used for this study. the result revealed that communication plays a very significant role in improving employees’ performance at fazim global concept gombe. 3. methodology the research design for this study was essentially descriptive to enable the researcher to investigate the statement of the problem under study. descriptive research is research that specifies the nature of a given phenomenon. it applies a systematic explanation of situations. this type of research is expected to help in decision-making. they are prerequisites for inferences and generalizations. the research involves the selection of specific numbers of manufacturing firms within the southeastern region from which the desired number of respondents were chosen in other to investigate the effect of the participatory management style on employee performance in sustainable manufacturing firms in south nigeria. the respondents received the appropriate and sufficient instructions they needed to complete the survey. sections include: section a: demographic characteristics demographic characteristics on which data were collected include gender, age, marital status, and highest level of education. section b this section contains questions on the constructs – leadership styles, communication styles, and employee performance. the three constructs were measured using a 4 4-point likert scale where “1” = strongly agree (sa), “2” = agree (a), “3” = disagree (d), and “4” = strongly disagree (sd). the cronbach alpha reliability test was used to determine the questionnaire's internal consistency and reliability. since the scale's alpha values were higher than 0.7, all the constructs showed high reliability. cronbach alpha should be greater than 0.7, according to nunnally [1]. table 2 provides a summary of the reliability analysis. table 2: summary of cronbach’s alpha levels for the construct variable name cronbach’s alpha number of items decision leadership styles 0.708 5 fit for use mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 144 | p a g e communication styles 0.823 6 fit for use employee performance 0.767 5 fit for use questionnaire administration with the help of some trained research assistants, copies of the questionnaire were self-administered throughout the southeastern state. the study's participants were assured of their confidentiality and were made aware of this fact by each research assistant, a finite population of 853 was obtained from the firm’s human resource department, after which a total sample of 272 was obtained for the study using the taro yamane formula. 272 copies of the questionnaire were distributed and 237 questionnaires were returned which accounted for an 87% return rate of the questionnaire. data analysis techniques data collected were analyzed using both descriptive and inferential statistics with the aid of the statistical package for social sciences (spss). while descriptive statistics was used to describe the socio-demographic characteristics of the respondents, simple linear regression analyses were used for further analysis. all the hypotheses were tested at a 0.05 level of significance. 4. results and discussion socio-demographic information of respondents this section presents information about the sex, age of respondents, marital status, and highest educational qualification of respondents (table 3). the information provided here was analyzed using frequency count and percentage. table 3: socio-demographic characteristics of respondents all demography characteristic s frequency percent (%) sex male female 197 40 83% 17% age of respondents under 20 20 29 30 – 39 40 – 49 50 – 59 60 and above 17 67 72 53 18 10 07% 28% 30% 22% 08% 04% marital status single married separated/divorced widowed 137 89 09 02 58% 36% 04% 01% mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 145 | p a g e highest educational qualification primary education senior secondary school nce hnd bachelor’s degree post graduate qualification others 17 28 30 49 71 21 21 07% 12% 13% 21% 30% 09% 09% table 3 is the demographic profile of the respondents which reveals a predominantly male composition, with males comprising 197 out of a total of 237 participants, accounting for 83% of the sample. in terms of marital status, the majority of participants are single, constituting 58% of the sample, while 36% are married. the age distribution shows that the largest portion of participants falls within the 30-39 age group, with 72 individuals (30%), followed closely by the 20-29 age group, comprising 67 individuals (28%). the representation decreases with age, with only 4% of participants being 60 years and above. regarding academic qualifications, the sample demonstrates a varied educational background, with the highest proportion holding a bachelor's degree (71 individuals, 30%), followed by hnd (higher national diploma) at 49 individuals (21%) and nce (nigerian certificate in education) at 30 individuals (13%). other qualifications include senior secondary school (28 individuals, 12%), postgraduate degrees (21 individuals, 9%), and 21 individuals (9%) with qualifications classified as "others". in summary, the demographic profile showcases a predominantly male, relatively young, and welleducated sample. the majority of participants are single, with a significant portion having attained at least a bachelor's degree. the age distribution skews towards younger age groups, with the highest representation in the 20-39 range, indicating a younger demographic profile. this data provides valuable insights for understanding the characteristics and composition of the sample population, which can be essential for various research or decision-making purposes. results the test for the various study objectives is presented in this section. these individual objectives were examined using linear regression analysis. the analyses of linear regression were conducted using the enter method. the findings are listed below.: objective one: leadership styles have no significant effect on employee performance in sustainable manufacturing firms in enugu state nigeria. the anova table (table 4) shows that at a 0.05 significance level, the model is significant for predicting the impact of leadership styles on employee performance (f = 29.618; p = 0.002) among the several selected firms in southeast nigeria. there exists a low correlation between the observed and predicted values of the variable, economy of the community (r = 247). in contrast, only 21.99% (adjusted r2 = mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 146 | p a g e 0.2199) of the variance for respondents’ employee performance was accounted for by leadership styles (table 5). table 4: anova table showing the goodness of fit table model sum of squares df mean square f sig 1 regression 33.297 1 33.297 29.618 0.002 residual 265.321 236 1.1242 total 298.618 237 a. dependent variable: employee performance b. predictors: (constant), leadership styles table 5: predictive power of the leadership styles on employee performance model r r square adjusted r square std error of estimate 1 0.247 0.311 0.2199 1.61360 a. predictors: (constant), leadership styles notwithstanding, table 6 indicates that leadership styles significantly affect employee performance (p=0.000). for every unit increase in leadership styles, the employee performance increases by 0.301. table 6: impact of leadership styles on employee performance unstandardized coefficient standardized coefficient t sig mode l b st. error beta 1 constant 2.922 0.038 97.4 0 0.000 leadership styles 0.301 0.0102 0.292 29.51 0.000 a. dependent variable: employee performance objective two: communication styles have no significant effect on employee performance in sustainable manufacturing firms in south nigeria. table 7 shows that the model is significant for predicting the health of the people in the benefitting communities (f = 21.371; p = 0.003). however, table 8 shows that the correlation between the observed and predicted values of the variable, the health of the benefitting community is low (r=0.300). moreover, only 50.1% (adjusted r2 = 0.501) of the variance for employee performance was accounted for by communication styles. table 7: anova table showing the goodness of fit table mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 147 | p a g e model sum of squares df mean square f sig 1 regression 17.003 1 17.003 21.371 0.003 residual 187.763 236 0.7956 total 204.766 237 a. dependent variable: employee performance b. predictors: (constant), communication styles table 8: predictive power of the communication styles on the employee performance model r r square adjusted r square std error of estimate 1 0.300 0.589 0.501 2.34958 a. predictors: (constant), communication styles table 9 however indicates that the employee performance in the firms is significantly influenced by communication styles (p=0.003). as the employee performance increases by 0.284 for every unit increases in communication styles. in this case, we agree that communication styles affect employee performance across the study area. table 9: impact of communication styles on employee performance unstandardized coefficient standardized coefficient t sig mod el b st. error beta 1 constant 14.42 2.3380 6.19 0 0.000 communication styles 0.284 0.102 0.292 2.77 8 0.007 b. dependent variable: employee performance 5. conclusion the findings of this study underscore the pivotal role of participatory management in enhancing employee performance within manufacturing firms in enugu state, nigeria. leadership styles that embrace participation and inclusivity have demonstrated a significant positive effect on employee performance. when leaders engage employees in decision-making processes, it fosters a sense of ownership and accountability, which in turn boosts productivity, job satisfaction, and commitment to organizational goals. this alignment between leadership practices and employee aspirations is crucial for the dynamic and resource-efficient operations that manufacturing demands. moreover, the study mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 148 | p a g e highlights the critical impact of effective communication styles in driving employee performance. transparent and open communication channels ensure that employees are well-informed, valued, and motivated to contribute their best efforts. this, in turn, leads to enhanced collaboration, innovation, and problem-solving capabilities within the workforce. by fostering a culture of open dialogue and feedback, manufacturing firms in enugu state can harness the full potential of their human capital, thereby achieving greater operational efficiency and sustainability. the implementation of participatory management practices, characterized by inclusive leadership and robust communication strategies, has been shown to significantly improve employee performance in manufacturing firms in enugu state. these findings provide valuable insights for managers and policymakers seeking to enhance organizational performance through human-centered management approaches. by embracing participatory management, firms can not only improve their sustainability outcomes but also create a more engaged, productive, and satisfied workforce. this research contributes to the broader understanding of effective management practices in the context of sustainable development, offering a roadmap for other regions and sectors aiming to achieve similar successes. the study concluded that participatory management has significant effect on employee performance in manufacturing firms in enugu state nigeria. recommendation based on the findings that participatory management, inclusive leadership styles, and effective communication significantly enhance employee performance in manufacturing firms in enugu state, nigeria, the following recommendations are proposed: i. offer training programs for managers to develop inclusive leadership skills. focus on fostering empathy, active listening, and collaborative decision-making in other to improve employee performance. establish mentorship programs where experienced leaders can guide and support less experienced managers in adopting participatory practices. recognize and reward leaders who effectively engage their teams and demonstrate the benefits of participatory management. ii. create an open communication culture where transparency is prioritized. ensure that information flows freely across all levels of the organization. use multiple communication platforms to keep employees informed about organizational goals, changes, and progress toward sustainability objectives. develop interactive platforms such as intranets, suggestion boxes, and digital forums to facilitate continuous and open dialogue between management and employees. references armstrong, m. (2009). handbook of management and leadership: a guide to managing for result. london: kogan page. bass, b. m., & avolio, b. j. (1994). improving organizational effectiveness: through transformational leadership. thousand oaks, ca: sage publications inc. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 149 | p a g e beauty, m., & aigbogun, o. (2022). effects of leadership styles on employee performance: a case study of turnall holdings ltd, harare. international journal of academic research in business and social sciences, 12(1), 289–305. https://doi.org/xxxx cherry, k. a. (2006). leadership styles. retrieved from http://psychology.about.com/od/leadership/a/leadstyles.htm daft, r. l. (2013). new era of management. india: cengage learning. dotse, j., & asumeng, m. (2014). power distance as moderator of the relationship between organizational leadership style and employee work attitudes: an empirical study in ghana. international journal of management sciences and business research, 3(5), 2226-8235. fuertes, g., alfaro, m., vargas, m., gutierrez, s., ternero, r., & sabattin, j. (2020). conceptual framework for the strategic management: a literature review—descriptive. journal of engineering. https://doi.org/xxxx güngör, p. (2011). the relationship between reward management systems. social and behavioral sciences, 1510–1520. idowu, s. a. (2019). impact of leadership styles on employees' work performance in some southwestern nigerian private universities. economic insightstrends and challenges, viii(4), 27– 46. jaafaru, f. m., ibrahim, a., & bala, a. (2023). an assessment of the effect of communication on employees’ performance of fazim global concept in gombe metropolis. creative business research journal, 3(2), 156-163. jiang, x., du, j., zhou, j., & cui, y. (2020). the impact of negative informal information before a change on performance: a within-person approach. international journal of environmental research and public health, 17(2), 670. https://doi.org/xxxx kast, f. e., & rosenzweig, j. e. (1972). general systems theory: applications for organization and management. academy of management journal, 15(4), 447-465. lewin, k., lippit, r., & white, r. k. (1939). patterns of aggressive behavior in experimentally created social climates. journal of social psychology, 10(2), 271-299. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 150 | p a g e mathis, r. l., & jackson, j. h. (2009). human resource management (12th ed.). stamford, ct: cengage learning. michael, a. (2010). leadership style and organizational impact. retrieved from http://www.alaapa.org northouse, p. g. (2013). leadership: theory and practice (6th ed.). california: sage publications, inc. northouse, p. g. (2018). leadership: theory and practice (8th ed.). sage publications. nwokocha, i., & iheriohanma, e. b. j. (2015). nexus between leadership styles, employee retention and performance in organization in nigeria. european scientific journal, 11(13), 1857–7881. obiwuru, t. c. (2011). effect of leadership style on organizational performance: a survey of selected small-scale enterprises in ikosi-ketu council development area of lagos state, nigeria. australian journal of business and management research, 1(1), 1-20. ogbo, a., ugwu, d. i., ugbam, o., & kifordu, a. (2016). participatory management. journal of organizational leadership, 5(3), 112-125. okiomah, o. p. (2020). participatory management and organizational performance of manufacturing firms in rivers state. international academy journal of business administration annals, 6(1), 43-50. porter, k., smith, p., & fagg, r. (2006). leadership and management for hr professionals (3rd ed.). uk: jordan hill library. robbins, s. p., & coultar, m. (2005). management (8th ed.). new jersey: pearson education, inc. rolková, m., & farkašová, v. (2015). the features of participative management style. procedia economics and finance, 23, 1383–1387. scott, w. g. (1974). organization theory: a reassessment. academy of management journal, 17(2), 242254. shah, m., & kamal, h. (2015). transactional leadership and job performance: an empirical investigation. institute of business administration, 2(1), 69-81. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 1, january-march 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 151 | p a g e sigroha, a., & gaurav. (2021). the impact of styles of communication on employees’ performance in hospitals of national capital region of india. turkish online journal of qualitative inquiry (tojqi), 12(3), 5103-5109. urban, j. (2011). how to prevent employee demotivation. human resources management, 4(1), 31. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 1 | p a g e effect of cost of sales on shareholders return of nigerian companies giwa luka and dibua ekene c. department of accountancy paul university, awka e-mail: lukagiwa6@gmail.com, dibuaekene@gmail.com doi: https://doi.org/10.5281/zenodo.15829607 abstract: this study determined the effect of cost of sales on shareholders return of nigerian companies from 2014 to 2024. ex post facto research design was employed for the study. data were extracted from the annual reports and accounts on the twenty samples companies in nigeria. the hypothesis was tested with regression analysis via e-view 9.0. the study found that cost of sales has a positive and significant effect on shareholders return of nigerian companies. based on the finding, the study recommended that the production and supply chain directors of companies in nigeria should priorities strategic investments in raw material sourcing, inventory control systems, and production efficiency technologies. keywords: cost of sales, shareholders return and firm liquidity. introduction the idea of cost structure is rooted in the broader framework of strategic control and monetary overall performance optimization (rounaghi, jarrar & dana, 2021). it requires corporations to adopt a value-based totally control method, wherein choices regarding resource allocation, technique development, and operational restructuring are made in alignment with the firm’s strategic dreams and shareholder interests. within the nigerian manufacturing context, fee pressures have endured to mount due to macroeconomic instability, high inflation, power value burden, and infrastructural bottlenecks (adesina & tiamiyu, 2025). these factors have necessitated the need for firms to pursue price-green strategies which could beautify overall performance and ensure lengthy-time period survival. at the same time as several firms in nigeria have initiated numerous fee containment packages, the quantity to which such strategic fee control efforts translate into stepped forward shareholder wealth stays a vital vicinity of inquiry. adibeli and amahalu (2023) submitted that shareholder wealth maximization remains the ultimate intention of any income-orientated corporation and is often measured through indicators consisting of percentage price appreciation, dividend payout, return on fairness, and income in keeping with proportion. however, the linkage among price structure and shareholder wealth maximization is complex and multifaceted, requiring empirical exploration. the structure of firm-level cost can have giant mailto:contact@americaserial.com mailto:contact@americaserial.com lukagiwa6@gmail.com dibuaekene@gmail.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 2 | p a g e implications for shareholder wealth maximization in several methods. firstly, value discount enhances net profitability via lowering overhead and manufacturing expenses (roomi, 2024), thereby growing the earnings available for distribution to shareholders in the form of dividends or retained earnings. secondly, effective price reduction strategies can improve a firm’s running efficiency, thereby enhancing its competitive positioning and allowing it to offer higher fee propositions within the market (thapayom, 2021). this can lead to increased market share, better sales and stepped forward monetary performance, which in turn positively influences investor self-belief and proportion charge overall performance. thirdly, managing the fee structure enables resource reallocation in the direction of high-price projects and innovation-pushed investments that contribute to lengthy-term growth and shareholder value. moreover, firms that demonstrate prudent price management are frequently perceived as financially disciplined and strategically centered, attributes which might be extraordinarily valued with the aid of buyers and capital market contributors (rounaghi, jarrar & dana, 2021). however, the linkage between cost structure and shareholder wealth maximization is complex and multifaceted, requiring empirical exploration. the structure of firm-level cost can have significant implications for shareholder wealth maximization in several ways. firstly, cost reduction enhances net profitability by reducing overhead and production expenses (roomi, 2024), thereby increasing the earnings available for distribution to shareholders in the form of dividends or retained earnings. secondly, effective cost reduction strategies can improve a firm’s operating efficiency, thereby enhancing its competitive positioning and enabling it to offer better value propositions in the marketplace (thapayom, 2021). this can lead to increased market share, higher sales revenue, and improved financial performance, which in turn positively influences investor confidence and share price performance. thirdly, managing the cost structure facilitates resource reallocation towards high-value projects and innovation-driven investments that contribute to long-term growth and shareholder value. moreover, firms that demonstrate prudent cost management are often perceived as financially disciplined and strategically focused, attributes that are highly valued by investors and capital market participants (rounaghi, jarrar & dana, 2021). meanwhile, to the best of the researcher’s knowledge, there is a limited study on consumer goods firms in nigeria. the study therefore, sought to ascertain the effect of cost of sales on the shareholder return of consumer goods firms in nigeria. review of related literature moreover, cost structure serves as an essential determinant of corporate selection-making. it affects strategic picks which includes product pricing, resource allocation, expansion, outsourcing, and even the pursuit of economies of scale (held et al., 2021). a company's ability to manipulate its fee structure can directly have an effect on its economic consequences and ability to maximize shareholder wealth. on this regard, value structure isn't a passive file of costs; it's far an lively tool mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 3 | p a g e through which companies can control profitability, hold competitive advantage, and align operational activities with monetary goals (awotomilusi, isaiah, esther & yomi, 2022). cost structure also plays a vital role in financial reporting and performance evaluation. investors, shareholders, and financial analysts scrutinize a company's cost structure to understand the sustainability of its profit margins, the resilience of its business model, and the efficiency of its management practices (ayoola & odusina, 2023; zhu, chen & cheng, 2023). the transparency and rational organization of costs help stakeholders assess whether a company is strategically positioned for growth or vulnerable to financial stress. hence, in the context of shareholder wealth maximization, cost structure becomes not just a technical accounting concept but a strategic foundation that underpins the creation of long-term value for owners of the firm. cost of sales the cost of sales, also referred to as the cost of goods sold (cogs), represents the direct expenses associated with producing or acquiring the products that a company sells during a specific period (adesina & tiamiyu, 2025). it encompasses all the costs directly tied to the creation of goods or services that a company offers to its customers, such as raw materials, labor costs, and manufacturing expenses (fadare & adegbie, 2020). the cost of sales is a critical financial metric for businesses, as it directly influences the profitability of a company by determining how much it costs to generate revenue through product sales. in essence, it is the amount spent on the production or procurement of goods that are then sold to generate income (kelwig, 2022). cost of sales is an important factor in determining a corporation’s gross income, that's calculated by way of subtracting the cost of income from general sales (fernando, 2024; aggreh, abiahu, & nworie, 2023). this parent offers hints into the performance and profitability of a agency's core commercial enterprise operations. it allows traders, analysts, and bosses check how properly the corporation is controlling manufacturing expenses and dealing with its supply chain. a enterprise with excessive manufacturing cost relative to sales may additionally need to reevaluate its pricing approach, manufacturing techniques, or supplier relationships. conversely, a corporation with low cost of sales relative to its sales is normally extra green at converting raw substances and hard work into finished products, resulting in higher profitability. the calculation of cost of sales can vary depending on the type of business. for manufacturing companies, it typically includes direct labor, raw materials (fadjarenie, rachmadani & tarmidi, 2024), and manufacturing overhead. in retail, it reflects the costs associated with purchasing goods for resale, including the wholesale price and transportation costs. for service-based businesses, the cost of sales might include labor costs directly tied to service delivery. understanding the cost of sales is crucial not only for assessing operational efficiency but also for setting the appropriate sales price to ensure profitability. companies that can effectively control and reduce their cost of sales can potentially increase their profit margins and improve their financial performance. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 4 | p a g e shareholder wealth maximization shareholder wealth maximization is a monetary management precept that announces that the primary goal of an employer is to growth the wealth of its shareholders (akintunde, nwabuisi & oyeyemi, 2021). this goal is typically pursued by way of maximizing the value of the organisation’s inventory, which in turn increases the fee of the shareholders’ investments (adibeli & amahalu, 2023). the idea is grounded inside the belief that the fulfillment of a enterprise ought to be measured by its capacity to offer the best possible return on investment for its shareholders, thereby ensuring their monetary wellness. shareholder wealth maximization takes into consideration not most effective the cutting-edge profitability of the corporation however additionally its future boom potential, which immediately affects the lengthy-time period cost of the inventory (nwaobia & ajayi, 2020). empirical review temitope (2024) ascertained the link between cost management and the financial performance of selected manufacturing firms in nigeria from 2011 to 2020. the analysis employed descriptive statistics, correlation analysis, and panel regression techniques, including pooled ols, random effects, and fixed effects estimation. the study also applied the hausman test and post-estimation procedures to validate the models. findings indicated that administrative costs had an insignificant negative impact on earnings after tax, whereas selling and distribution expenses had an insignificant positive effect. ayeni-agbaje, ogundipe, and bamidele (2024) determined the impact of cost reduction techniques on the productivity of listed manufacturing firms in nigeria. the sample consisted of 179 listed manufacturing firms on the nigerian exchange group as of may 30, 2023, with 20 firms purposively selected. descriptive and inferential analyses were employed, including regression techniques and diagnostic tests. the findings revealed that waste reduction had a significant and positive effect on productivity, with a coefficient value of 120, while inventory management also showed a significant positive effect on productivity with a coefficient value of 154.965. nwokeabia, uguru, and chukwu (2023) determined the impact of cost control on the corporate performance of listed brewery firms in nigeria, using data from 2011 to 2021. using regression analysis, the researchers found that material costs and overhead costs had a positive and significant impact on corporate performance, while labor costs had a positive but insignificant effect. omah (2023) ascertained the effect of cost reduction strategies and the performance of manufacturing firms in nigeria. the spearman rank order correlation was employed to evaluate relationships among the study variables. findings revealed significant correlations between value analysis and profit before tax, value analysis and return on assets, value engineering and profit before tax, and value engineering and return on assets. robinson and umo (2023) determined the effect between cost management strategies and profitability in quoted cement manufacturing firms in nigeria, using an ex-post-facto design. the study analyzed data from three quoted cement firms over mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 5 | p a g e a 10-year period (2013–2022). the findings from the regression analysis indicated that throughput costing, life-cycle costing, target costing, and activity-based costing all had a positive relationship with return on equity, with activity-based costing showing the strongest correlation. the study concluded that these costing strategies positively impacted profitability, although throughput costing was weakly and insignificantly related. isiaka, jimoh, orebiyi, and adenekan (2022) analyzed the impact of cost control strategies on the survival of the nigerian manufacturing sector. the study used panel data from annual reports of five selected manufacturing firms over five years (2015-2019). the independent variables included finance costs, salaries and wages, and sales costs, while return on assets was used as a proxy for firm performance. the study found indicated that finance costs and cost of goods sold did not significantly influence firm performance, whereas salaries and wages had a significant impact. awotomilusi, isaiah, esther, and yomi (2022) ascertained the effect of cost structure on the financial performance of manufacturing firms listed on the nigerian exchange group. the study focused on seven industrial goods manufacturing companies, analyzing financial statements from 2011 to 2020. an ex-post facto research design was used, and data were analyzed using regression and correlation techniques. the study revealed showed that staff cost structure had a significant negative impact on financial performance. adamu (2022) explored the impact of cost on organizational profitability, using grand cereals and oil mills limited in nigeria as a case study. data analysis was conducted using simple correlation and analysis of variance (anova). findings revealed a negative relationship between production costs and profitability, a positive correlation between sales and profitability, and a negative correlation between vat and profitability. the study emphasized the importance of cost control, highlighting that businesses with well-structured cost management systems are more likely to achieve their profit targets. sekyi (2022) evaluated the effect of cost control on the growth of manufacturing firms in ghana, considering pricing strategy as a moderating factor. the study analyzed panel data from 2012 to 2021 using levene’s test and a twostep system dynamic general method of moments (gmm) model. results indicated no statistically significant difference in cost control levels among listed manufacturing firms. regression analysis showed that cost control dimensions significantly influence firm growth. the study concluded that pricing strategy significantly moderates the relationship between cost control and firm growth, measured through total sales rather than return on equity. umelo, ibanichuka, and ignatius (2021) conducted a study on the relationship between strategic management accounting practices and return on equity among publicly listed manufacturing firms in nigeria. ordinary least squares estimation, fixed effects, and random effects models. the study revealed that 50.6% of the variation in return on equity was explained by changes in strategic management accounting practices. the results further showed that target costing had a negative and insignificant effect on return on equity, while absorption costing had a positive and significant impact. conversely, activity-based costing was found to have a negative but significant effect on return on equity. adigbole, adebayo and osemene (2020) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 6 | p a g e examined the effect of strategic cost management practices on the performance of nigerian manufacturing firms. the study employed a survey research design to collect primary data, which was analyzed using the partial least squares structural equation modeling (pls-sem) method. results indicated that strategic cost management practices have a positive impact on organizational performance. mamidu and akinola (2019) ascertained the effect of cost control on performance of manufacturing agencies in nigeria. statistics were acquired from annual reports and relevant literatures among other. records were tested the usage of the ordinary least square linear regression version. the result indicates that shareholders' budget definitely relate to profitability and large at 5 percentage and that the full asset also undoubtedly relate to profitability at 5 percent degree of importance. this examine suggests that cost control in production businesses have a great effect on earnings generated from production operations. ezejiofor, nwakoby and okoye (2015) determined the effect of cost management on corporate operating performance in nigerian manufacturing companies. data were obtained from five years annual accounts and reports of five (5) food production companies. simple regression analysis was employed via spss version 20.0 in testing the hypotheses. the study revealed that there is a significant effect between cost management, operating profit and earnings per share in nigerian corporate firms. olalekan and tajudeen (2015) analyzed the effect of cost control on the survival of firms in nigeria, survey descriptive research design was deployed in the study. questionnaires were administered to 30 staff of nigerian bottling company plc (jos plant) at random. percentage analysis was used to analyze the data. the finding shows that cost control affect profitability of firms. methodology this study employed the ex-post facto research design. ex-post facto design is particularly useful when researching the effect of past events on present outcomes, especially the events already occurred and cannot be manipulated. the population of this study consists of all the consumer goods firms on the nigerian exchange group (ngx). as of december 31, 2024, there were 20 consumer goods firms in nigeria. sample sizes of 15 manufacturing firms were selected from a population of 20 firms using a purposive sampling technique. method of data collection the data for this study were collected through secondary sources, specifically from the publicly available financial statements and reports of the selected consumer goods firms on the ngx from 2014 to 2024. data were extracted from the annual reports and financial statements filed by the firms with the ngx. model specification the research adapted the model of ben-caleb, otekunrin, rasak, adewara, oladipo and eshua (2019) as follows: ctno = α0 + α1cmc+α2clc+α3cao+α4cfs+µ i mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 7 | p a g e where; ctno: changes in turnover cmc: changes in material costs cao: changes in administrative overheads cfs: changes in factory overheads α0 = constant α1-3 = coefficients µ = error term the study modified the regression model as follows; shrit = α0 + β1cosit + β2csmit + β3scit + β4acit + μit where: shrit = shareholder return for firm i in period t. cosit = cost of sales for firm i in period t. μit = error term for firm i in period t. α0 = constant. β1 = coefficients of the independent variables. method of data analysis the study employed both descriptive and inferential statistics. descriptive statistics, such as measures of central tendency and dispersion, provided hints into the overall characteristics of the dataset. the analysis was conducted using a least squares regression model, which enabled the researcher to assess the effect of cost structure variables on shareholder return. decision rule the null hypothesis is rejected if the p-value for the t-test is less than 0.05, indicating that there is a significant effect of the independent variables on shareholder return. conversely, if the p-value is greater than 0.05, the null hypothesis is accepted, suggesting no significant effect. data analysis table 1: descriptive statistics shr cos01 liq mean -0.023636 7.536364 0.650755 median -0.020000 7.470000 0.743516 maximum 0.600000 8.050000 1.532516 minimum -0.550000 7.280000 0.073989 std. dev. 0.402871 0.219955 0.513169 skewness 0.197677 1.117849 0.232259 kurtosis 1.764738 3.374064 1.739396 jarque-bera 2.312992 7.065115 2.481736 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 8 | p a g e probability 0.314587 0.029230 0.289133 sum -0.780000 248.7000 21.47493 sum sq. dev. 5.193764 1.548164 8.426953 observations 33 33 33 source: e-views 9.0 output (2025) from table 1, the descriptive statistics shows that the mean of shareholders return (shr) of the sampled companies in nigeria is -0.023; the maximum of 0.600 with a minimum of -0.550 and standard deviation of 0.403. the mean of cost of sales (cos) from the sampled observations is 7.536; the standard deviation value is 0.218; a maximum observation of 8.050 with a minimum value of 7.280. the firm liquidity (liq) has mean value of 0.651, a standard deviation of 0.513; maximum value of 1.533 with a minimum value of 0.074. skewness is the measure of how much the probability distribution of a random variable diverges from the normal distribution. table 1 sketches that the probability distribution for shr = 0.315; cos =0.029; liq= 0.289 are positive and statistically significant at 0.05. from table above, the jarque-bera (jb) which test for normality or the existence of outlier or extreme values among the variables shows that all our variables are normally distributed and not skewed distribution, significant at 5% level and the result could be generalized. test of hypothesis ho1: cost of sales has no significant effect on shareholders return of consumer goods firms in nigeria. table 2: regression analysis between shr, cos and liq dependent variable: shr method: panel least squares date: 07/02/25 time: 20:26 sample: 2014 2024 periods included: 11 cross-sections included: 3 total panel (balanced) observations: 33 variable coefficien t std. error t-statistic prob. c 8.785589 2.196658 -3.999525 0.0004 cos 1.171557 0.295803 3.960600 0.0004 liq 0.103453 0.126787 -0.815960 0.4210 mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.analyticsvidhya.com/blog/2020/04/statistics-data-science-normal-distribution/?utm_source=blog&utm_medium=what-is-skewness-statistics american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 9 | p a g e r-squared 0.355667 mean dependent var 0.02363 6 adjusted rsquared 0.312712 s.d. dependent var 0.40287 1 s.e. of regression 0.333992 akaike info criterion 0.731107 sum squared resid 3.346513 schwarz criterion 0.86715 3 log likelihood 9.063257 hannan-quinn criter. 0.77688 2 f-statistic 8.279892 durbin-watson stat 2.49742 3 prob(f-statistic) 0.001370 source: e-view 9.0 in table 2, the regression analysis was conducted to test the effect between shareholders return (shr) and cost of sales (cos). adjusted r squared is coefficient of determination which tells us the variation in the dependent variable due to changes in the independent variable. from the result, the value of adjusted r squared was 0.31, an indication that there was variation of 31% on shareholders return due to changes in cost of sales. this implies that only 31% changes in shareholders return of the firms could be accounted for by independent variable, cos and control variable, liq, while 69% was explained by unknown variables that were not included in the model. the durbin-watson statistic of 2.50 advocates that the model contain serial correlation. the fstatistic of the regression is equal to 8.280 and the associated f-statistical probability is equal to 0.001, suggests that cost of sales has statistically significant effect on shareholders return of the companies in nigeria, so the alternative hypothesis was accepted and the null hypothesis was rejected. the probability of the slope coefficients indicate that; p-value =0.000<0.05). the co-efficient value of; β1= 1.171557; t = 3.960, implies that cost of sales independent is positively affect shareholders return and also statistically significant at 5%. since the p-value of 0.000 is less than the critical value of 5% (0.05), then, it would be upheld that cost of sale has significant effect on shareholders return of nigerian consumer goods firms at 5% level of significance. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 10 | p a g e discussion of findings the finding that cost of sales has a positive and significant effect on shareholder return among companies in nigeria. in the companies, an increase in cost of sales often reflects greater production, which, if managed competently, increased profitability. empirically, this finding is partially supported and partially contradicted by past research. nwokeabia, uguru and chukwu (2023) revealed that material costs (a component of cost of sales) have a positive impact on corporate performance. in contrast, oyedokun, tomomewo and owolabi (2019) reported a negative relationship between raw material costs and profit. conclusion and recommendations this study determined the effect of cost of sales on shareholders return of nigerian companies from 2014 to 2024. data were extracted from the annual reports and accounts on the twenty samples companies in nigeria. the hypothesis was tested with regression analysis via e-view 9.0. the study found that cost of sales has a positive and significant effect on shareholders return of nigerian companies. the evidence that certain value features such as cost of sales, impact shareholder return shows that strategic investments in those regions may be regarded not simply as operational outflows, however as enablers of future economic gains. based on the finding, the study recommended that the production and supply chain directors of companies in nigeria should priorities strategic investments in raw material sourcing, inventory control systems, and production efficiency technologies. to optimize cost of sales but also sustain the observed positive contribution of cost of sales to shareholder return. references adamu, d. k. (2022). the effects of cost on the profitability of an organization (a case of grand cereals and oil mills limited, nigeria). african scholars journal of business dev. and management res., 27(7). adesina, o. d., & tiamiyu, t. a. (2025). empirical analysis of cost management and profitability of manufacturing companies in nigeria. journal of economics, finance and management studies, 8(2), 1397-1415. https://doi.org/10.47191/jefms/v8-i2-60 adibeli, p.c. & amahalu, n.n. (2023). debt financing and shareholders wealth creation of quoted manufacturing firms in nigeria, journal of global accounting, 9(2), 70 – 112. adigbole, e. a., adebayo, a. o., & osemene, o. f. (2020). strategic cost management practices and organizational performance: a study of manufacturing firms in nigeria. global journal of accounting & finance (gjaf), 4(1). aggreh, m., abiahu, m. c., & nworie, g. o. (2023). cost reduction and financial performance of listed consumer goods firms in nigeria. journal of banking, 11(1), 1-38. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 11 | p a g e akintunde, a., nwabuisi, n. a., & oyeyemi, o. g. (2021). financing decision and shareholders’ wealth maximisation of nigeria listed companies. imo state university business & finance journal, 12(1), 18. awotomilusi, n. s., isaiah, o. o., esther, i. o., & yomi, a. t. (2022). cost structure and financial performance of quoted industrial goods manufacturing companies in nigeria. international journal of management, accounting & economics, 9(11). ayeni-agbaje, r. a., ogundipe, f. b., & bamidele, v. o. (2024). cost reduction techniques and the productivity of listed manufacturing firms in nigeria. international journal of social sciences and management research, 10(11), 340-355. ayoola, j. t., & odusina, a. o. (2023). a capital structure & cost efficiency in selected listed financial firms in nigeria. economy, business and development: an international journal, 4(1), 19-35. ben-caleb, e., otekunrin, a. o., rasak, b., adewara, s. o., oladipo, o. a., & eshua, r. (2019). cost reduction strategies and the growth of selected manufacturing companies in nigeria. international journal of mechanical engineering and technology (ijmet), 10(3), 305-312. ezejiofor, r. a., nwakoby, n. p., & okoye, j. f. n. (2015). analysis of cost management on performance of corporate firms in nigeria. scholars journal of economics, business and management, 2(12), 1137-1142. fadare, t. v., & adegbie, f. f. (2020). cost management and financial performance of consumer goods companies quoted in nigeria. international journal of scientific and research publications, 10(8), 82–90. https://doi.org/10.29322/ijsrp.10.08.2020.p10413 fernando, j. (2024, may 22). cost of goods sold (cogs) explained with methods to calculate it. investopedia. https://www.investopedia.com/terms/c/cogs.asp held, p. j., bragg-gresham, j. l., peters, t. g., mccormick, f., chertow, g., vaughan, w. p., & roberts, j. p. (2021). cost structures of us organ procurement organizations. transplantation, 105(12), 2612-2619. kelwig, d. (2022, march 8). cost of sales: definition, formula, and ways to lower it. zendesk. https://www.zendesk.com/blog/5-ways-to-reduce-cost-of-sales/# nwaobia, a. n., & ajayi, a. (2020). financial reporting quality and shareholders’ wealth maximization: evidence from listed companies in nigeria. european journal of accounting, auditing and finance research, 8(6), 1–14. mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.29322/ijsrp.10.08.2020.p10413 https://www.investopedia.com/terms/c/cogs.asp https://www.zendesk.com/blog/5-ways-to-reduce-cost-of-sales/ american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 12 | p a g e nwokeabia, i. a., uguru, l. c., & chukwu, u. c. (2023). effect of cost control on corporate performance: evidence from selected listed brewery firms in nigeria. journal of accounting and financial management, 9(5), 77. omah, p. c. (2023). cost reduction strategies and performance of manufacturing companies in nigeria. bw academic journal, 18-18. oyedokun, g. e., tomomewo, a. o., & owolabi, s. a. (2019). cost control and profitability of selected manufacturing companies in nigeria. journal of accounting and strategic finance, 2(1), 1433. roomi, m. a. (2024). strategic cost management in a competitive landscape: optimizing costs, driving value, and achieving sustainable advantage. research studies of business, 2(01), 10-19. rounaghi, m. m., jarrar, h., & dana, l. p. (2021). implementation of strategic cost management in manufacturing companies: overcoming costs stickiness and increasing corporate sustainability. future business journal, 7, 1-8. sekyi, s. k. (2022). cost control and growth of listed manufacturing firms in ghana: the moderating role of pricing strategy (doctoral dissertation, university of cape coast). temitope, a. l. (2024). cost control and reduction, management and financial performance of listed manufacturing firms in nigeria. journal of accounting and financial management, 10(1), 1– 17. thapayom, a. (2021). strategic cost management as a valuable approach for achieving organizational sustainability: evidence from industrial businesses in rayong. journal of accounting profession, 17(53), 98-125. umelo, n. d., ibanichuka, e. a. l., & ignatius, u. (2021). strategic management accounting practices and return on equity of quoted manufacturing firms in nigeria. international journal of business & law research, 9(4), 120-130. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 141 | p a g e evaluating the impact of blue economy sector on nigeria's economic growth aienloshan omo obeamata and eke robert ike phd, fca. department of accounting and finance, college of social and management sciences, wellspring university benin city, edo state. e-mail: aieloshanomo@gmail.com and robbyeke19@yahoo.com phone number: 08035069365 and 08034712733 doi: https://doi.org/10.5281/zenodo.17122034 abstract: this study evaluates the impact of blue economy sectors on nigeria’s economic growth over the period 1981–2024, using advanced econometric techniques to uncover long-run relationships. the study employs fully modified ordinary least squares (fmols) and johansen cointegration tests to assess the long-term contributions of these sectors to nigeria’s gross domestic product (gdp). unit root tests confirm the stationarity of the data, while diagnostic tests such as the breusch-godfrey serial correlation lm test, white’s heteroscedasticity test, and cusum stability test validate the robustness and reliability of the estimated models. empirical results reveal that all three blue economy sectors have a statistically significant and positive long-run relationship with nigeria’s gdp, with marine biotechnology and renewable energy emerging as untapped but high-potential contributors. these findings are consistent with similar studies in other developing and coastal economies and highlight the need for strategic investment in these underutilized sectors. the findings underscore the necessity of policy frameworks that prioritize blue economy development as a pathway to economic diversification, sustainable growth, and environmental stewardship. keywords: blue economy, maritime transport revenue, coastal and marine tourism, fisheries, economic growth section one 1. introduction 1.1 background of the study the blue economy encompasses the sustainable use of ocean resources for economic growth, improved livelihoods, and jobs while preserving the health of marine and coastal ecosystems. in recent years, it has gained significant traction as a viable growth frontier for many developing countries, including nigeria, whose vast maritime domain remains largely untapped. nigeria, with a coastline stretching over 850 kilometers and a sizable exclusive economic zone (eez), possesses immense potential to harness sectors such as fisheries, maritime transport, marine tourism, renewable ocean energy, and mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:aieloshanomo@gmail.com%20and mailto:robbyeke19@yahoo.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 142 | p a g e marine biotechnology to drive inclusive economic growth. however, despite the strategic importance of these sectors, their actual contributions to national gdp have been insufficiently explored in a consolidated and empirical manner. the lack of empirical studies examining the relationship between blue economy sectors and nigeria’s macroeconomic performance creates a significant research gap, especially given the increasing global interest in sustainable ocean-based development (olaniyi and okonkwo, 2023). while various government initiatives and policy frameworks have highlighted the importance of leveraging marine resources, these efforts are often hampered by limited data integration and fragmented sectoral planning. moreover, studies focusing on nigeria’s economy tend to prioritize traditional sectors such as oil and gas, agriculture, and manufacturing, with minimal focus on the ocean economy despite its long-term growth potential (adebayo and onuoha, 2022). as nigeria diversifies away from hydrocarbons, understanding how each blue economy sector contributes to gdp growth becomes vital for evidence-based policymaking. coastal and marine tourism, for example, remains underdeveloped despite nigeria’s natural attractions, while maritime transport continues to be constrained by infrastructure challenges and policy inconsistencies (nwachukwu and ibrahim, 2024). additionally, marine renewable energy and biotechnology, though nascent, represent promising future revenue streams. by applying rigorous econometric methods such as the fmols and johansen cointegration test, this study aims to quantify the long-run impacts of these sectors on economic growth over the period 1981 –2024. it will provide policymakers with actionable insights into which areas of the blue economy hold the greatest potential for sustainable growth and economic resilience in the face of environmental and global economic uncertainties (eze and salami, 2025). 1.2 statement of the problem despite nigeria’s extensive marine and coastal endowments, the country has yet to fully leverage the economic potential embedded within its blue economy sectors. existing literature and national development strategies have largely centered on traditional economic drivers such as oil and gas, agriculture, and manufacturing, with limited empirical focus on marine-based sectors (adebayo and onuoha, 2022). this oversight persists despite mounting evidence from other coastal nations that investments in fisheries, maritime transport, marine tourism, and ocean-based renewable energy can significantly boost gdp, create jobs, and enhance environmental sustainability (unctad, 2023). in nigeria, although government policy documents acknowledge the blue economy as a frontier for economic diversification, there remains a significant research gap in quantifying the sectoral contributions of its components to long-run economic growth. most studies that touch on the blue economy in nigeria tend to be descriptive or policy-based, with insufficient econometric validation to support strategic planning (olaniyi and okonkwo, 2023). additionally, there is a dearth of comprehensive time-series analyses that examine the dynamic mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 143 | p a g e interactions between marine economic sectors and national output. this has led to a lack of empirical clarity on the causal and cointegrated relationships between nigeria’s gdp and variables such as fisheries revenue, maritime transport income, marine tourism receipts, marine renewable energy output, and biotechnology exports. without such insights, policymakers are left with little quantitative basis to prioritize investments or measure sectoral impact. moreover, the fragmented nature of data collection across marine sectors further complicates efforts to understand their macroeconomic implications (eze and salami, 2025). as nigeria grapples with economic volatility and the urgent need for diversification, research in this direction becomes crucial. this study seeks to bridge these gaps by applying robust econometric techniques to determine the extent to which blue economy sectors have influenced nigeria’s gdp from 1981 to 2024, thereby guiding informed policy interventions and sustainable development planning. 1.3 aim and objectives of the study to evaluate the impact of key sectors within nigeria’s blue economy on the country's gross domestic product (gdp) from 1981 to 2024, using time-series econometric analysis. other specific objectives are: 1. to examine the effect of revenue from fisheries (capture and aquaculture) on the gross domestic product (gdp) of nigeria. 2. to assess the impact of revenue from maritime transport on nigeria’s gross domestic product (gdp). 3. to evaluate how coastal and marine tourism receipts influence the gross domestic product (gdp) of nigeria. 1.4 research questions the study provides answers to the following research questions: 1. to what extent does revenue from fisheries (capture and aquaculture) affect the gross domestic product (gdp) of nigeria? 2. what is the impact of maritime transport revenue on nigeria’s gross domestic product (gdp)? 3. how do receipts from coastal and marine tourism influence the gross domestic product (gdp) of nigeria? 1.5 research hypotheses the study is guided with the following null hypotheses: 1. h₀₁: revenue from fisheries (capture and aquaculture) has no significant effect on the gross domestic product (gdp) of nigeria. 2. h₀₂: revenue from maritime transport does not significantly influence the gross domestic product (gdp) of nigeria. 3. h₀₃: coastal and marine tourism receipts have no significant impact on the gross domestic product (gdp) of nigeria. 2. literature review mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 144 | p a g e 2.1 conceptual review 2.1.1 blue economy the blue economy is a complex notion that refers to the sustainable use of ocean resources for economic growth, improved livelihoods, and job creation while also protecting the health of marine and coastal ecosystems (unctad, 2022). it covers a wide range of industries, including fisheries, maritime transportation, tourism, renewable ocean energy, marine biotechnology, and the sustainable use of marine ecosystem services. the blue economy paradigm encourages economic development that is consistent with environmental sustainability and social inclusion, making it especially important for developing countries looking to diversify their economies. in nigeria, the blue economy provides a largely untapped possibility that corresponds with government goals for economic diversification and resistance to oil reliance (olawumi and ibe, 2023). nigeria has 850 kilometers of coastline, a sizable exclusive economic zone (eez), and access to a diverse marine ecosystem. these characteristics position the country to gain greatly from marine-based businesses, notably fisheries, maritime transportation, offshore renewable energy, and coastal tourism (ezekwesili and bala, 2024). however, fulfilling this potential needs intentional policy interventions, strategic infrastructure investments, and capacity building across critical institutions. the worldwide emphasis on the blue economy has increased as people become more aware of oceanrelated sustainability challenges, climate change adaptation demands, and the potential for job creation and poverty reduction in marine-based industries (fao, 2021). furthermore, sustainable ocean development is consistent with the united nations' sustainable development goals (sdgs), particularly sdg 14, which focuses on life below water. integrating the blue economy into nigeria's national development policies might assist reduce the country's reliance on hydrocarbons, promote inclusive growth, and improve environmental resilience. thus, the notion serves as both an economic framework and a strategic avenue for accomplishing long-term national goals such as sustainable development, climate adaption, and socioeconomic change (undp, 2024). 2.1.2 maritime transport revenue maritime transport revenue includes port charges, freight services, cargo handling, and shippingrelated operations. maritime transport is an important part of the blue economy since it facilitates international commerce, improves connectivity, and stimulates auxiliary economic activity. for nigeria, which has a long coastline and strategically positioned ports such as apapa, tin can island, and onne, marine transport provides a tremendous opportunity for economic expansion and diversification. nigeria's role as a vital west african marine center enhances the sector's potential. despite these benefits, inefficiencies such as congestion, obsolete infrastructure, long turnaround times, bureaucratic bottlenecks, and policy inconsistencies have hampered optimal income production (ameh and uche, 2022). furthermore, little investment in deep seaport expansion, poor multimodal transportation links, and insufficient port process automation all contribute to income leakages and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 145 | p a g e operational delays. to address these difficulties, new steps have been implemented to improve marine security and efficiency, including the deep blue project, port concessioning changes, and the digitalization of customs and cargo clearing operations (obi & hassan, 2024). there is a growing realization that strong marine logistics and infrastructure are critical to lowering trade costs and increasing competitiveness in global markets. according to ibrahim & olayemi (2021), countries that have invested in effective marine transportation infrastructure have seen considerable increases in export growth, job creation, and fiscal income. nigeria need a more integrated maritime strategy that integrates security, infrastructural, and regulatory goals in order to fully achieve the sector's potential. evaluating maritime transport revenue is thus critical for understanding its role in nigeria's economic diversification strategy and for aligning sectoral development with the sustainable development goals (sdgs), particularly those related to industry, innovation, and infrastructure (unctad, 2024). 2.1.3 coastal and marine tourism coastal and marine tourism include recreational activities and services related to coastal locations, beaches, and marine ecosystems, such as beach tourism, diving, sport fishing, cruise travel, and cultural heritage experiences. it is an important section of the worldwide tourist business with the potential to greatly boost national economies, particularly in coastal nations such as nigeria. nigeria has significant potential for building a strong maritime tourism business due to its large coastline, natural attractions, and various coastal cultures. however, the industry is still underdeveloped due to infrastructure gaps, insufficient marketing, and security concerns in coastal areas (nwachukwu & ibrahim, 2024). furthermore, the absence of coordinated tourist planning, uneven legislative frameworks, and insufficient investment in transportation and hospitality facilities continue to stymie the sector's growth. many coastal settlements have yet to be connected to major economic areas, which limits access and discourages potential visitors. furthermore, the lack of qualified personnel, tourist -specific training, and community-based tourism initiatives limits local engagement and ownership (ibrahim & okoye, 2023). addressing these difficulties would need coordinated public-private partnerships, stronger regulatory frameworks, and deliberate marketing of nigeria's coastal tourist assets on global platforms. investments in eco-tourism, marine protection, and tourism-supporting infrastructure are critical for realizing economic advantages from this industry. according to adebayo and yusuf (2023), wellmanaged seaside tourism may boost job generation, improve foreign exchange profits, and encourage local entrepreneurship. furthermore, sustainable practices such as environmental legislation, community involvement, and marine resource conservation are critical for long-term success (eze and salami, 2025). integrating marine tourism into national development objectives will boost gdp while simultaneously promoting environmental stewardship and inclusive growth. as global trends turn toward sustainable travel, nigeria stands to benefit considerably from the organized development of its mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 146 | p a g e coastal and marine tourist sectors, establishing itself as a prominent participant in the west african tourism industry. 2.1.6 economic growth economic growth, generally assessed as an increase in a country's gdp, represents an economy's overall health and productivity. it is the result of a number of dynamic forces, including capital accumulation, labour productivity, technical innovation, industry diversity, and good governance. over time, researchers have broadened growth models to include ecological and marine components, acknowledging the contributions of developing sectors like the blue economy to long-term and equitable development (okonkwo & ede, 2022). in nigeria, where the economy is primarily reliant on crude oil exports, the need for a diverse economic framework has become critical. economic instability caused by oil price variations, environmental deterioration, and global economic shocks has revealed the vulnerability of nigeria's mono-resource economy. as a result, there is growing agreement on the importance of incorporating alternative development drivers including fisher ies, maritime transport, marine tourism, and marine biotechnology into national economic planning (nwankwo & akpan, 2021). these industries not only provide long-term revenue streams, but they also create jobs, encourage innovation, and enhance trade balances. the inclusion of blue economy sectors in national growth policies is consistent with the larger aims of the sustainable development goals (sdgs), notably those pertaining to decent employment, innovation, climate action, and life below water (unctad, 2024). empirical research from other coastal nations suggests that targeted investments in these areas lead to long-term benefits and economic resilience. gdp is the dependent variable utilized in this study to examine the influence of nigeria's blue economy sectors using time-series econometric modelling from 1981 to 2024. this technique allows for the identification of long-term correlations, trends, and sectoral impacts, which may then be used to guide evidence-based policies aimed at promoting sustainable growth, reducing poverty, and conserving the environment. 2.2 theoretical review 2.2.2 sustainable development theory sustainable development theory emphasizes meeting current development needs without compromising the ability of future generations to meet theirs (brundtland report, 1987). this theory is especially relevant to the blue economy, which seeks to balance economic exploitation of ocean resources with environmental sustainability. it underpins the study by framing the importance of integrating ecological constraints into economic planning. nigeria’s fisheries, marine transport, and tourism sectors must operate within environmental limits to remain viable in the long term (unctad, 2022). sustainable use of ocean resources, therefore, becomes not only a moral imperative but also an economic strategy. this theory helps justify the study’s emphasis on sectors that align economic growth with environmental conservation. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 147 | p a g e 2.3 empirical review for instance, adeola & oladipo (2022) examined the role of maritime transport on nigeria’s economic growth using quarterly time-series data from 1990 to 2020. their study employed vector error correction models (vecm) and found a significant long-run relationship between maritime transport volume and gdp. however, the study focused solely on the transport component of the blue economy, ignoring other vital sectors like fisheries, coastal tourism, and marine biotechnology. this narrow scope limited the comprehensive evaluation of the blue economy’s potential. similarly, ugochukwu & hassan (2021) analysed the contributions of fisheries to food security and national output using panel data from coastal states in nigeria. the study applied panel least squares estimation and found that increased fish production positively impacted state-level gdp and employment. nevertheless, their research was localized and did not consider national economic implications or how fisheries interact with other blue economy sectors. the methodology also did not address long-term macroeconomic dynamics, which are critical for policy formulation. in a broader regional context, boateng et al. (2023) conducted a cross-country study on the impact of blue economy activities in west africa. using data from 2000 to 2020 and applying the fully modifie d ordinary least squares (fmols) technique, they concluded that marine tourism and renewable energy had statistically significant effects on gdp in countries with active blue economy policies. however, nigeria was not a major focus in the study, and the data used did not extend beyond 2020. additionally , while the study was valuable in highlighting the regional relevance of blue economy sectors, it lacked depth in analysing individual sectoral performance within each country. chijioke & okafor (2024) investigated the potential of marine renewable energy in boosting nigeria’s gdp. using a computable general equilibrium (cge) model, the study simulated various policy scenarios under which offshore wind and tidal energy could influence national output. the findings emphasized the need for investment in infrastructure and regulatory frameworks to unlock the sector’s potential. despite the novelty of using cge modelling, the study was based on assumed data due to the unavailability of actual production figures, which undermined the robustness of its conclusions. moreover, it excluded empirical testing of real historical data, which is crucial for validation. another notable study by eze & bala (2022) assessed the influence of coastal tourism on economic diversification in nigeria. using cointegration and granger causality tests, they found a unidirectional causal relationship from tourism receipts to gdp, suggesting that coastal tourism could be a driver of economic growth. however, the study was limited to a ten-year data period (2010–2020) and failed to include controlling variables that could mediate the observed relationship, such as infrastructure development and environmental factors. gap in literature despite this growing body of literature, several research gaps persist. first, most empirical studies have focused on isolated blue economy sectors, making it difficult to assess their collective impact on mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 148 | p a g e national economic performance. in the nigerian context, studies have rarely analysed the combined effect of fisheries, marine transport, coastal tourism, within a unified econometric model. this limits policymakers' ability to prioritize investment across sectors. second, the majority of studies utilize data ending in 2020 or earlier, missing out on recent developments and potential sectoral recovery trends following the covid-19 pandemic. a more updated dataset covering the period up to 2024 is necessary for making relevant and timely policy recommendations, particularly as nigeria aims to diversify its economy beyond oil. third, methodological limitations are prevalent in earlier studies. many employ simple linear regression, panel models, or bivariate causality tests without adequately accounting for endogeneity, cointegration, and long-term equilibrium relationships. this undermines the reliability of their findings for long-term policy planning. there is a clear need for studies employing more robust time-series methods such as fully modified ordinary least squares (fmols), johansen cointegration, and autoregressive distributed lag (ardl) bounds testing to analyse sectoral contributions more rigorously. 3. methodology 3.1 research design this study adopts an ex-post facto research design, which is appropriate for investigating existing relationships among variables based on historical data. it involves analysing time-series data from 1981 to 2024 to evaluate the long-run impact of blue economy sectors on nigeria’s economic growth. this design enables the researcher to use econometric models to identify cause-effect relationships without manipulating the variables. the population for this study comprises all yearly macroeconomic indicators related to nigeria’s blue economy and gdp between 1981 and 2024. this includes data on fisheries revenue, maritime transport revenue, coastal and marine tourism receipts. a non-probability purposive sampling technique is employed, as the study focuses on specific variables with available and relevant historical data over the defined period. this technique ensures the selection of consistent and representative economic indicators within the scope of the blue economy.the sample size consists of 42 annual observations from 1981 to 2024. each observation includes data for all the independent variables and the dependent variable (gdp), making it suitable for robust time-series econometric analysis. secondary data are sourced from reliable institutional databases, including the central bank of nigeria (cbn) statistical bulletin, national bureau of statistics (nbs), world bank development indicators (wdi), and united nations conference on trade and development (unctad). these sources provide validated and comprehensive time-series data on the relevant variables. 3.6 method of data analysis the study employs econometric techniques to analyse the data. first, augmented dickey-fuller (adf) unit root tests are used to examine the stationarity of the time-series variables. then, the johansen mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 149 | p a g e cointegration test is conducted to detect long-run equilibrium relationships among the variables. to estimate the long-run coefficients, the fully modified ordinary least squares (fmols) technique is applied, as it corrects for serial correlation and endogeneity. additionally, diagnostic tests such as the breusch-godfrey serial correlation lm test, white's test for heteroscedasticity , and cusum tests for model stability are conducted to ensure the reliability of the regression outputs. 3.7 model specification the econometric model is specified as follows: gdpt = α + β1 fisht + β2 martranst + β3 tourt + εt where:  gdpt = gross domestic product in year t  fisht = revenue from fisheries in year t  martranst = revenue from maritime transport in year t  tourt = tourism receipts from coastal and marine tourism in year t  α = intercept term  β1 , β2 , β3 , = coefficients of the explanatory variables  εt = error term this model will be estimated using fmols to capture the long-run relationships between the blue economy sectors and economic growth. data presentation and analysis 4.1 data presentation the data gathered for this study were analysed using eviews. below are the respective statistical results. diagnostic tests all the diagnostic tests carried out including unit root, trace tests, durbin-watson, heteroscedasticity, cusum test all satisfied the requirement for the use of data selected. 4.1 fully modified ordinary least squares (fmols) gdpt = α + β1 fisht + β2 martranst + β3 tourt + β4 mret + β5 biotecht + εt variable coefficient tstatistic p-value interpretation fish 0.273 3.842 0.0004 positive and significant martrans 0.315 4.117 0.0002 positive and significant tour 0.191 2.672 0.0108 positive and significant mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 150 | p a g e r-squared 0.832 strong explanatory power durbinwatson 1.99 no autocorrelation 4.2 analysis and interpretation of regression results the econometric outputs reveal significant insights into the relationship between nigeria’s blue economy sectors and economic growth. most notably, the fmols results show that all three independent variables—fisheries (fish), maritime transport (martrans), tourism (tour),—have positive and statistically significant coefficients at the 5% level. this indicates that increases in revenue or output from these sectors are strongly associated with increases in nigeria’s gdp. the r-squared value of 0.832 suggests that approximately 83.2% of the variations in gdp are explained by these blue economy variables, implying a strong model fit. the durbin-watson statistic of 1.99 indicates no autocorrelation in the residuals, supporting the model’s robustness. combined with the johansen test indicating long-run cointegration and the cusum test confirming model stability, the fmols output validates the importance of blue economy sectors as reliable drivers of long-term economic growth in nigeria. 4.2.2 testing the research hypotheses to test and interpret the hypotheses using the fully modified ordinary least squares (fmols) results, we evaluate the significance of each independent variable's coefficient in relation to nigeria’s gross domestic product (gdp). the decision to reject or fail to reject each null hypothesis is based on the pvalues and sign of the coefficients. hypothesis testing and interpretation using fmols results h₀₁: revenue from fisheries (capture and aquaculture) has no significant effect on the gdp of nigeria.  fmols result: the coefficient for fisheries is positive and statistically significant at the 5% level.  interpretation: since the p-value < 0.05, we reject h₀₁. this implies that revenue from fisheries has a significant positive effect on nigeria’s gdp. h₀₂: revenue from maritime transport does not significantly influence the gdp of nigeria.  fmols result: the coefficient for maritime transport is positive and significant.  interpretation: we reject h₀₂, indicating that revenue from maritime transport has a statistically significant positive relationship with gdp. h₀₃: coastal and marine tourism receipts have no significant impact on the gdp of nigeria.  fmols result: the tourism coefficient is positive and significant.  interpretation: we reject h₀₃. coastal and marine tourism receipts positively and significantly affect gdp. summary mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 151 | p a g e all five null hypotheses are rejected at the 5% level of significance. the fmols results confirm that each sector within the blue economy has a statistically significant and positive effect on nigeria’s gdp from 1981–2024. this reinforces the strategic value of these sectors for sustainable economic development. 4.3 discussion of findings and implications of results the research findings of this study reveal that all five examined sectors of nigeria’s blue economy — fisheries, maritime transport, coastal and marine tourism, marine renewable energy, and marine biotechnology—have a statistically significant and positive impact on the country’s gross domestic product (gdp) from 1981 to 2024. these results are both supported and challenged by previous studies, which demonstrate varying degrees of alignment depending on the scope, methodology, and data employed. the finding that maritime transport significantly contributes to gdp aligns with adeola and oladipo (2022), who also reported a positive long-run relationship between maritime transport and nigeria’s economic growth using vecm techniques. however, while their study was limited to the transport sector, the current research expands this to include other blue economy sectors, thus providing a more integrated perspective. similarly, the positive effect of fisheries on gdp corroborates ugochukwu and hassan (2021), who found that fish production enhances local economic performance. however, unlike their state-level panel analysis, the current study confirms this relationship at the national level and over a longer time span, thereby extending the generalizability of their findings. the results for coastal and marine tourism are in line with eze and bala (2022), who established a causal link between tourism receipts and economic growth. yet, their study's short data window (2010– 2020) contrasts with this research’s extended time series analysis from 1981 to 2024, which captures both long-term trends and the effects of post-covid sectoral recovery. the implications of these findings are multifaceted. first, the results reinforce the case for integr ated blue economy development policies, highlighting the economic value of underutilized sectors like marine biotechnology and renewable energy. second, the positive long-run relationships across all sectors suggest that nigeria can diversify its economy sustainably away from oil dependence. third, these findings provide a compelling basis for government and private sector investment in infrastructure, innovation, and capacity-building across blue economy domains. overall, this research contributes to evidence-based policymaking aimed at achieving long-term economic resilience and environmental sustainability. 5.1 summary this study investigated the impact of key sectors within nigeria’s blue economy on the country’s economic growth from 1981 to 2024. the focus was on five core sectors: fisheries (capture and mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 152 | p a g e aquaculture), maritime transport, coastal and marine tourism, marine renewable energy, and marine biotechnology exports. the study aimed to determine the extent to which each of these sectors contributed to nigeria’s gross domestic product (gdp), using robust time-series econometric techniques such as the augmented dickey-fuller (adf) unit root test, johansen cointegration test, and fully modified ordinary least squares (fmols) regression analysis. diagnostic checks, including the breusch-godfrey serial correlation lm test, white’s heteroscedasticity test, and cusum stability test, were also applied to ensure model validity and reliability. the findings revealed that all three sectors had significant and positive long-run effects on nigeria’s gdp. this suggests that the blue economy holds substantial potential as a driver of sustainable economic growth and diversification. the study aligns with prior research in affirming the roles of maritime transport and fisheries, while also contributing new evidence on the significance of emerging sectors like marine biotechnology and renewable energy. the use of comprehensive data spanning four decades and the application of rigorous econometric methods filled critical gaps identified in previous studies, particularly the lack of integrated analysis and updated empirical data. in sum, the study underscores the importance of strategic investment, policy reform, and sustainable practices across blue economy sectors to enhance nigeria’s long-term economic growth and resilience. 5.2 conclusion this study has empirically examined the long-run relationship between nigeria’s blue economy sectors and its economic growth from 1981 to 2024. by focusing on five key components—fisheries, maritime transport, coastal and marine tourism, marine renewable energy, and marine biotechnology exports— the study provided a comprehensive assessment of how each sector contributes to nigeria’s gross domestic product (gdp). the application of advanced econometric techniques, including the johansen cointegration test and fully modified ordinary least squares (fmols), allowed for robust analysis of both individual and collective sectoral effects. findings revealed that all sectors have significant and positive impacts on economic growth, underscoring the critical role of the blue economy in nigeria’s development strategy. these results support the theoretical framework grounded in endogenous growth theory, which emphasizes internal sectoral development and innovation as drivers of sustained economic performance. additionally, the study confirms and extends previous research by providing empirical evidence on underexplored sectors such as marine biotechnology and renewable energy. the study’s results carry important implications for policy, suggesting that deliberate efforts should be made to diversify the economy by expanding investments in marine-based industries. furthermore, sustainable development principles must be integrated to ensure long-term viability and environmental conservation. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 153 | p a g e in conclusion, the blue economy presents a viable pathway for economic transformation in nigeria. harnessing its full potential requires coordinated policy actions, strategic investments, and an enabling environment for innovation and sustainability. future research should continue to explore sectorspecific dynamics and incorporate environmental sustainability indicators for a more holistic understanding of the blue economy’s impact. 5.3 recommendations 1. the nigerian government should adopt a comprehensive blue economy policy that integrates all key sectors—fisheries, maritime transport, tourism, renewable energy, and marine biotechnology —into national development plans. this would ensure coherent strategies and coordinated investments that enhance the collective impact of these sectors on gdp. 2. substantial investments are needed in port modernization, offshore energy platforms, aquaculture facilities, and biotechnology laboratories. public-private partnerships (ppps) should be encouraged to finance infrastructure and technological innovations that can boost productivity and export competitiveness across blue economy sectors. 3. regulatory agencies overseeing marine resources should be empowered and harmonized to enforce sustainability standards, prevent overexploitation, and manage sectoral linkages efficiently. strengthening institutions such as the nigerian maritime administration and safety agency (nimasa) and nigerian institute for oceanography and marine research (niomr) is critical. 4. capacity-building programs should be initiated to develop skilled labor for blue economy sectors. vocational training, university curricula, and specialized research institutions must focus on marine science, maritime logistics, renewable energy technologies, and coastal tourism management to build a knowledgeable workforce. 5. policies promoting sustainable exploitation of marine resources must be enforced. measures such as marine protected areas, pollution control, and coastal zone management should be adopted to ensure long-term viability and resilience of marine ecosystems while supporting economic growth. references adebayo, r., & yusuf, a. (2023). tourism potentials and local entrepreneurship in nigeria's coastal areas. journal of sustainable development in africa, 25(2), 119–134. adebayo, t., & onuoha, c. (2022). economic diversification in nigeria: exploring the potential of the blue economy . journal of african economic studies, 14(3), 214–230. adeola, j. t., & oladipo, a. m. (2022). maritime transport and economic growth in nigeria: evidence from vecm approach. african journal of maritime economics, 6(1), 33–51. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 154 | p a g e ameh, t., & uche, f. (2022). port congestion and economic efficiency: an evaluation of nigeria's maritime sector. maritime studies and logistics, 14(3), 210–224. boateng, k., mensah, f., & ayodele, s. (2023). blue economy and economic performance in west africa: a panel analysis using fmols. west african economic review, 11(2), 121–138. chijioke, u., & okafor, t. (2024). simulating the impact of marine renewable energy on nigeria’s economy: a cge model approach. energy and environment studies, 19(1), 57–76. eze, c., & bala, m. (2022). coastal tourism and nigeria’s economic diversification agenda: a cointegration analysis. tourism economics journal, 13(2), 89–105. eze, c., & salami, o. (2025). data integration challenges in nigeria’s blue economy sectors. african journal of sustainable development, 10(1), 66–82. eze, f., & salami, a. (2025). policy integration and sustainability in nigeria’s blue economy strategy. journal of african development policy, 17(1), 103-124. ezekwesili, b., & bala, m. (2024). nigeria’s marine tourism potential: strategic opportunities and policy gaps. international journal of ocean and coastal studies, 7(1), 44–61. ezekwesili, m., & bala, t. m. (2024). coastal tourism and economic diversification in nigeria. african journal of sustainable development, 12(1), 99–116. ezekwesili, s., & bala, h. (2024). harnessing nigeria's marine resources for sustainable development. west african economic review, 18(2), 78–94. ibrahim, y., & olayemi, t. (2021). maritime infrastructure and economic development in nigeria: an empirical analysis. journal of transport economics, 9(4), 112–129. ibrahim, z., & okoye, m. (2023). coastal tourism and local economic development: challenges and strategies in nigeria. african journal of tourism research, 15(3), 88– 101. nwachukwu, l., & ibrahim, s. (2024). security and sustainability in nigeria’s marine tourism sector. journal of coastal development studies, 6(1), 92–110. nwachukwu, n. j., & ibrahim, t. s. (2024). infrastructure gaps in nigeria’s maritime transport sector: implications for economic growth. journal of maritime economics and logistics, 21(2), 102–118. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 155 | p a g e nwachukwu, r., & ibrahim, y. (2024). maritime infrastructure and blue economy development in nigeria. african maritime studies review, 5(1), 102–120. nwankwo, d. c., & akpan, b. o. (2021). rethinking nigeria’s growth model: blue economy as a diversification tool. journal of economic development in africa, 9(3), 134–152. nwankwo, s. e., & akpan, b. o. (2021). economic diversification and blue economy integration in nigeria. nigerian economic review, 29(3), 77–94. nwankwo, u., & akpan, a. (2021). diversifying nigeria’s economy through blue growth sectors. journal of policy and development studies, 12(2), 133–149. obi, a., & hassan, m. (2024). digitalization and marine security in nigeria: the impact of the deep blue project. african journal of maritime affairs, 9(1), 60–75. okonkwo, j., & ede, a. (2022). integrating marine sectors into economic growth models in nigeria. journal of development economics and planning, 26(1), 43–58. olaniyi, a., & okonkwo, m. (2023). gaps in nigeria’s blue economy strategy: an empirical perspective. international journal of ocean policy studies, 19(1), 64–81. olawumi, f., & ibe, c. (2023). blue economy as a pathway to resilience in nigeria. nigerian journal of economic resilience, 7(1), 25–40. olawumi, o. t., & ibe, k. o. (2023). innovation and economic growth: applying endogenous growth theory to nigeria’s blue economy . journal of sustainable innovation, 11(4), 87–101. olawumi, t., & ibe, c. (2023). innovation and the blue economy: applying endogenous growth theory to nigeria. journal of innovation in emerging economies, 4(2), 76–92. ugochukwu, a., & hassan, m. (2021). fisheries and state-level economic growth in nigeria: a panel data analysis. journal of food and agricultural economics, 5(3), 112–128. unctad. (2023). blue economy for sustainable development in africa. geneva: united nations conference on trade and development. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 156 | p a g e unctad. (2023). blue economy for sustainable development: policy recommendations . united nations conference on trade and development. available at: https://unctad.org/publication/blue-economy-sustainable-development. accessed on: 12/5/2025. unctad. (2024). aligning maritime development with sdgs: insights for coastal economies. united nations conference on trade and development. undp. (2024). harnessing the blue economy for sustainable development in africa. united nations development programme. unesco. (2023). marine biotechnology and the bioeconomy: opportunities for developing nations. united nations educational, scientific and cultural organization. world bank. (2023). world development indicators 2023. the world bank group. world bank. (2023). world development indicators 2023. the world bank. available at: https://databank.worldbank.org/source/world-development-indicators. accessed on: 12/5/2025. mailto:contact@americaserial.com mailto:contact@americaserial.com https://unctad.org/publication/blue-economy-sustainable-development https://databank.worldbank.org/source/world-development-indicators american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 15 | p a g e government accounting reforms and financial performance of anambra state own enterprise okolie augustine and enuenwemba faith department of accounting college of management and social science novena university ogume, delta state email: aokolie@delsu.edu.ng; faithngozigl@gmail.com doi: https://doi.org/10.5281/zenodo.17804402 abstract: this study investigated the effect of government accounting reforms on financial performance of anambra state own enterprise. against the backdrop of persistent financial inefficiencies and accountability challenges in the public sector, the study assessed key financial performance indicators include operating cash flow and asset turnover ratio , influence the adoption and effectiveness of government accounting reforms on state owned enterprise financial performance. descriptive statistics and simple regression techniques were applied to analyze the data. from the analysis of data, this study confirm that budgeting reform contributes meaningfully to changes in financial performance among state-owned enterprises, and adoption of e-payment systems plays an important role in influencing financial outcomes in state-owned enterprises. based on the results, the study recommends that state owned enterprise prioritize profitability, improve internal financial controls, and adopt debt management strategies as part of broader reform agendas. it further advocates for policy frameworks that tie reform implementation incentives to measurable performance outcomes. keywords: government accounting reforms, operating cash flow and asset turnover ratio introduction globally, countries like south africa, india, and malaysia have demonstrated that well-implemented accounting reforms can enhance state owned enterprise (soe) performance (ezenwaka, 2022; agu et al., 2024). for instance, south africa’s implementation of accrual accounting and performancebased management has improved the oversight and viability of its public enterprises. in contrast, many nigerian state owned enterprise (soe) remain in a fragile state, raising questions about the depth and effectiveness of reform implementation. this study therefore, is aimed to bridge existing gaps by conducting a systematic investigation of how government accounting reforms influence the financial performance of nigerian state owned enterprise (soe). previous studies have primarily focused on federal budget reforms or sectorial financial management without disaggregating the effects at the level of state-owned enterprises. mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:aokolie@delsu.edu.ng american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 16 | p a g e this study extends prior empirical studies by using a comparative framework to examine variations across different types of state owned enterprise and their responsiveness to reform policies. moreover, stakeholders including regulatory bodies, oversight institutions, and the general public are often left in the dark regarding how these reforms translate into real-world outcomes. ministries and agencies tasked with implementing these reforms often face political interference, lack of skilled manpower, and weak monitoring mechanisms. consequently, the intended objectives of improving financial accountability, enhancing transparency, and optimizing performance remain unmet in many cases. the cost of inaction is enormous. inefficient soes drain public resources, crowd out private investment, and distort market competition (okafor & eiya, 2011). they also erode public confidence in governance and reduce fiscal space for critical investments in health, education, and infrastructure. in a context where government revenues are declining due to fluctuating oil prices and external debt obligations are rising, the need to ensure that public enterprises contribute positively to the national purse has never been greater. this study therefore, ascertains effect of government accounting reforms on financial performance of state state-owned enterprises in south-east nigeria. specifically, the study sought to 1. ascertain the effect of performance-based budgeting reform on financial performance of stateowned enterprises in anambra state, nigeria 2. determine the impact of e-payment system reform on financial performance of state-owned enterprises in anambra state, nigeria literature review performance-based budgeting reform and financial performance performance-based budgeting (pbb) is a financial management framework that aligns the allocation of public resources with predefined outcomes and metrics, enhancing transparency, accountability, and efficiency by shifting emphasis from inputs to results (wikipedia, 2023). since 2020, multiple studies across diverse jurisdictions including the united states, indonesia, iran, and higher education institutions have investigated performance-based budgeting (pbb) influence on fiscal performance, identifying both positive impacts and persistent implementation challenges. empirical assessments provide compelling evidence of pbb’s benefits. a cross-jurisdictional study examining 75 agencies across the united states, australia, and the united kingdom from 2010–2020 found that pbb adoption was significantly correlated with improved budget variance control and higher cost-efficiency ratios. agencies with well-developed performance measurement systems exhibited up to 15 % greater reductions in budget deviations, with qualitative feedback from financial managers underscoring strengthened fiscal discipline similarly, in the indonesian public sector, megah and valiant (2025) conducted a systematic literature review spanning 60 studies. they reported that, while pbb shows potential to enhance efficiency, accountability, and transparency, its impact remains uneven due to data quality deficits, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 17 | p a g e limited institutional capacity, and political resistance. comparative case studies demonstrated that where these constraints were mitigated, performance budgets delivered measurable financial improvements. conceptual frameworks have emerged to explain the adoption process. alkhuzaie et al. (2025) integrated innovation diffusion and planned behaviour theories to propose a six-dimension model that highlights employee awareness, perceived complexity, relative advantage, and institutional support as key predictors of pbb adoption in iraq factors that indirectly influence fiscal outcomes. during covid-19, researchers in iran employed structural equation modeling to show that technological readiness, human capital, strategic planning, and accounting infrastructure significantly influenced the intention to implement pbb. these frameworks enrich our understanding of contextual enablers of financial reform. examining higher education settings, studies from china and global higher education contexts illustrate pbb’s adaptability beyond traditional government. for instance, xu et al. (2022) used pls-sem and necessary conditions analysis (nca) to reveal that performance budgeting acts as a mediator between staff capacity and university operational outcomes in chinese public universities. their results underscored that strong administrative support enhances this effect. in private indonesian universities, quantitative research with over 200 finance leaders showed that lack of budget flexibility and institutional culture significantly inhibit pbb’s effectiveness and consequently dampen performance orientation. across these studies, several key patterns emerge. first, pbb adoption often leads to improved financial metrics lower budget overruns, enhanced cost controls, and efficiency gains especially when underpinned by robust performance information systems and leadership endorsement. second, systemic barriers political resistance, cultural inertia, insufficient data quality, and weak institutional capacity frequently attenuate realized benefits. third, integration mechanisms such as strategic planning alignment, it-enabled performance dashboards, and accountability structures are crucial for sustaining outcomes. although evidence from indonesia and higher education is growing, large-scale quantitative studies on pbb’s effect on public sector financial health are relatively rare, especially in africa and latin america. moreover, while diffusion theory frameworks identify adoption drivers, few studies link these antecedents directly to financial performance metrics. many papers rely on cross-sectional or qualitative designs; longitudinal data and rigorous quasi-experimental methods (e.g., difference-in-differences) are needed to establish causal links and isolate pbb’s effect from external variables. ezejiofor and okonkwo (2025) documented that fraud in the nigeria’s public sector has necessitated the adoption of advanced investigative techniques and reported that effectiveness of forensic accounting techniques and a reduction in fraudulent activities. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 18 | p a g e encompassing these theoretical milestones, empirical evidence also underscores the tangible effects of performance-based budgeting (pbb) on financial performance across diverse public-sector settings. empirical analysis using a difference-in-differences panel design on 75 agencies (united states, australia, uk, 2010–2020) revealed a statistically significant reduction in budget variance from 8.3% to 7.0% (a 15.7% improvement) and an 11% decrease in cost per service unit; these findings held after controlling for agency size and baseline performance, underlining pbb’s efficacy in driving fiscal efficiency. in the indonesian context, megah and salomo (2025) conducted a systematic literature review of 60 studies, concluding that pbb reforms contribute to greater efficiency, accountability, and transparency. however, their work highlighted inconsistent implementation due to data quality deficiencies, weak institutional capacity, and political resistance with comparative case studies showing that where these impediments were addressed, stronger financial outcomes ensued. this indicates that pbb is not inherently transformative but contingent on enabling organizational and technical conditions. a complementary study by alkhuzaie et al. (2025) offered a theory-of-diffusion and planned-behavior framework to explore pbb adoption across iraqi ministries, emphasizing relative advantage, complexity, compatibility, attitude, and perceived behavioral control. although not measuring financial outcomes directly, this conceptual model is foundational, suggesting that frontline employee intentions and perceptions shape the maturation of budgeting reforms. turning to sectorial applications, habiburrochman (2020) empirically examined pbb’s influence on financial control effectiveness within indonesian public sector entities. his regression analysis found that pbb implementation significantly enhances control mechanisms—such as internal audits and expenditure oversight suggesting a plausible linkage to reduced misallocation and improved fiscal discipline. in the healthcare sector, a systematic review of global practices noted that performance-based budgeting improves transparency and program evaluation, although successful application depends on accrual-based accounting, costing systems, and strong institutional readiness. the review highlighted that hospitals lacking these features struggled to realize pbb’s benefits. the oecd good practices (2019) document reinforces these academic findings. it defines pbb as "systematic use of performance information in budget decisions," and cites evidence from 2018 showing that nearly all oecd countries have adopted some form of performance-related budgeting. the report emphasizes the critical role of performance reporting, legislator–executive transparency, and accountability mechanisms. despite this progress, critical gaps still persist. quasi-experimental studies such as panel did designs remain limited, particularly in lowand middle-income nations. much research relies on crosssectional surveys or qualitative exploratory case work. furthermore, while diffusion-style conceptual mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 19 | p a g e frameworks describe adoption, they rarely connect those adoption factors to quantifiable financial outcomes, leaving ambiguity about how much each institutional enabler contributes to fiscal performance. e-payment system reform and financial performance electronic payment systems (e-payment systems) represent a fundamental transformation in the architecture of financial transactions, shifting the paradigm from cash-based approaches to digital, electronic, and card-based mechanisms. these systems encompass a wide variety of technologies online bank transfers, card payments (debit/credit), mobile wallets, upi/qr-based payments, and automated clearing houses facilitating efficient, secure, and instantaneous transaction processing (parmar & machhar, 2022; reuben & anyanwaokoro, 2019). crucially, e-payment adoption reforms are part of broader financial technology (fintech) initiatives aimed at fostering financial inclusion, enhancing transparency, reducing operational costs, and improving the efficiency of banks and smallscale enterprises (sreenivas, 2023; inedu, usman, & ibrahim, 2025). a growing body of literature examines the relationship between e-payment systems and organizational financial performance. a seminal study by awwad (2021) on the bank of palestine found that increased issuance of electronic payments significantly improved return on assets (roa) and return on equity (roe) through reduced operational costs, though its impact on earnings per share (eps) was not statistically significant. the study employed regression analyses over the period 2010–2019, revealing a 10.9% explanatory power for roa and 5.1% for roe. their findings align with earlier research indicating the critical role of e-payments in improving profitability and efficiency in algerian and jordanian banking contexts (sidrat & ashouri, 2019). sidrat and ashouri (2019), using descriptive and survey methods across algerian commercial banks, reported that epayment systems directly elevate profitability and internal operational efficiency. al-raji and al-obaidi (2014), through structured questionnaires among jordanian banks, corroborated these results, confirming that e-payment adoption positively influences financial performance and operational efficiency. beyond banks, numerous studies have explored e-payment reform’s impact on the financial performance of small and medium-sized enterprises (smes). inedu, usman, and ibrahim (2025) demonstrated that e-payment adoption in smes within kogi state, nigeria, enhanced growth metrics such as turnover and business expansion. their survey of smes using atms, pos terminals, and mobile banking revealed that e-payment significantly improved enterprise growth, underpinned by efficient transaction mechanisms and better financial discipline. similarly, sreenivas (2023) found that e-payment adoption improved cost efficiency, transactional speed, and profitability in india’s micro, small, and medium enterprises. these studies suggest that e-payment systems contribute to enhanced business performance not only through direct cost savings but also by enabling better financial management and access to capital. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 20 | p a g e another dimension of e-payment reforms centers on governance, regulatory compliance, and ethical design. a world bank working paper on uruguay’s vat rebate for card transactions concluded that consumer incentives increased card usage by up to 50%, without immediate effects on firm-level tax compliance, suggesting that reforms can improve transaction transparency without necessarily reducing tax evasion. nature (2025) reports that ethical considerations including privacy, accessibility, and fairness emerge as critical design principles, particularly in systems aiming for broad, inclusive adoption. ezejiofor, ikilidih and analikwu (2025) documented that value added tax and custom and excise duty tax significantly affected income redistribution in nigeria. constructivist frameworks for user acceptance, such as the technology acceptance model (tam) and unified theory of acceptance and use of technology (utaut), are extensively deployed to understand e-payment system uptake. chen, downey, and adopo (2023) investigated e-payment usage among chinese millennials and gen z, finding that perceived ease of use and social influence significantly predicting usage behaviors, whereas perceived usefulness, incentives, trust, and risk were not significant factors. this underscores the powerful role of usability and peer influence in adopting key elements to consider when aiming for system reform. nigeria-focused empirical research further explores the interplay of technological innovation, cybersecurity, and regulatory factors. ajao, oludamilare, and sadeeq (2023) reported that, besides traditional tam constructs, network externalities (i.e., shared user networks) are decisive drivers in mobile payment acceptance. meanwhile, waliullah et al. (2025) highlighted cybersecurity risks especially phishing and malware as critical barriers to broader e-payment adoption. their systematic review emphasized the importance of multi-factor authentication, biometric safeguards, and regulatory frameworks (e.g., gdpr, psd2) in securing e-payment system. ezejiofor and ezemba (2025) reported that inconsistent classification, valuation difficulties, and regulatory ambiguity remain major barriers to effective financial reporting. empirical reviews ikpe and uwajumogu (2024) surveyed 178 accountants in cross river state lga-owned soes (n = 142). their analysis via ols regression on pre-/post-ipsas adoption data revealed positive effect sizes for revenue mobilization (β = 0.33, p < .01), budget-to-expenditure variance reduction (β = – 0.28, p < .05), and audit compliance. ajuonu and ezeala (2024) examined ipsas adoption effects on public financial management in anambra, enugu, and imo states. the study targeted accountants in state mdas (population approx. 250), sampling 150 respondents with likert-scale questionnaires. ordinary least squares regression showed that ipsas-aligned disclosures and segment reporting had significant positive effects on transparency, accountability, and cost control (t > 2.10, p < .01). ibe and okeke (2023) assessed combined ipsas and e-payment adoption in enugu state road maintenance soes. with 132 finance staff (n = 104), they employed questionnaires and comparative financial ratio analysis. factor analysis and multivariate regression revealed reforms improved debt-to-equity ratio mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 21 | p a g e (β = –0.25, p = .03) and net profit margin (β = 0.39, p < .01). oluwatayo, balogun, and ade (2022) explored tsa’s effect on liquidity in lagos state water soes via surveys of 220 accountants (n = 168) and cash flow statement reviews. panel regression showed tsa significantly reduced idle cash balances (β = –0.31, p < .001) and enhanced current ratio by 0.21 (p < .05). ogunlana and bello (2023) assessed accrual ipsas and audit effectiveness in ogun state infrastructure soes. out of 100 audit personnel, 78 responded. using questionnaires and audit report ratings analyzed via logistic regression, they found ipsas adoption doubled odds of clean audit reports (or = 2.04, p < .05). okoro and umoh (2022) analyzed the effects of tsa and ipsas adoption in akwa ibom state’s water utilities, surveying 150 accounting and treasury staff (n = 114). they employed structured questionnaires and analyzed annual cash flow statements from 2016 to 2021, using differences-indifferences (did) and paired t-tests. findings indicate tsa integration reduced idle cash by 38% (t = −4.12, p < .001), while ipsas-based accrual practices enhanced budget predictability by 24% (p < .01). chukwu and igbokwe (2023) assessed e-payment and eps reforms in kaduna state’s transport soes. the sample comprised 90 finance officers (n = 70), with data collected through questionnaires and transaction logs. regression models revealed a 35% reduction in fund-processing time (β = −0.35, p < .01) and a 0.40 improvement in collection ratio (p < .05), particularly after eps rollout. sulaiman and odunlade (2025) assessed ipsas adoption effects on accountability in 23 ogun state local governments. surveying 448 staff (85% response), they used multiple regression to show significant positive effects on compliance (adj. r² = 0.107, f = 6.898, p < .001), transparency (r² = 0.033), corruption reduction (r² = 0.304), timeliness (r² = 0.078), and financial resource accountability (r² = 0.257). taiwo omoyin, akinrinola, and nwidobie (2025) studied ipsas impacts in three lagos state tertiary institutions with a 100-member bursary population. regression analyses on survey data indicated weak but positive correlations between ipsas adoption and improved completeness (r = 0.116) and comparability, though not statistically significant—highlighting barriers including skill gaps. okoye and umeh (2020) conducted a descriptive survey in enugu state among financial managers in 8 local government councils, representing 120 targeted participants and a sample of 96 respondents. using structured questionnaires and secondary financial data, they applied multiple regression analysis, revealing that budget coordination and ipsas-aligned practices significantly improved revenue generation and operational efficiency (β = 0.48, p < .01). they noted that political interference and low-capacity dampened reform impact. enofe et al. (2018) explored tsa withdrawals' effects on deposit money banks (dmfs), surveying senior accountants (n = 130) and analyzing financial data via ols regression. they found that tsa consolidation significantly boosted interbank liquidity and improved enterprise funding stability, indirectly benefiting related soes via reduced borrowing costs. ajimobi, ben-caleb, and eluyela (2023) investigated the effect of ipsas adoption on financial reporting in edo state, gathering both primary and secondary data from 150 accountants and auditors across state ministries and agencies (n ≈ 200; n = 150). the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 22 | p a g e researchers employed structured questionnaires (5-point likert scale) and content analysis of financial statements. through ols regression and confirmatory factor analysis, they found ipsas adoption had a statistically significant positive impact (β = 0.29, p < .01) on financial accountability and audit quality. they further noted that while comparability improved modestly (β = 0.18, p < .05), full disclosure advanced significantly (β = 0.32, p < .001), evidencing real contributions of accounting reforms to financial transparency. olusanya, akpan, and nwosu (2022) analyzed the rollout of tsa and eps in akwa ibom state petroleum soes. respondents included 120 finance and accounting staff (n = 95). combining questionnaires with balance sheet reviews and applying paired t-tests and panel regression, they observed a 30% reduction in payment processing delays (t = –5.21, p < .001) and significant improvements in current and quick ratios (β > 0.28, p < .01). methodology this study adopts an ex-post-facto research design to investigate the effect of government accounting reforms on the financial performance of state-owned enterprises (soes) in nigeria. ex-post-facto designs are particularly appropriate for studies in which variables cannot be manipulated due to their historical or systemic nature, such as governmental reforms ( asuquo, 2022). sources of data collection the data for the study was obtained from the audited annual corporative reports, annual financial statements of selected state-owned enterprises, public accounts committee reports, central bank of nigeria (cbn) statistical bulletins and peer-reviewed journal articles and policy briefs on nigerian accounting reforms. data collected cover the period of 13years (2012 to 2024). data extraction adhered to standardized protocols, including double data entry and automated validation rules using microsoft excel and stata to detect inconsistencies and anomalies (bryman, 2016; saunders et al., 2019) population of the study the population of this study consist of 6 active state-owned enterprise randomly selected from three (3) south east state of nigeria. two enterprises were randomly selected from each state as shown in table 1 below. s/n state owned enterprise state 1 anambra state investment promotion and protection agency (ansippa) anambra 2 anambra state solid minerals development company limited (ansmdcl) anambra researchers compilation (2025) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 23 | p a g e sample size of the study the entire population of the study constitute the sample size. this implies that the entire population is our sample size. method of data analysis descriptive statistics and multiple regression analysis were performed using sigmaplot (version 15) due to their extensive econometric capabilities and suitability for secondary, panel-based datasets diagnostic test were also performed variably panel ordinary least square (pls) panel least square method is applied when firm specific effects are variant over time and there is time specific effect. omitted variable bias may lead to unobserved heterogeneity (data limitation or ignorance, unobserved variables) in a panel data model. the observed heterogeneity may be ignored; proxy variables may be used to measure it but may include errors. model specification the study adopted two models to achieve the set objectives of the study. the first model captures the direct relationship between government accounting reform and financial performance. therefore, we can say that; (fp) = ocf+atr+error ii substituting equation (3.3) in equation 2 in place of financial performance (fp), we have the econometrically model to be gar= β0 + β1ocf+ β2atr+error where: β0β2= coefficient of proxies of independent variable gar =government accounting reforms fp=financial performance ocf=operating cash atr= flow and asset turnover ratio apriori expectations: β1β2, > 0 but each of the specific objectives can be represented and measured with the following model model 2: e-psr = β0+ ocf+atr+error-i where, pbbr= performance-based budgeting reform e-psr= e-payment system reform decision rule the hypotheses were tested at 5% error margin. consequently, when the p-statistic appear less than or equal to critical level of 0.05, we shall accept the alternate and uphold that significant association mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 24 | p a g e exist. conversely, when the p-statistics appear higher than the critical level of 0.05, the null hypothesis will be accepted and the alternate hypothesis rejected. data analysis panel regression analysis the study employed panel regression analysis to ascertain the impact of government accounting reforms on financial performance of state-owned enterprise in nigeria and how the explanatory variables and the dependent variable are related. the summarized results of the panel regression analysis are presented in the table below. table 2: summary of regression estimation (anambra state investment promotion and protection agency (ansippa) variables coefficient std. error t p vif constant -7.724 14.344 -0.538 0.619 ocf 0.222 0.165 1.344 0.250 675.733 atr 0.0231 0.0950 0.243 0.820 1.869 (0.222 * ocf) + (0.0231 * atr) r = 0.997 rsqr = 0.994 adj rsqr = 0.981 standard error of estimate = 1.095 the results presented in table 2 offer an in-depth statistical summary of the regression estimation conducted to examine the relationship between financial performance indicators and the implementation of government accounting reforms (gar) at the anambra state investment promotion and protection agency (ansippa). the regression model, which includes variables such as ocf, and atr, was designed to determine how these financial metrics collectively explain variations in gar. the turnover ratio (atr), yielded statistically insignificant results with p-values of 0.924, 0.774, and 0.820 respectively. operating cash flow (ocf), though showing a positive relationship with gar (coefficient = 0.222), had a p-value of 0.250, again not statistically significant. interestingly, atr had the lowest vif at 1.869, which implies less multicollinearity and possibly a more distinct, though still insignificant, influence the dependent variable. the overall lack of statistical significance for individual predictors despite a high r-squared value suggests that the combined influence of the financial performance indicators, rather than any single metric, plays a critical role in explaining the variations in gar implementation at ansippa. this multicollinearity issue highlights the complex and interdependent nature of financial performance variables in public-sector institutions. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 25 | p a g e table 3: summary of regression estimation (anambra state solid minerals development company limited (ansmdcl) variables coefficient std. error t p vif constant -4.102 3.779 -1.085 0.339 ocf 0.00769 0.0547 0.141 0.895 933.509 atr 13.714 15.506 0.884 0.426 969.909 (0.00769 * ocf) + (13.714 * atr) r = 0.999 rsqr = 0.998 adj rsqr = 0.994 standard error of estimate = 0.149 the regression results presented in table 3 offer valuable insights into the relationship between financial performance indicators and the implementation of government accounting reforms (gar) at the anambra state solid minerals development company limited (ansmdcl). ocf, and atr are positively related to gar. despite the high explanatory power of the model with r = 0.999, r² = 0.998, and adjusted r² = 0.994 none of the predictor variables are statistically significant at the 0.05 level. most variables have extremely high vifs, with ocf (933.509), and atr (969.909) far exceeding the acceptable threshold of 10. this suggests that these predictors are highly correlated with each other, making it difficult to isolate their individual impact on gar. the model’s standard error of estimate (0.149) is relatively low, which reflects a good overall prediction accuracy of the model. test of hypotheses hypothesis one h01: performance-based budgeting reform has no significant effect on financial performance of stateowned enterprises in nigeria. table 4: analysis of variance (anova) source df ss ms f p-value regression (model) 9 6,845.20 760.58 6.32 0.00003 residual (error) 40 4,815.80 120.40 total 49 11,661.00 the anova results in table 4 indicate that performance-based budgeting reform has a significant effect on the financial performance of state-owned enterprises in nigeria. p-value of 0.00003, is far below the 0.05 significance threshold. based on this, the null hypothesis (h07) which states that performance-based budgeting has no significant effect on financial performance is rejected. the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 26 | p a g e findings therefore confirm that budgeting reform contributes meaningfully to changes in financial performance among state-owned enterprises. hypothesis two h02: e-payment system reforms have no significant effect on financial performance of state-owned enterprises in nigeria. table 5: analysis of variance (anova) source df ss ms f p-value regression (model) 9 7,150.32 794.48 6.55 0.00002 residual (error) 40 4,856.19 121.40 total 49 12,006.51 the anova results in table 5 show that the e-payment system reform has a significant effect on the financial performance of state-owned enterprises in nigeria. p-value of 0.00002, shows a far below 0.05 significance level. given this strong statistical evidence, the null hypothesis (h08) which states that the e-payment system reform has no significant effect on financial performance is rejected. hence, the adoption of e-payment systems plays an important role in influencing financial outcomes in state-owned enterprises. conclusion the study explored the impact of key financial performance indicators on government accounting reforms (gar) across various state-owned enterprises in anambra state, nigeria. drawing from the descriptive statistics and regression analyses presented, several conclusions can be drawn with clarity and academic rigor. the study indicates a strong relationship between the independent variables namely, operating cash flow (ocf), and asset turnover ratio (atr) and the dependent variable (gar). however, atr often failed to reach statistical significance, implying that profitability margins and asset efficiency, while important in general financial analysis, may play a limited direct role in influencing gar outcomes within these public-sector organizations. this study found that performance-based budgeting reform has a positive effect on financial performance of state-owned enterprise by promoting accountability and encouraging efficient use of resources and facilitates evaluation and continuous improvement in operational performance within soes. also that e-payment reform ensures efficiency and traceability and significantly increases transaction transparency speed, reduce delays and fraud. on the basis of the above, ggovernment agencies must implement more robust monitoring tools that link financial performance indicators to reform outcomes, promoting accountability and data-driven policymaking. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 27 | p a g e references ajao, q., oludamilare, o., & sadeeq, l. (2023). drivers of mobile payment acceptance: the impact of network externalities in nigeria. ajao, t., odunlade, s., & ufuoma, p. (2022). integrated financial management information system and fraud prevention in nigerian public agencies. international journal of public administration, 45(9), 789–805. ajimobi, a. o., ben-caleb, e., madugba, j. u., adegboyegun, a. e., & eluyela, d. f. (2023). impact of international public sector accounting standards (ipsas) adoption on financial accountability in selected local governments of edo state, nigeria. journal of interdisciplinary research in accounting and finance, 10(3), 37–52. alkhuzaie, r., muhamad, h., daud, z. m. & senik, r. (2025). the strategy of adopting performance-based budgeting in the public sector: a conceptual framework. corporate & business strategy review, 6(1), 187–196. ajuonu, a. u., & ezeala, g. (2024). effect of ipsas adoption on public financial management: evidence from anambra, enugu, and imo states. journal of accounting and financial management, 10(3), 51–64. chen, x., downey, a., & adopo, a. (2023). usage behaviors of e-payment services by chinese millennials and gen z. journal of business and organizational analysis, 12(1), 50–68. chukwu, e. c., & igbokwe, c. (2023). impact of e-payment and eps adoption on fund processing and revenue collection in kaduna state transport enterprises. nigerian journal of digital finance, 2(1), 54–71. ezejiofor, r. a. & ezemba, o. e. (2025). accounting for cryptocurrency and digital assets in nigeria: challenges and emerging standards (2015–2025). international journal of advanced academic research. 11(10), 32-42. doi: https://doi.org/10.5281/zenodo.17430754. enofe, a. o., afiangbe, s. e., & agha, d. i. (2018). impact of tsa on deposit money banks in nigeria. international journal of financial management, 8(1), 22–34. ezejiofor r. a. & okonkwo, m.c. (2025). forensic accounting and fraud detection and prevention in the nigerian public sector. journal of accounting and financial management 11(8). 25048856 p-issn 2695-2211. www.iiardjournals.org online version mailto:contact@americaserial.com mailto:contact@americaserial.com https://doi.org/10.5281/zenodo.17430754 american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 28 | p a g e ezejiofor, r. a., ikilidih, j.n. & analikwu, m.i. (2025). federal government indirect tax revenue and income distribution in nigeria (2000-2023). journal of accounting and financial management 11(6), e-issn 2504-8856 p-issn 2695-2025 www.iiardjournals.org online version habiburrochman, e. (2020). performance-based budgeting and its impact on control effectiveness. international journal of innovation, creativity and change, 11(11), 255–273. ibe, o. a., & okeke, n. a. (2023). combined ipsas and e-payment reforms in enugu state road maintenance enterprises. international journal of infrastructure finance, 5(3), 19–36. inedu, h., usman, i. c., & ibrahim, a. j. (2025). electronic payment system and the growth of smes in nigeria. international journal of advanced economics, 7(2), 40–50. nature. (2025). fundamental principles to design an ethical payment system. humanities and social sciences communications, 12(3), 103–115. megah, k. i. & valiant, r. s. (2025). systematic literature review: assessing the effectiveness of performance-based budgeting in government financial management. jurnal ilmu pemerintahan, 10(1), 52–74. okafor, c., & eiya, o. (2011). corporate governance and financial performance of selected public enterprises in nigeria. european journal of economics, finance and administrative sciences, (22), 123–134. okoye, l. u., & umeh, j. c. (2020). budgeting practices and financial performance in enugu local governments. african journal of public administration, 9(1), 45–58. oluwatayo, f. b., balogun, o. a., & ade, v. (2022). liquidity impact of tsa implementation in lagos state water utilities. journal of water resources management & finance, 11(2), 25–41. okoro, h. i., & umoh, j. a. (2022). combined effects of tsa and ipsas on cash and budget efficiency in akwa ibom state water utilities. journal of nigerian financial systems, 6(4), 101–118. ogunlana, a. a., & bello, k. (2023). accrual ipsas and audit report effectiveness in ogun state infrastructure enterprises. ogun journal of accounting & finance, 2(1), 67–81. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 29 | p a g e olusanya, a. o., akpan, e. e., & nwosu, c. (2022). treasury single account (tsa) effects on payment processing in akwa ibom petroleum soes. journal of petroleum economics and public finance, 4(2), 51–68. parmar, n., & machhar, s. (2022). a study on the adoption of e-payment systems in india: a literature review. scientific journal of finance and financial law studies, 2(1), 1–12. reuben, o., & anyanwaokoro, m. (2019). the contribution of electronic payment systems to financial performance: evidence from nigerian banks. international journal of multidisciplinary economics and research, 6(4), 85–97. sreenivas, b. n. (2023). role of small and medium enterprises in digital payment in india. journal of digital finance, 12(1), 22–35. sulaiman, a. j., & odunlade, o. a. (2025). ipsas adoption and financial accountability in ogun state lgas. journal of finance and accounting, 13(3), 109–124. taiwo, o., akinrinola, o., & nwidobie, b. m. (2025). ipsas adoption and financial report quality in lagos tertiary institutions. african journal of accounting and financial research, 8(2), 1– 14. waliullah, m., hossain george, m. z., hasan, m. t., alam, m. k., munira, m. s. k., & siddiqui, n. a. (2025). assessing the influence of cybersecurity threats on digital banking: a systematic literature review. wikipedia. (2025). treasury single account. https://en.wikipedia.org/wiki/treasury_single_account wikipedia. (2025). treasury single account. wikipedia. (ssbfnet.com, researchgate.net, en.wikipedia.org, scirp.org, iiardjournals.org, digitalcommons.du.edu, sserr.ro) xu, x., li, y., & wang, j. (2022). do staff capacity and performance-based budgeting improve university performance? palgrave communications, 8, article 223. mailto:contact@americaserial.com mailto:contact@americaserial.com https://en.wikipedia.org/wiki/treasury_single_account https://www.ssbfnet.com/ojs/index.php/ijrbs/article/download/1639/1196/5699?utm_source=chatgpt.com https://www.researchgate.net/publication/359407229_effect_of_treasury_single_account_tsa_on_the_financial_performance_of_commercial_banks_in_tanzania_a_study_based_on_camel_rating_analysis?utm_source=chatgpt.com https://en.wikipedia.org/wiki/treasury_single_account?utm_source=chatgpt.com https://www.scirp.org/reference/referencespapers?referenceid=2518988&utm_source=chatgpt.com https://www.iiardjournals.org/get/jafm/vol.%2010%20no.%208%202024/effect%20of%20treasury%20single%20185-198.pdf?utm_source=chatgpt.com https://digitalcommons.du.edu/irbe/vol6/iss1/20/?utm_source=chatgpt.com https://sserr.ro/wp-content/uploads/2022/12/sserr-9-2-40-53.pdf?utm_source=chatgpt.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 30 | p a g e effect of tier one capital components on the loan portfolio of deposit money banks in nigeria udeh patience ndidiamaka federal polytechnic ohodo, enugu state doi: https://doi.org/10.5281/zenodo.17804495 abstract: the inadequacy of tier one capital components has been a recurring issue of concern in the nigerian banking sector, potentially affecting the ability of deposit money banks to perform their traditional role of financial intermediation through loans and advances. additionally, the impact of specific tier one capital components, such as paid-up share capital, and statutory reserve on the loan portfolio of deposit money banks in nigeria remains unclear hence, the study examines the effect of tier one capital components on loan portfolio of deposit money banks in nigeria from 2015 to 2024. the independent variables of the study and proxies for tier one capital components are paid-up share capital and statutory reserve, while loans and advances are the dependent variable. a total of 23 deposit money banks were listed on the nigerian stock exchange during the period, out of which 6 banks were sampled for the study. secondary data were collected from the audited annual financial statements of the selected banks and analyzed using panel data regression analysis. findings suggest that paid up-share capital has a positive and significant effect on loans and advances. however, statutory reserve has a positive but non-significant effect on loans and advances. the study recommends that nigerian deposit money banks should be adequately capitalized at all times in accordance with the central bank of nigeria's prudential guidelines to enable the banks to efficiently provide their traditional service of financial intermediation, while implementing a retention policy that will enable them to retain a sizable proportion of their earnings for future growth and expansion. the implication of the study is that strong bank capital components can enhance lending capacity, thereby contributing to industry development, economic growth, and financial stability. keywords: paid-up-share-capital, retained-earnings, statutory-reserve, share-premium and loans-and-advances. 1.1 introduction capital adequacy standards for banks that operate internationally have been a major concern for bank regulators worldwide. in view of this, internationally active banks are required to maintain a significant and adequate level of capital to avoid bank failures and to protect the interests of bank stakeholders. the globally recognized and acceptable capital regulations originated from the basel committee on banking supervision, which was established by the central bank governors of the group of ten (g10) industrialized nations of the world in 1975. the committee framed the details of mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 31 | p a g e the agreed structure for measuring capital adequacy and the minimum capital standard (aspal & afroze, 2014). in 1988, the basel committee came up with basel capital accord which propounded the definition of capital and distinguished bank capital between core elements (tier 1) capital and supplementary elements (tier 2) capital. in the same year, the basel committee introduced capital adequacy regulation, which required globally active banks to maintain a minimum capital equal to 8% of risk adjusted assets, with capital consisting of tier i capital (equity capital and disclosed reserves) and tier ii capital (long term debt, undisclosed reserves and hybrid instruments) (jacobson, linde & roszbach, 2002). thus, the adoption of the standards in the city of basle came to be referred as the basle capital accord on capital adequacy standard. the capital adequacy standard under the basle accord has been widely accepted worldwide by bank regulators and was implemented by the central bank of nigeria, effective december 2005 (ezike & oke, 2013). the 2007-2009 financial crisis reveals several weaknesses in the capital bases of internationally active banks. the definitions of capital varied widely between jurisdictions. nickolas (2020) defines tier i capital as a bank's core capital and is the funds that a bank uses to function on a regular basis and forms the basis of a financial institution's strength. it consists of shareholders' equity and retained earnings disclosed on the financial statements of banks and is a primary indicator to measure a bank's financial health. tier i capital enable a bank to absorb losses without ceasing business operations. it is the primary funding source of the bank. typically, it holds nearly all of the bank's accumulated funds. these funds are generated specifically to support banks when losses are absorbed so that regular business functions do not have to be shut down. under basel iii, the minimum tier 1 capital ratio is 10.5%, which is calculated by dividing the bank's tier 1 capital by its total risk-weighted assets (rwa). risk-weighted assets measure a bank's exposure to credit risk from the loans it underwrites. raja (2019) identified three major components of tier 1 capital, namely, paid up share capital, preference share (which must be irredeemable and non-cumulative) and retained earnings or general reserve. in nigeria, the cbn guidance notes on regulatory capital (2018) classifies tier i capital into seven components, namely: paid-up share capital, irredeemable preference shares, share premiums, general reserves (retained earnings), smeeis reserves, statutory reserve and other reserves as may be determined by the cbn from time to time. for the purpose of this study, however, we will adopt, paid up share capital and statutory reserve as the independent variables and proxies for components of tier i capital. paid-up capital is the amount of money a company has received from shareholders in exchange for shares of stock. paid-up capital is created when a company sells its shares on the primary market directly to investors, usually through an initial public offering (ipo). when shares are bought and sold among investors on the secondary market, no additional paid-up capital is created as proceeds in those transactions go to the selling shareholders, not the issuing company (chen, 2020). retained mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.investopedia.com/contributors/53895/ https://www.investopedia.com/terms/f/financial-health.asp https://www.quora.com/profile/karthik-raja-924 https://www.investopedia.com/terms/s/secondarymarket.asp american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 32 | p a g e earnings are undistributed earnings that have not been paid to stockholders or transferred to a surplus account. retained earnings are part of a bank's net worth, or capital and surplus. retained earnings are also known as retained surplus. it represents that portion of a company's profits that it keeps to reinvest in the business or pay off debt, rather than paying them out as dividends to its investors. retained earnings are one component of the corporation's net worth and increase the supply of cash that's available for acquisitions, repurchase of outstanding shares, or other expenditures the board of directors authorizes (scott, 2003). a statutory reserve is an amount of cash a financial institution, such as a bank, credit union, or insurance company, must keep on hand to meet the obligations incurred by virtue of accepting deposits and premium payments. the statutory reserves required of banks and credit unions are generally set by the nation's central bank, and those required of insurance companies are set by statute or regulation by the national, state or provincial government or regulatory authority. calculated in various ways, statutory reserves are required to ensure that financial institutions are capable of paying claims even in a calamitous situation. a statutory reserve is usually kept as on deposit with the central bank of a country (marshal, 2020). a company issues its shares at a premium when the price at which it sells the shares is higher than their par value. this is quite common, since the par value is typically set at a minimal value. the amount of the premium is the difference between the par value and the selling price. if shares do not have a par value, then there is no premium (bragg, 2020). loans/advances is the independent variable of the study. loans and advances refer to a debt provided by a financial institution for a particular period while advances are the funds provided by the banks to the business to fulfill working capital requirements, which are to be payable within one year. loan and advances is the most important asset as well as the primary sources of earning of banks, which help to improve the financial health of banks (surbhi, 2015). 1.2 statement of the problem tier i capital is the primary funding source of the bank and is the assets a bank holds in order to continue providing for the business needs of its customers. the capital helps to ensure there is enough money to fulfill banking needs including providing loans and advances to customers of the bank. the components of tier 1 capital includes ordinary share capital, general reserve or retained earnings, and preferred share capital. the amount of capital that is held shows the strength of the bank as a measure of financial preparedness in case of emergencies. the importance of tier i capital in banking operation cannot be over emphasized. ttier i capital is the funds that a bank uses to function on a regular basis and forms the basis of a financial institution's strength. it consists of shareholders' equity and retained earnings disclosed on the financial statements of banks and is a primary indicator to measure a bank's financial health. tier i capitals are generated specifically to support banks when losses are absorbed so that regular business functions do not have to be shut down. therefore, common equity capital is the most effective loss-absorption mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.wisegeek.com/what-is-a-credit-union.htm https://www.wisegeek.com/what-is-a-central-bank.htm https://www.accountingtools.com/articles/2017/5/16/share https://www.accountingtools.com/articles/what-is-par-value.html https://www.investopedia.com/terms/f/financial-health.asp american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 33 | p a g e financial instrument of banks. the reinforcement of common equity capital within the total regulatory capital of banks contributes to financial stability and sustained economic growth of a nation. thus, internationally active financial institutions and banks must maintain a capital adequacy at specific minimum level prescribed by regulatory authorities in order to avoid risks and bankruptcy. history of nigeria banks, however, shows that only few internationally active banks in nigeria are able to comply with this requirement since the basle i, ii and iii were introduced into the international banking arena. the consequence is that the evolving competition in the banking industry as a result of globalization has made it difficult for nigerian banks to play their major role of financing economic activities arising from inadequate capital. inadequate bank capital has led to a crisis of confidence in the nigeria banks to the extent that the original functions which is to support the volume, type and character of banks business to provide for the possibilities of losses that may arise there from and to enable the banks meet reasonable credit need of the community have been eroded. the losses suffered by these banks led to series of banks failures in nigeria (ikpefan, 2013). it is in view of this development that the researcher embarked on this study to investigate the effect of tier one capital components on the loan portfolio of deposit money banks in nigeria. 1.3 the main objective of this study was to examine the effect of tier one capital components on the loan portfolio of deposit money banks in nigeria. the specific objectives of the study were to: i. ascertain the effect of paid-up share capital on total loans & advances ii. investigate the effect of statutory reserve on total loans & advances 1.4 the following research questions are in line with the specific objectives of the study. i. what is the effect of paid-up share capital on loans and advances of deposit money banks in nigeria? ii. to what extent does statutory reserve affect loans and advances of deposit money banks in nigeria? 1.5 null hypotheses were formulated for the study as follows: i. paid-up share capital does not significantly affect loans and advances ii. statutory reserve does not significantly affect loans and advances findings of the study will help to moderate and improve the volume and quality of the loan portfolios of their banks, respectively. it will also benefit investors in the nigeria banking sector. knowledge of the effect of tier one capital components on the loans portfolio of banks will assist current and potential investors of the banking sector to make an informed business decision. this knowledge will enable investors analyze the possibility of a bank generating adequate return on investment give that loan portfolio is the highest income generating assets of banks. the study will be of importance to the central bank of nigeria (cbn) and the nigeria deposit insurance corporation (ndic) who are the apex regulators of the nigeria banking industry. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 34 | p a g e the study was scoped to focus on the effect of tier one capital components on loan portfolio of deposit money banks in nigeria from 2015 to 2024. the independent variables of the study are: paid-up share capital and statutory reserve while the dependent variable is loans and advances of selected deposit money banks in nigeria. data on these variables were collected from six (6) deposit money banks that were selected from the deposit money banks listed on nigeria exchange group (ngx) during the period of 10 years (2015-2024). review of related literature 2.1 conceptual review components of tier i capital reichartz (2020) states that tier 1 capital is the core capital a bank holds in its reserves and exists as the primary source of funds. it's the assets a bank holds to continue providing for the business needs of its customers. since banks typically provide capital for customers, this can include a substantial amount of risk. the capital helps to ensure there is enough money to fulfill needs. tier 1 capital includes common stock, retained earnings, and preferred stock. the amount of capital that is held shows the strength of the bank as a measure of financial preparedness in case of emergencies. the strength of banks is determined by its tier 1 capital ratio. this ratio is used to describe the capital being held by a bank versus the total risk-weighted assets (rwas) of the bank. risk-weighted assets are the assets held by the bank that are weighted by its credit risk. raja (2019) also asserts that tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. it consists of the types of financial capital considered the most reliable and liquid, primarily equity (paid-up share capital and reserves). examples of tier 1 capital are common stock, preferred stock that is irredeemable and non-cumulative, and retained earnings. the theoretical reason for holding tier i capital is to provide protection against unexpected losses. under the basel accord, a bank has to maintain a certain level of cash or liquid assets as a ratio of its risk-weighted assets. the basel accords are a series of three sets of banking regulations that help to ensure financial institutions have enough capital on hand to handle obligations. tier 1 capital includes (i) permanent shareholders’ equity in the form of common stock, perpetual non-cumulative preferred stock, and minority interests in equity accounts of consolidated subsidiaries; (ii) disclosed reserves such as retained earnings, share premiums, or other surplus, and (iii) qualifying innovative capital instruments up to a maximum of 15 percent of tier 1 capital. goodwill is deducted. this study will, however, adopt paid-up share capital, retained earnings, statutory reserve, and share premium as the independent variables and measures of components of tier i capital. mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.quora.com/profile/karthik-raja-924 https://goo.gl/dxcgqb https://www.investopedia.com/terms/b/basel_accord.asp https://www.investopedia.com/terms/b/basel_accord.asp american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 35 | p a g e paid-up share capital paid-up capital is the amount of money a company has received from shareholders in exchange for shares of stock. paid-up capital is created when a company sells its shares on the primary market directly to investors, usually through an initial public offering (ipo). this represents the funds raised by the banks through the issuance of shares to the public. this comes mainly in form of ordinary and preference shares. most deposit money banks source fund through this form when they want to engage in capital projects or to meet certain legal requirements. it is the initial capital of banks before they take off (ogbunobi, 2010; chen, 2020). paid-up share capital represents money that is not borrowed. a company that is fully paid-up has sold all available shares and thus cannot increase its capital unless it borrows money by taking on debt. a company could, however, receive authorization to sell more shares. a company's paid-up capital figure represents the extent to which it depends on equity financing to fund its operations. this figure can be compared with the company's level of debt to assess if it has a healthy balance of financing, given its operations, business model, and prevailing industry standards (chen, 2020). statutory reserve a statutory reserve is an amount of cash a financial institution, such as a bank, credit union, or insurance company, must keep on hand to meet the obligations incurred by virtue of accepting deposits and premium payments. the statutory reserves required of banks and credit unions are generally set by the nation's central bank, and those required of insurance companies are set by statute or regulation by the national, state or provincial government or regulatory authority. calculated in various ways, statutory reserves are required to ensure that financial institutions are capable of paying claims even in an emergency situation (marshal, 2020). the statutory reserve requirement is a monetary policy instrument available to central banks of various economies for purposes of liquidity management. effectively, banking institutions are required to maintain balances in their statutory reserve accounts. the srr is used to withdraw or inject liquidity when the excess or lack of liquidity in the banking system is perceived by the bank to be large and long-term in nature (central bank of malaysia statistical bulletin, 2016). section 16 of the banks and other financial institutions act of 1991 (bofia 1991) makes it compulsory for banks to maintain a reserve fund out of the net profits for each year. subsections 1 (a) and (b) specify the percentage of the net profit that should be transferred to this fund based on the outstanding amount and related to the share capital. in fact, section 16(1) of (bofia 1991) states that an appropriation of 30% of profit after tax must be made to statutory reserve if the statutory reserve is less than the paidup share capital of the bank and 15% of profit after tax if the statutory reserve is greater than the paid up share capital of the bank (ogbunobi, 2010). not only does the reserve requirement address liquidity issues and enhance the perception of stability for a nation's banking industry, it can also have a moderating effect on a nation's economy. if the reserve requirement is raised, the amount of mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.investopedia.com/terms/e/equityfinancing.asp https://www.wisegeek.com/what-is-a-credit-union.htm https://www.wisegeek.com/what-is-a-central-bank.htm https://www.wisegeek.com/what-is-the-banking-industry.htm american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 36 | p a g e money available for lending is automatically reduced, effectively slowing down economic activity. likewise, a reduction in the reserve requirement can potentially increase the amount of money available for lending. loan and advances loans refer to a debt provided by a financial institution for a particular period while advances are the funds provided by the banks to the business to fulfill working capital requirement which are to be payable within one year. a loan is also seen as an amount borrowed for specific financial needs like investing in assets, purchasing consumer durable, constructing a building, making payments, or fulfilling financial obligations so that business processes can run smoothly. advances are also provided by banks to organizations or business owners for meeting their capital requirements. loans differs from advances in two major ways, firstly, loans are a source of long-term financing (typically more than a year), whereas advances are a source of short-term financing, that is, to be repaid within less than a year. secondly, the monetary value of an advance is usually less than that of a loan (surbhi, 2015). banking business is all about collecting deposit from members of the public and using the deposit collected to create loans and advances to borrowers. this process is known as financial intermediation. therefore lending is one the fundamental functions of money deposit banks. loans symbolize investment and typically constitute the lengthened assets of banks. individuals and firms alike request for loans to meet their various funding needs (gambo, 2017; timsina, 2017; akani & oparaordu, 2018). lending may be on short, medium or long-term basis and is one of the services that commercial banks do render to their customers. banks give loans and advances to individuals, firms as well as government in order to enable them carry out investment and development activities as a way of growing and contributing to the economic development of a country. 2.2 theoretical framework 2.2.1 buffer theory of capital adequacy the buffer theory of capital adequacy was propounded by calem & rob in 1996. the theory postulates that capital is more reliable, dependable and can be used for long term planning. more capital tends to absorb adverse shocks and thus reduces the likelihood of failure (rime, 2001). banks raise capital when the portfolio risk goes up in order to keep up their capital buffer (laeven & levine, 2009). the capital buffer is the excess capital a bank holds above the minimum capital required (jokipii & milne, 2011) buffer theory predicts that a bank approaching the regulatory minimum capital ratio may have an incentive to boost capital and reduce risk in order to avoid the regulatory costs triggered by a breach of the capital requirements. the capital buffer theory holds that banks with low capital buffers attempt to rebuild an appropriate capital buffer by raising capital while banks with high capital buffers attempt to maintain their capital buffer. however, poorly capitalized banks may also be mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 37 | p a g e tempted to take more risk in the hope that higher expected returns will help them to increase their capital. this is one of the ways risks relating to lower capital adequacy affects banking operations. in the event of bankruptcy of a bank, the risks are absorbed by the bank, customers and deposit insurance corporation. the main objective of the study is to investigate the effect of tier one capital components on loan portfolio of deposit money banks in nigeria. the buffer theory of capital adequacy on the other hand states that an adequate capital tends to absorb adverse shocks and thus reduces the likelihood of bank failures. therefore, banks raise capital when the bank loan portfolio risk goes up in order to keep up their capital buffer. this theory predicts that as a bank approaches the regulatory minimum capital requirement, it will have the urge to boost capital so as to reduce risk in order to avoid the regulatory costs triggered by a breach of the capital requirements. since buffer theory deals with bank regulatory capital, the need for capital adequacy and the need to reduce loan portfolio risk which are the pertinent issue in the study, we hereby anchor the study on buffer theory of capital adequacy developed. 2.3 empirical review ali and marsida (2015) studied the influence of some macroeconomic and banking factors on credit growth in the albanian banking system from 2002 to 2013. the study used credit growth as a dependent variable while gdp growth, inflation rate, unemployment rate, loan interest rate, capital adequacy ratio, bank size and npl ratio were used as the independent variables. ordinary least squares (ols) regression model was used to analyze the data collected for the study. quarterly panel data for the whole albanian banking system with a total of 48 observations per each variable were collected. result shows that the credit growth in the albanian banking system is positively related to gdp growth, inflation rate and capital adequacy ratio while is negatively related to unemployment rate, interest rate, non-performing loans and bank size. gambo (2017) studied the relationship between bank specific and macroeconomic determinant of non-performing loans in nigerian deposit money banks over the period of 5 years (2010 to 2014). a sample of 10 banks out of 15 quoted by the nigerian stock exchange (nse) was considered on a cross sectional basis. non-survey research design and secondary data were used and these were obtained from the banks’ annual reports and accounts, central bank of nigeria (cbn) and nigerian stock exchange fact book. the data were analyzed using descriptive statistics, correlation coefficient and multiple regressions. results suggest that the relationship between capital adequacy ratio and inflation reveals a positive insignificant relationship; whereas return on asset had negative insignificant relationship with the rate of non-performing loans. the study recommended that cbn for policy purposes should frequently assess the lending habit of deposit money banks in nigeria. finally, strengthening securities market will have a positive impact on the general improvement of the banking institutes thereby increasing the effectiveness of the financial sector. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 38 | p a g e odundo and orwaru (2018) explored bank size and financial stability of commercial banks in kenya from 2011 to 2017. the main objective of this study was to establish whether or not bank size has a significant effect on financial stability of commercial banks in kenya as measured by their return on assets (roa), controlling for the banks’ loan portfolio, capital strength and reliance on deposits. the study adopted a correlation research design. the target population was all the 10 commercial banks listed at the nairobi securities exchange (nse). secondary balanced panel data sourced from the annual reports of all the 10 listed commercial banks at the nse was used, yielding 70 data points. the regression results suggest that bank capital has a significant positive effect on stability. it was recommended that effective policies should be put in place to encourage banks to maintain higher capital bases to guarantee their soundness. afrifa et al, (2019) sampled 625 microfinance institutions (mfi) across 40 countries from 2010-2015 and examined the effect of buffer capital on the performance of mfis. the study also examined how the effect varies with loan portfolio quality in the mfis. regression analysis was adopted for the study. regression analysis was adopted for the study. findings from the study suggest a negative relationship between buffer capital and mfis’ performance. the study also found that loan portfolio quality positively moderates the buffer capital-mfi performance relationship. it was also ascertained that the buffer capital-loan portfolio quality relationship does not vary for deposit-taking, profitmaking, and regulated mfis. the findings shed new light on the value relevance of capital in microfinance institutions. fungáčov et al, (2015), using a large dataset of 170 chinese banks for the period 2004 to 2013, conducted a study to ascertain how reserve requirements influence monetary policy through bank lending channel in china. specifically, the study analyzed the reaction of loan supply to changes in reserve requirements. finding from the study found no evidence of the bank lending channel through the use of reserve requirements. the study equally observed that changes in banks ‘reserve requirements influence loan growth of the sampled banks. the same findings hold true for other monetary policy instruments. it was also ascertained that bank ownership structure influences transmission of monetary policy in the studied banks. atlaw (2017) studied the effect of reserve requirement on ethiopian commercial banks’ performance from, 2004 to 2016. the specific objectives of the study were: effect of reserve requirement on commercial banks’ profitability, effect of reserve requirement on commercial banks’ profitability on lending capacity. time series data of 13 sampled commercial banks in ethopia were obtained and used for the study. a quantitative research approach was adopted for the study. secondary financial data were analyzed using linear regressions models. result of data analysis indicates that reserve requirement has a negative effect on both commercial banks’ profitability and lending capacity, thereby, affecting performance. the study recommended that commercial banks in ethiopia should mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 39 | p a g e be aware of the effect of reserve requirement on their performance and thus, national bank of ethiopia should be proactive in proper amendments of the reserve requirements of banks. timsinam (2017) used ordinary least square regression method to investigate the determinants of bank lending using commercial banks in nepal from 1975 to 2014. nepalese commercial banks' private sector credit (pvct) was used as the dependent variable while volume of deposits (dep), interest rate (ir), stipulated cash reserve requirements ratio (crr), liquidity ratio (lr), inflation (inf), exchange rate (exr), and gross domestic product (gdp) were used as the independent variables of the study. result of the regression analysis indicates that gross domestic product and liquidity ratio have the greatest impacts on their lending behavior. granger causality test was also conducted and shows evidence of unidirectional causal relationship from gdp to private sector credit. this implies that gdp is the barometer of the economy and commercial banks should pay attention to the overall macro-economic situation of their country, factors affecting the gdp in general and their liquidity ratio in particular while taking lending decision oganda (2018) examined the effect of cash reserves on performance of commercial banks in kenya from 2007 to 2016. the study was a comparative analysis between national bank and equity bank of kenya. specifically the study seeks to ascertain; the effects of cash reserves, customer deposits, nonperforming loans and asset base on the performance of commercial banks in listed kenya. pearson product moment correlational analysis was used to analyze the data gathered for the study. document analysis guide was used to gather quantitative data from the banks financial statements through 2007 to 2016 and interview schedule was used to gather primary data. pearson correlation was used to show the strength and association among the study variables. the study found that cash reserves had a strong negative correlation with return on equity (roe) while, cash reserves significant relate with return on equity (roe). it was recommended that the banks should therefore minimize cash reserves and invest this money in productive investments. azira et al, (2018) examined the bank specific and macroeconomic determinants of commercial bank lending in malaysia using a sample of 27 banks covering the period from 2005 to 2014. specifically the impact of macro prudential policy measure implemented in 2010 on the lending activities of malaysian commercial banks was investigated. using random effects estimation, the result demonstrate that bank size and volume of deposit positively influence commercial bank lending in malaysia, while liquidity negatively influences the lending activities. with regard to macroeconomic determinants, this study does not find any conclusive evidence to support the influence of gross domestic product (gdp), lending rate and cash reserve requirement on commercial bank lending activities in malaysia. moreover, the findings of this study also reveal that the macro prudential policy measure which was implemented in 2010 to curb the high level of household indebtedness does not give any significant impact on lending activities in malaysia during the study period. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 40 | p a g e while there have been several studies on bank capitalization and performance in many parts of the world, very few of them have focused on bank capitalization and performance of the nigerian banking industry. a few of the works reviewed by the researcher were carried out in nigeria while the rest of them were conducted abroad. udeh (2015) who evaluated the impact of monetary policy instruments on profitability of commercial banks in nigeria using zenith bank as evidence. gambo (2017) who assessed the relationship between bank specific and macroeconomics determinant of non-performing loans in nigerian deposit money banks.akani & oparaordu (2018) who analysed the determinants of commercial banks credit to the domestic economy in nigeria. akinyomi (2014) who examined the effect of deposit volume on bank lending behavior in the nigerian post-consolidation banking period. bawa, akinniyi & njarendy (2018) who examined the effect of cash reserve ratio and money supply on the profitability of deposit money banks. eze (2014) who examined the determinants of bank profitability in nigeria. eze & unah (2015) who investigated if retained earnings is determined by capital structure in the oil and gas sector of nigeria. also, none of the 63 studies covered 2019 and 2020 financial year in terms of time coverage. therefore, this study intends to fill these research gaps by evaluating the effect of tier one capital components on loan portfolio of deposit money banks in nigeria from 2010 to 2020. 3. methodology the study adopted ex-post facto research design. this study was conducted in nigeria and precisely on deposit money banks. secondary data were sourced from the published annual financial statement of the selected banks. population of the study is the twenty-three (23) deposit money banks listed in the ngx from 2015 to 2024. sample was determined by simple random sampling technique and six (6) banks were randomly selected from the population. the dependent variable of the study are loans and advances while the independent variables are: share capital, retained earnings, statutory reserve and share premium. the following model was developed and adopted based on the variables of the study: loa = β0+ β1psc+ β2str+ε where: f = function of load= loans and advances pdsc = paid-up share capital star= statutory reserve β=beta ε = error term panel data regression analysis was used as the main statistical tool. descriptive statistics were also be used to measure data distribution and dispersion. hypotheses were tested using 0.05 level of mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 41 | p a g e significance. decision rule was set to accept the alternate hypothesis (h0) if the p-value of the tstatistic < 0.05 and the modulus of the t-statistic > 2. otherwise, accept the null hypotheses (h0). 4. data analysis the data obtained from the sampled banks were analyzed using panel data regression analysis. the results of the analysis are presented in tables 1, 2 and 3 below. table 1: descriptive statistics load pdsc star mean 13762365 85256067 1.43e+08 median 14715590 22950000 1.23e+08 maximum 18140000 7.69e+08 3.92e+08 minimum 7851931. 714100.0 18689788 std. dev. 2914616. 1.72e+08 88910064 skewness -1.366547 3.148851 2.345198 kurtosis 2.271406 12.26109 4.829945 jarque-bera 7.083021 308.3457 26.02621 probability 0.028970 0.000000 0.000002 sum 8.12e+08 5.03e+09 8.42e+09 sum sq. dev. 4.93e+14 1.72e+18 4.58e+17 observations 60 60 60 source: eview 10.0 output table1 shows the variable description of the 60 observations of the panel data of the sampled deposit money banks in nigeria. from the table, the industry’s minimums include loans and advances; ₦7851931, paid-up share capital; ₦714100.0; and statutory reserve: ₦18689788. however, the industry’s maximum includes loans and advances; ₦18140000, paid-up share capital; ₦769000000 and statutory reserve: ₦392000000. the means for the variables studied are loans and advances; ₦13762365, paid-up share capital; ₦85256067, and statutory reserve: ₦143000000. the normality of the distribution of the data series is shown by the coefficients of skewness, kurtosis, and jarque-bera probability. from the table1, the probability of the jarque-bera statistics for all the variables (focal and explanatory) have significant p-values as follows loans and advances (0.028970), paid-up share capital (0.000000) and statutory reserve (0.000002). the skewness coefficients which are greater than one for the explanatory variables under study. the kurtosis coefficient provides a second level of confirmation that all the variables are abnormally distributed with coefficients greater than three, loans and advances (0.028970), paid-up share capital (0.000000) and statutory reserve (0.000002). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 42 | p a g e table2: hausmann test correlated random effects hausman test equation: untitled test cross-section random effects test summary chi-sq. statistic chi-sq. d.f. prob. cross-section random 6.569026 2 0.1605 cross-section random effects test comparisons: variable fixed random var(diff.) prob. pdsc 1.588068 1.550869 0.035097 0.8426 star 0.012534 -0.016318 0.000358 0.1272 source: eviews 10 output this hausmann test was conducted to choose the appropriate model between the random effect and fixed effect models. h0: random effect model is the appropriate model for the study h1: fixed effect model is the appropriate model for the study results from table2, shows that the coefficient of the haussmann test is not significant (0.1605>0.05). based on this result, we reject the null hypothesis and accept the alternative. hence, fixed effect model is the appropriate model for the study. table3: regression analysis result dependent variable: load method: panel least squares date: 12/16/24 time: 19:35 sample: 2015 2024 periods included: 10 cross-sections included: 6 total panel (balanced) observations: 60 variable coefficient std. error t-statistic prob. pdsc 1.588068 0.392291 4.048190 0.0002 star 0.012534 0.036465 0.343723 0.7325 c -3.470606 3.652858 -0.950107 0.3466 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 43 | p a g e effects specification cross-section fixed (dummy variables) r-squared 0.716616 mean dependent var 8.852184 adjusted r-squared 0.665607 s.d. dependent var 0.322332 s.e. of regression 0.186394 akaike info criterion -0.370894 sum squared resid 1.737140 schwarz criterion -0.021837 log likelihood 21.12683 hannan-quinn criter. -0.234359 f-statistic 14.04880 durbin-watson stat 0.736236 prob(f-statistic) 0.000000 source: eviews 10 output table3 reveals that paid-up share capital has a positive (coefficients 1.588068) and significant (pvalue 0.0002) effect on loans and advances of deposit money banks in nigeria. retained earnings have a positive (coefficients 0.005284) and nonsignificant (p-value 0.5529) effect on loans and advances. statutory reserves was found to have a positive (coefficient -0.012534) and nonsignificant effect (p-value 0.7325) on loans and advances. the effect of share premium on loans and advances as revealed by the regression is positive (coefficients 0.110478) and nonsignificant (p-value 0.6643). it was also revealed that a change in paid-up share capital will result to 1.59 increase in loans and advances of deposit money banks in nigeria. in the same way, a change in retained earnings, statutory reserves, and share premium will result to 0.005, 0.012, and 0.110 increase in loans and advances of deposit money banks respectively. the adjusted r-squared (r2) indicated that 66% of the changes in loans and advances of deposit money banks in nigeria is explained by the predictor variables (paid-up share capital. retained earnings, statutory reserves, and share premium). the remaining 34% could be explained by other factors capable of influencing the loans and advances of deposit money banks in nigeria and other remote factors captured by the error term. the probability of the f-statistic is significant (prob fstatistic 0.00000) which shows the statistical fitness of the multiple regression model and the results, by extension. there is a positive serial autocorrelation in the time series data extracted from annual reports and accounts of deposit money banks in nigeria as suggested by durbin-watson stat of 0.736. 4.3 test of hypotheses hypothesis one decision: from the panel regression analysis in table3, the p-value of 0.0002 is < 0.05 and the tstatistic of 4.048190 is > 2. therefore, the null hypothesis is rejected and the alternate hypotheses mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 44 | p a g e accepted. this implies that paid-up share capital have a significant effect on loan and advances of deposit money banks in nigeria. hypothesis two decision: from the panel regression analysis in table3, the p-value of 0.7325 > 0.05 and the tstatistic of 0.343723 < 2. therefore, the null hypothesis is accepted and the alternate hypotheses rejected. this implies that statutory reserve does not have a significant effect on loan and advances of deposit money banks in nigeria. discussion of findings paid-up share capital and loan and advances the result of test of hypothesis one revealed that paid-up share capital have a positive and significant effect on loans and advances of deposit money banks in nigeria. the implication of this finding is that the more the banks are adequate capitalization, the more they are able to advance loans and advances to their clients, thereby increasing the profitability of the banks. the result is consistent with buffer theory of capital adequacy propounded by calem & rob in 1996. the theory postulates that capital is more reliable, dependable and can be used for long term planning. more capital tends to absorb adverse shocks and thus reduces the likelihood of bank failure. this result is also in tandem with the finding of gambacorta & shin (2016) who conducted a study to find out if greater amount of capital (lower leverage ratio, defined as total assets over equity) induce banks to lend more. the researchers found out that banks with higher capital have higher lending growth. it also aligns with the findings of ayaydin, and karakaya (2014) who evaluated the effect of bank capital on profitability and risk in turkish banks and observed a positive relation between the capital and profitability. it further supports the findings of ezike and oke (2013) who analyzed capital adequacy standards, basle accord and the performance of nigerian banks and found that capital adequacy standards, exert a major influence on bank performance. bridges, gregory, nielsen, pezzini, radia, and spaltro (2014) also made similar findings when the researchers explored the effect of changes in micro prudential regulatory capital requirements on bank capital ratios and bank lending in uk. the researchers found that capital requirements affect lending with heterogeneous responses in different sectors of the economy. the result contradicts the findings of ikpefan (2013) who explored the impact of bank capital adequacy ratios, management and performance in the nigerian commercial bank and found that capital adequacy ratios have negative impact on return on assets. statutory reserve and loan and advances the result of test of hypothesis three shows that statutory reserve does not significantly affect loans and advances of deposit money banks in nigeria. the implication of this finding is an increase in statutory reserves, will reduce the banks’ ability to grant more loans and advances to their clients. this result is consistent with the finding of bawa, akinniyi and njarendy (2018) who analyzed the effect of cash reserve ratio and money supply on the profitability of deposit money banks in nigeria mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 45 | p a g e and found that cash reserve ratio has negative and nonsignificant impact on the earnings of deposit money banks. other resercher found that reserve requirement has a negative effect on both commercial banks’ profitability and lending capacity, thereby, affecting performance (abid & lodhi, 2015; atlaw, 2017; eden, 2014). this result contradicts the finding of: akani and oparaordu (2018) who explored the determinants of commercial banks credit to the domestic economy in nigeria and found that banks specific variables such as deposit liabilities and liquidity ratio have positive impact on total loans and advances while deposit rate. awdia et al (2011) who analyzed the impact of capital requirements on bank risk-taking at lebanese banks and found a positive correlation between bank profitability and increase in capital. 5. summary of findings the findings are summarized as follows: i. paid-up share capital has a positive and significant effect on loans and advances of deposit money banks in nigeria. ii. statutory reserve has a positive and nonsignificant effect on loans and advances of deposit money banks in nigeria. in conclusion, tier i capital is the primary funding source of the bank and is the assets a bank holds in order to continue providing for the business needs of its customers. tier i capitals are generated specifically to support banks when losses are absorbed so that regular business functions do not have to be shut down. the effect of the tier i capital on loans and advances of banks led to the study. from the result of the data analysis, paid-up share capital has a positive and significant effect on loans and advances of deposit money banks in nigeria. statutory reserve has a positive and nonsignificant effect on loans and advances of deposit money banks in nigeria. the adjusted r-squared shows that 66% of the changes in loans and advances of deposit money banks in nigeria is explained by the predictor variables (paid-up share capital and statutory reserves). the remaining 34% could be explained by other factors capable of influencing the loans and advances of deposit money banks in nigeria and other remote factors captured by the error term. based on the findings and the specific objectives of the study, the researcher hereby recommends that nigeria deposit money bank should be adequately capitalized at all times in accordance with the central bank of nigeria regulatory guideline. adequate capital as could be observed from the findings of the study enable the bank to efficiently provide its traditional role of financial intermediation in the economy. they can achieve this capital adequacy through the issue of shares which will increase their paid-up share capital. nigeria deposit money banks should also comply with the regulatory requirement concerning statutory reserve. however, the regulatory standard should not be exceeded because statutory reserve was found to limit the ability of the banks to extend loans and advances to their clients. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 46 | p a g e references abid, s. f & lodhi, s (2015). impact of changes in reserve requirement on banks profitability: a case of commercial banks in pakistan. european journal of business and management. 7(31),1-6. adebayo, m., adeyanju, d., & olabode, s. (2011). liquidity anagement and commercial banks’ profitability in nigeria. research journal of finance and accounting, 2(7/8), 25-37. afrifa, g, gyapong, e & zalata, a.m (2019). buffer capital, loan portfolio quality and the performance of microfinance institutions: a global analysis. journal of financial stability 44 (1), 25-37. akani, h. w & oparaordu, b (2018). determinants of commercial banks credit to the domestic economy in nigeria: examinations of dynamics principles. indian journal of finance and banking, 2(2), 26-41. alhassan, a. l., coleman, a. k. and andoh, c. (2014). asset quality in a crisis period: an empirical examination of ghanaian banks. review of development finance 4(1), 50-62. ali, s & marsida, h (2015). the impact of macroeconomic and banking factors on credit growth in the albanian banking system. alkhazaleh, a. m.k (2017). factors that may drive the commercial bank lending: evidence from jordan. journal of banks and bank systems, 12(2), 31-38. aspal, p. k & afroze n, a (2014). empirical analysis of capital adequacy in the indian private sector banks. american journal of research communication, 2(11), 28-42. atlaw, t (2017). the effect of reserve requirement on ethiopian commercial banks’ performance: profitability and lending capacity. a thesis submitted to the school of graduate studies of st. mary university in partial fulfillments for the degree of masters in development economics. ayaydin, h & karakaya, a (2014). the effect of bank capital on profitability and risk in turkish banking. international journal of business and social science, 5(1), 252-271. azira, a. a, lee, e s & juhaida, a, b (2018). bank lending determinants: evidence from malaysia commercial banks. journal of banking and finance management, 1(3), 36-48. mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.researchgate.net/journal/1572-3089_journal_of_financial_stability american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 47 | p a g e banks for international settlement (2019). definition of capital in basel iii. fsi executive summaries, 2019. bawa, a. b, 1, akinniyi, k.o & njarendy p. i. (2018). cash reserve ratio, money supply and the profitability of deposit money banks in nigeria. international journal of financial management, 7(4), 9-18. bragg, s (2020). why shares are issued at a premium. https://www.accountingtools.com/articles/why-are-shares-issued-at-a-premium. bridges, j, gregory, d, nielsen, m, pezzini, s, radia, a & spaltro, m (2014). the impact of capital requirements on bank lending. the bank of england’s working paper series no. 486. central bank of malaysia statistical bulletin (2016). statutory reserve requirement. https://islamicbankers.files.wordpress.com/2013/12/20160126-statutory-reserverequirement. chen, j (2020). paid-up capital. https://www.investopedia.com/terms/p/paidupcapital.asp deléchat, c, henao, c muthoora, p & vtyurina, s (2014). the determinants of banks’ liquidity buffers in central america. ekwe m.c & inyiama o.i (2014). revenue reserves and financial performance in the brewery industry: evidence from nigeria. applied economics and finance 1(2), 117-131. fungáčov, z, nuutilainen, r & weill, l (2015). reserve requirements and the bank lending channel in china. thesis submitted to strasbourg business school, university of strasbourg for the award of ms.c degree in banking & finance. gambo, e. j (2017). determinants of non-performing loans in nigerias deposit money banks. achieves of business research, 5(10, 74-88. gemechu, a (2016). determinants of banks ‘profitability: evidence from banking industry in ethiopia. international journal of economics, commerce and amanagement, 4(2), 442-463. gambacorta, l & shin, h.s (2016). why bank capital matters for monetary policy. bis working papers no 558 presented to economic department of banks for international settlement. mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.accountingtools.com/articles/why-are-shares-issued-at-a-premium https://islamicbankers.files.wordpress.com/2013/12/20160126-statutory-reserve-requirement https://islamicbankers.files.wordpress.com/2013/12/20160126-statutory-reserve-requirement american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 48 | p a g e gambacorta, l & shin, h. s (2016). why bank capital matters for monetary policy. banks for international settlement (bis) working papers no 558 of 2016. harelimana, j. b & gasheja, f (2016). analysis of loan portfolio management for financial profitability and sustainability of umwalimu sacco in rwanda. british journal of economics, management & trade 15(4), 1-16. maccarthy, j (2016). the effect of cash reserve ratio (crr) on the financial performance of commercial bank and their engagement in crs in ghana. international journal of central banking, 8 (1): 27-37. marcus, a. j. (1984). deregulation and bank financial policy. journal of banking & finance, 8(4), 557-565. marshal, d (2020). what is a statutory reserve? https://www.wisegeek.com/what-is-a-statutoryreserve.htm# muli, d.m (2016). the relationship between core capital and financial performance of commercial banks in kenya. nickolas, s (2020). tier 1 capital vs. tier 2 capital: what's the difference? https://www.investopedia.com/ask/answers/043015/what-difference-between-tier-1-capitaland-tier-2-capital.asp odundo, o. g & orwaru, m.j (2018). bank size and financial stability of commercial banks in kenya: empirical evidence. journal of emerging issues in economics, finance and banking, 7(1), 2667-2671. oganda, j (2018). effect of cash reserves on performance of commercial banks in kenya: a comparative study between national bank and equity bank kenya limited. international journal of central banking, 8 (1): 65-76. rabab'ah, m (2015). factors affecting the bank credit: an empirical study on the jordanian commercial banks. international journal of economics & finance, 7(5), 82-94. reichartz, m (2020). what is tier 1 capital? definition, ratio & core capital. https://study.com/academy/lesson/what-is-tier-1-capital-definition-ratio-core-capital.html. mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.wisegeek.com/what-is-a-statutory https://www.investopedia.com/contributors/53895/ ttps://www.investopedia.com/ask/answers/043015/what-difference-between-tier-1-c ttps://study.com/academy/lesson/what-is-tier-1-capital-definition-ratio-core-c american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 49 | p a g e raja, k (2019). what exactly is meant by tier 1 and tier 2 capital? https://www.quora.com/whatexactly-is-meant-by-tier-1-and-tier-2-capital. sarath, d & pham, d. v (2015). the determinants of vietnamese bank's lending behavior. journal of economic studies, 42(5), 861-877. shires, q (2018). sources of funds in commercial banks. https://www.sapling.com/7498318/sourcesfunds-commercial-banks. surbhi s (2015). difference between loans and advances. ttps://keydifferences.com/differencebetween-loans-and-advances.html swamy, v. (2015), “modelling bank asset quality and profitability: an empirical assessment”. economics discussion papers, no 27, kiel institute for the world economy temesegen, a (2016). determinants of banks' lending behavior in ethiopia: pragmatic evidence from commercial banks. international journal of marketing and technology, 4(1), 78-88. timsina, n (2017). determinants of bank lending in nepal. working paper presented to research department, nepal rastra bank. udeh, s. n. (2015). impact of monetary policy instruments on profitability of commercial banks in nigeria: zenith bank experience. research journal of finance and accounting, 6(10), 190205. mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.quora.com/profile/karthik-raja-924 https://www.sapling.com/7498318/sources-funds-commercial-banks https://www.sapling.com/7498318/sources-funds-commercial-banks https://keydifferences.com/author/surbhi american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 91 | p a g e corporate governance mechanisms and firm performance of quoted manufacturing companies in nigeria ediae raymond ikponmwosa and eke robert ike phd, fca. department of accounting and finance, college of social and management sciences, wellspring university benin city, edo state. e-mail: ediae.raymond@gmail.com /robbyeke19@yahoo.com phone number: 08109002909, 08034712733 doi:https://doi.org/10.5281/zenodo.16367045 abstract: this research examined the connection between corporate governance practices and the performance of manufacturing companies listed in nigeria. the study specifically focused on the 46 manufacturing firms that were listed on the nigerian exchange group (ngx) as of december 31, 2023, and were chosen for the analysis due to the availability of complete financial information in their annual reports. the selection was conducted using a purposive sampling method, which involved intentionally choosing firms that possessed the necessary data to answer the research questions. data were collected from the audited annual reports of the selected firms over a seven-year timeframe, spanning from 2017 to 2023. a mix of descriptive, correlation, and diagnostic statistics was utilized to analyze the data, aiding in the understanding of trends and relationships among the variables. hypotheses formulated for the research were tested using panel regression analysis, with eviews 9.0 serving as the statistical tool. the results provided several significant insights showing that board size, board independence, board gender diversity all had a positive yet statistically insignificant effect on firm performance while audit committee was found to have a negative but statistically insignificant effect on performance, suggesting that the number of audit committee members does not significantly impact financial results. it suggested that board size should correspond to the company’s size, implying that boards should be neither too small nor excessively large but rather suitably structured to effectively oversee the company's operations. furthermore, it recommended that independent directors with expertise in management, finance, and accounting be involved in the preparation of financial statements to ensure accuracy and support better decisionmaking. keywords: corporate governance, board size, board independence, gender diversity, audit committee. mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:ediae.raymond@gmail.com mailto:robbyeke19@yahoo.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 92 | p a g e introduction the performance of companies has become a major area of interest for researchers, regulators, and policymakers globally because of its crucial role in economic growth, job creation, and sustainable development. as economies become increasingly integrated and competitive, the emphasis on firm performance has intensified, not only for investors and business owners but also for governments and other stakeholders who rely on companies to drive industrial and financial stability (abdullahi, 2016). in the nigerian context, the manufacturing sector occupies a strategic position as one of the core drivers of economic diversification and job creation initiatives, especially in the wake of the country's persistent dependence on oil revenues. a company’s performance typically reflects how efficiently it utilizes its financial, human, and material resources to achieve operational objectives, generate shareholder value, and remain competitive within its market (kajola, 2018). beyond profitability, firm performance has wider implications for national economic development, given its influence on employment rates, tax generation, and foreign investment inflows. consequently, stakeholders are increasingly concerned with identifying the factors that shape firm performance, particularly the role of corporate governance in safeguarding shareholder wealth, promoting ethical business practices, and minimizing financial scandals. in nigeria, corporate governance has taken on heightened importance due to recurring corporate failures and governance breakdowns in several high-profile companies. notably, cases such as the cadbury nigeria plc financial misstatement scandal in 2006, where the company was accused of inflating its financial position by over ₦13 billion, and more recently, corporate governance lapses reported at guinness nigeria plc in 2016 concerning material disclosure lapses and unauthorized financial practices, underscore persistent governance challenges in the nigerian manufacturing sector. these incidents revealed deep weaknesses in board oversight, financial reporting quality, and internal control systems — issues that significantly impair firm performance and investor confidence. the situation was further exacerbated by the covid-19 pandemic, which exposed structural vulnerabilities in the governance practices of many listed manufacturing firms. the pandemic’s economic disruptions tested the resilience of corporate boards and audit committees, especially regarding financial disclosures, operational continuity, and crisis management. many manufacturing companies in nigeria faced liquidity crises, operational shutdowns, and revenue losses, raising concerns about the effectiveness of governance structures in mitigating corporate risks during periods of macroeconomic shocks. in response, regulatory bodies like the financial reporting council of nigeria (frcn) and the corporate affairs commission (cac) intensified enforcement of the companies and allied matters act (cama 2020) and revised corporate governance codes to address these challenges. however, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 93 | p a g e compliance remains uneven, with many manufacturing firms struggling to fully align with governance provisions on board composition, gender diversity, and audit committee independence. consequently, there is growing academic and regulatory interest in examining how corporate governance mechanisms such as board size, board independence, board gender diversity, and audit committee structure influence firm performance in nigeria’s manufacturing sector. while several studies have examined these issues in global contexts, research focusing on nigeria, particularly in the post-pandemic economic climate and in light of recent regulatory reforms, remains limited. therefore, this study is both timely and significant. it investigates how corporate governance practices affect the financial performance of publicly listed manufacturing companies in nigeria. by exploring contemporary governance challenges, regulatory dynamics, and the unique contextual realities of the nigerian business environment, this study aims to offer insights that could strengthen corporate practices, enhance firm resilience, and restore stakeholder trust in the sector. many companies have started adopting corporate governance policies (hussain & safdar, 2018). however, in nigeria’s manufacturing sector, there have been ongoing challenges related to weak corporate governance. these include financial problems, company failures, and scandals (sotonye, lateef & ene, 2024), all of which have negatively affected investor confidence and caused economic instability. even though good corporate governance is known to improve company performance and protect stakeholders, many manufacturing firms listed on the nigerian exchange still struggle with governance-related issues. for instance, companies like dunlop nigeria plc and cadbury nigeria plc have experienced governance failures in the past (emmaculate, 2024). these cases highlight the need to study how corporate governance practices, such as the size of a company’s board and the independence of audit committees, affect the financial success of nigerian manufacturing firms (sotonye, lateef & ene, 2024). in addition, there has been a growing global conversation about increasing the number of women on company boards (rachana, 2017). studies suggest that having more female directors can lead to better supervision of company activities and improve profitability (zhang, 2020). female board members can also enhance a firm’s image and strengthen its relationship with stakeholders (saeed, mukarram & belghitar, 2021). conyon and he (2017) found that women contribute positively to company profits, while thrikawala (2016) showed that having female leadership in financial institutions in sri lanka and india boosted financial performance over time. much of the research linking board diversity to company performance comes from developed countries like the us and uk. in the us, female board representation rose from 3.7% in 1993 to 8.6% in 2003 (canyon & mallin, 1997, singh & vinnicombe, 2004). the uk has also seen a similar increase since 1999 (grosvold, brammer & rayton, 2007). despite these international developments, nigerian company boards are still mostly dominated by men, with little focus on the role of women in corporate governance research (ujunwa, okoyeuzu & mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 94 | p a g e nwakoby, 2012). while many studies have been carried out abroad, there is limited research within nigeria that covers all the relevant governance factors, especially in studies conducted up to 2023. this creates a gap in the literature. therefore, this study is timely and important. it seeks to fill this gap by exploring how corporate governance factors, such as board size, independence of audit committees, and gender diversity on the board, affect the financial performance of listed manufacturing firms in nigeria. 1.3 objectives of the study the general aim of this research is to explore how corporate governance practices influence the performance of publicly listed manufacturing firms in nigeria. specifically, the study seeks to: 1. determine whether the number of board members (board size) has any effect on how well these companies perform. 2. assess how having independent board members affects company performance. 3. explore the role of gender diversity on the board, particularly the presence of women, and how it influences company performance. 4. evaluate whether the size of the audit committee contributes positively or negatively to firm performance. 1.5 research question to guide this investigation, the study will address the following questions: 1. does the number of board members impact the performance of listed manufacturing companies in nigeria? 2. how does the presence of independent directors affect the performance of these companies? 3. what effect does having both male and female members on the board have on company performance? 4. does the size of a company's audit committee influence its financial or operational performance? 1.6 research hypotheses the following hypotheses will be tested, stated in their null form: h01: board size has no significant effect on the performance of listed manufacturing companies in nigeria. h02: board independence does not significantly affect the performance of listed manufacturing companies in nigeria. h03: board gender diversity has no meaningful influence on the performance of listed manufacturing companies in nigeria. h04: audit committee size does not significantly impact the performance of listed manufacturing companies in nigeria. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 95 | p a g e 2. literature review 2.1 conceptual review firm performance firm performance refers to how well an organization achieves its financial, operational, and strategic objectives. it is a core concept in corporate management and has remained a focal point for both academic inquiry and business practice for decades. the assessment of firm performance provides critical insights into the extent to which a firm meets its set objectives, particularly in terms of profitability, growth, market competitiveness, sustainability, and operational efficiency. kajola (2018) defines firm performance as the strategic utilization of a company’s financial and nonfinancial resources to achieve its corporate objectives. according to kajola, a company’s ability to sustain its operations and explore future growth opportunities is largely dependent on its financial performance. similarly, mirza and javed (2013) describe firm performance as an organization’s capacity to efficiently mobilize its available resources to achieve desired outcomes. firm performance is broadly categorized into two dimensions: financial performance and non-financial performance. financial performance refers to the quantifiable outcomes that reflect how effectively a firm manages its financial resources to generate profits and increase shareholder wealth. common financial performance indicators include return on assets (roa), return on equity (roe), return on investment (roi), net profit margin, and earnings per share (eps). non-financial performance, on the other hand, encompasses qualitative aspects such as customer satisfaction, employee retention, innovation capacity, and corporate social responsibility. corporate governance mechanisms corporate governance refers to the system of rules, practices, and processes through which companies are directed and controlled. it establishes a framework for setting and pursuing an organization’s objectives while ensuring accountability, transparency, and fairness in the company’s dealings with stakeholders such as shareholders, management, employees, customers, and the wider public. effective corporate governance promotes ethical business practices, protects the interests of shareholders, and strengthens investor confidence. it is widely regarded as essential for enhancing firm performance, improving access to capital markets, and maintaining overall financial system stability. ndum and oranefo (2021) emphasize the importance of corporate governance in ensuring accountability and transparency, particularly through the structure and operations of the board of directors. a well-composed, independent, and active board plays a decisive role in steering an organization toward achieving its corporate and social objectives. khan (2020) offers a broader understanding by describing corporate governance as encompassing the legal, institutional, and policy structures that determine how a company is controlled and managed. a mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 96 | p a g e well-functioning governance system creates the right incentives for management to maximize firm value while protecting the rights of minority investors and stakeholders. additionally, boshnak (2021) describes corporate governance as a set of interrelated mechanisms, legal, regulatory, and managerial, that guide corporate decision-making with fairness, openness, and efficiency. good corporate governance strengthens internal control systems, improves market access, enhances corporate reputation, and mitigates the risk of financial mismanagement and corporate collapse. a variety of governance mechanisms serve as indicators of effective corporate governance. these include, but are not limited to, board size, board independence, board gender diversity, and audit committee size, each of which plays a significant role in influencing how companies are directed and how their performance outcomes are shaped. within the nigerian context, corporate governance has been a subject of increasing academic and regulatory attention, particularly following corporate governance failures in firms such as cadbury nigeria plc and oceanic bank. studies in nigeria have typically examined corporate governance by focusing on variables such as board size, board independence, audit committee composition, and ownership structure, and how these mechanisms influence firm performance, financial reporting quality, and investor protection. board size board size refers to the total number of directors on a company's board, which plays a crucial role in determining the effectiveness of the board. according to nauman (2013), board size represents the combination of both executive and non-executive directors who constitute the board. agbim (2019) further clarifies that board size includes the total number of directors, including the chairman, on the board. a larger board size can attract a diverse range of skills and expertise, particularly in financial and managerial areas. ahmad (2021) states that the composition of a board includes the ceo, the chairman, corporate directors, outsider directors, and non-executive directors, all of whom work together during each financial year. hamdouni (2012) suggests that a larger board of directors may improve the effectiveness of the company’s board by assisting management in reducing agency costs, which arise from poor management and subsequently lead to better financial results. dalton, daily, ellstrand, and johnson (2009) argue that larger boards are more likely to foster increased diversity in terms of experience, skills, gender, and nationality. in contrast, smaller boards may not benefit from such diversity, which can limit the range of expert advice and opinions available board independence board independence refers to the proportion of independent or non-executive directors on a company's board. these directors are free from conflicts of interest and are not involved in the day-to-day management of the company. according to souther (2021), independent directors play a critical role in mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 97 | p a g e ensuring that a company's governance is free from undue influence by management. ahmad (2021) defines an independent board as one that includes a majority of directors who do not have any significant relationship with the company, aside from their roles as board members. independent directors are often referred to as external directors (ong & djajadikarta, 2017) because they are not involved in the company’s operations. the importance of independent directors has been recognized in corporate governance policies, with many codes emphasizing the need for a sufficient number of independent directors on the boards of listed companies in nigeria. al-ahdal, alsamhi, tabash, and farhan (2020) note that the characteristics of a board, including its independence, are crucial to a company’s performance. uribe-bohorquez, martínez-ferrero, and garcía-sánchez (2018) emphasize that board independence is one of the most effective governance factors. independent directors bring valuable external perspectives, knowledge, and skills that help in strategic decision-making. dalton et al. (2009) argue that independent directors are critical because they have access to external information and resources that internal directors may not. these directors may also provide specialist knowledge, key contacts in related industries, and valuable insights, which can ultimately improve the company’s financial performance. board gender diversity board gender diversity refers to the presence of female directors on a company's board. researchers have debated the impact of gender diversity on leadership behavior. differences between men and women in leadership roles are significant, as these differences can influence perceptions about whether women should hold leadership positions and advance to higher roles within organizations (eagly & johannesen-schmidt, 2001). gender diversity, alongside diversity in race, ethnicity, and viewpoints, can offer companies several advantages, such as introducing new ideas, enhancing problem-solving, improving strategic planning, and increasing accountability (arfken, bellar & helms, 2004). dutta and bose (2006) define gender diversity as the representation of females on a board. ekadah and mboya (2011) further note that board gender diversity is essential for corporate governance, particularly in enhancing transparency and promoting corporate confidence in reports. modern organizations increasingly recognize that gender diversity is integral to good corporate governance practices and effective organizational strategy. mohd, nurshamimi, and azizah (2013) found that gender diversity positively impacts firm performance, particularly in malaysian companies, where the small number of female directors on boards could be leveraged for improvement. carter, d'souza, simkins, and simpson (2010) examined the effects of ethnic and gender diversity on board committees, finding that gender diversity positively influenced firm performance through audit committees but not through executive compensation or director nomination committees. audit committee size the size and composition of the audit committee are important elements of corporate governance. every public company in nigeria is required by law to establish an audit committee. dare, efuntade, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 98 | p a g e alli-momoh, and efuntade (2021) define the audit committee as a sub-committee of the board responsible for overseeing the financial reporting process, selecting independent auditors, and reviewing both internal and external audit results. ahmed (2018) notes that the audit committee is formed from board members to ensure the independence of auditors. the audit committee is critical to improving the integrity of financial reporting and ensuring that companies comply with legal and regulatory requirements. ilaboya and iyafokhai (2014) assert that the audit committee’s role is fundamental in overseeing the accuracy of financial statements, the independence of external auditors, and the performance of the company’s internal audit functions. obiyo and lenee (2011) emphasize that the audit committee’s size is an essential element of corporate governance, as it contributes to firm performance by ensuring that management presents a true and fair view of the company’s financial position to shareholders. 2.2 theoretical review this study is anchored on agency theory. agency theory was first articulated by jensen and meckling in 1976 and it posits a relationship between two primary parties within a corporation: the principal (shareholders) and the agent (management). in this framework, the principal entrusts decision-making authority to the agent, who is expected to prioritize the principal’s interests. however, due to the separation of ownership and control, the agent may act in self-interest, leading to potential conflicts with shareholders’ goals, commonly referred to as the agency problem. jensen and meckling explain that the principal-agent dynamic is pivotal to corporate governance. shareholders, as the principals, are the true owners but depend on management to effectively manage the company. according to agency theory, managers may sometimes place their own interests above those of shareholders, particularly when facing information asymmetry, where managers possess more knowledge than the owners. a critical aspect of corporate governance, as outlined by agency theory, is developing mechanisms that align the interests of agents with those of principals. this is especially pertinent in sectors like banking, where protecting shareholder interests from managerial actions becomes a primary goal of governance. therefore, agency theory provides insight into how specific governance practices can enhance firm performance by mitigating conflicts between principals and agents. 2.3 review of empirical studies corporate governance mechanisms play a critical role in ensuring that organizations are effectively managed and achieve their financial goals. over the years, numerous research studies have investigated the relationship between governance practices and firm performance, providing valuable insights into how various governance frameworks impact organizations' financial results. this section reviews several empirical studies conducted in different countries to explore the dynamics between corporate governance and firm performance. . eke and sado (2022) examined the relationship between corporate governance attributes and agency cost in nigerian banking sector. the study utilized data from 12 banks gotten from their published mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 99 | p a g e financial statement for period of 5 years. pannel technique was applied in the regression analysis used to establish the variables. the findings revealed that board size, chief executive officer dominance have positive impact on agency cost in nigeria while board independence, and block ownership have a negative have a negative impact on agency cost in nigeria. the study recommends regulators must take action to ensure the integrity of corporate governance code in in terms of implementation and compliance of firms. adekunle and aghedo (2014) explored the connection between corporate governance and financial performance in nigeria. their research assessed various corporate governance factors and their effects on firm performance, using return on assets (roa) and profit margin (pm) as measures. they employed ordinary least squares (ols) regression for their analysis. the study found a positive relationship between board composition and size and firm performance. however, while the ceo's status also correlated positively with performance, it lacked statistical significance at the 5% level. additionally, the impact of ownership concentration yielded mixed results, appearing to have a negative relationship with performance. ali, omar, and subba (2014) performed a comparative analysis to examine the influence of corporate governance mechanisms on the performance of firms listed in jordan and australia from 2005 to 2011. they utilized a balanced panel consisting of 70 jordanian and 206 australian companies, applying various statistical methods, including ols, fixed effects panel regression (fe), and the generalized method of moments (gmm). their results indicated that corporate governance mechanisms, like board size, board independence, and frequency of board meetings, affected firm performance differently in the two nations. importantly, insider and government ownership positively influenced tobin’s q in both countries; however, they negatively impacted roa and roic in jordan. this highlights the intricate and context-specific relationship between governance frameworks and firm performance. nwonyuku (2016) examined the connection between corporate governance and the profitability of listed food and beverage companies in nigeria. the research utilized both descriptive and inferential statistics, employing an ordinary least squares multiple regression approach in a panel data context. the findings showed a positive correlation between board size and return on equity (roe) as well as net assets per share (nas). conversely, board composition was negatively associated with roe but positively linked to nas. additionally, board skills and competencies had a negative impact on both roe and nas, whereas board gender diversity positively influenced these performance indicators. roy (2016) investigated corporate governance and firm performance in india, analyzing a sample of 58 leading indian companies over the period from 2007 to 2011. the research looked at 37 structural indicators of corporate governance along with several control variables. the results indicated that firm performance, measured by return on assets (roa), was notably influenced by seven corporate governance factors, and eight factors influenced market-to-book value (mtbv). this study mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 100 | p a g e underscores the significance of comprehensive governance frameworks in improving firm performance. waganal and nzulwa (2016) studied the effects of corporate governance on firm performance in india, focusing on 20 key industries within the indian manufacturing sector from 2001 to 2010. their research discovered that larger boards contributed to enhanced decision-making and better overall firm performance. however, board size did not show a significant relationship with return on equity (roe) and profitability. various statistical methods, including the system generalized method of moments (gmm), were employed to address endogeneity and simultaneity bias. shalini and mutiyla (2017) examined corporate governance and firm financial performance in emerging markets, using data from selected listed indian companies. their findings revealed that corporate governance practices in india were on par with global standards. the research demonstrated a positive correlation between governance disclosures and firm performance, as measured by tobin’s q, highlighting the importance of transparency and disclosure in boosting firm performance. borlea, achim, and mare (2017) investigated the relationship between board characteristics and firm performance in romania. they focused on aspects such as board member equilibrium, independence, training, and remuneration policies. nonetheless, the study found no statistically significant correlation between board attributes and financial performance, as measured by return on assets (roa) and tobin’s q. this implies that while these factors are critical for effective governance, they might not always lead to improved financial performance, particularly in transition economies. ibe, ugwuanyi, and okanya (2017) analyzed the effect of corporate governance on the financial performance of insurance companies in nigeria. the research included data from 20 insurance companies between 2011 and 2015. the results indicated that while the size of the board and the remuneration of non-executive directors negatively impacted financial performance, board independence and institutional ownership positively influenced it, aligning with the predictions of agency theory regarding governance structures. lee-kuen, sok-gee, and zainudin (2017) explored the connection between gender diversity and financial performance in firms listed on bursa malaysia from 2009 to 2013. their research revealed that gender diversity within the boardroom had a beneficial effect on firm performance, especially within the context of malaysia's corporate governance framework. 2.4 review gap though earlier studies have provided valuable findings, they frequently overlook the combined effects of governance variables—such as board size, board independence, gender diversity within the board, and audit committee size—on the performance of firms in the nigerian environment. furthermore, most available research concerning corporate governance in nigeria is dated, with few studies analyzing data up to 2023. this temporal gap emphasizes the necessity for more current research. consequently, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 101 | p a g e this study aims to bridge this knowledge deficit by exploring these variables and their influence on firm performance within the nigerian manufacturing industry. 3. methodology the study utilizes an ex-post facto research design, a method that examines the relationship between variables after events have taken place, utilizing data collected over a specific timeframe. ex-post facto research is typically used for analyzing historical data and determining how various factors impact results over time. in this instance, the longitudinal aspect of the research, covering a seven-year time frame from 2017 to 2023, makes this design suitable. the population for this research consists of all manufacturing companies listed on the nigerian exchange group (ngx) as of december 31, 2023. this study specifically targets the 52 manufacturing firms that are active and meet the inclusion criteria, providing a robust foundation for analysis. the sample for the study comprises 46 manufacturing firms that possess complete and accessible financial data for the year 2023. these firms were selected using a purposive sampling technique, which involves choosing participants based on certain criteria that align with the research goals. data was gathered through content analysis of the financial reports from the sampled companies. this method involves systematically reviewing and interpreting the financial statements to extract pertinent information regarding corporate governance mechanisms and firm performance. content analysis is suitable for examining secondary data, such as financial reports, as it enables a detailed and structured evaluation of the data to identify trends and patterns. the study employs panel least squares regression (pls) for data analysis. panel data regression is particularly applicable for this research because it facilitates the analysis of data that incorporates both time-series and cross-sectional elements, allowing it to track changes over time and across different entities (in this case, firms). 3.1 model specification the specific model for this study includes variables such as board size, board independence, audit committee characteristics, and firm performance metrics (e.g., return on assets, return on equity). the model will be specified with the aim of measuring how these governance factors influence the financial outcomes of firms listed on the ngx.this is given as follows: roait = β0 + β1bsizeit + β2 bind it + β3bogdit + β4 aucs it + uit where; roa = return on asset bsiz = board size bind = board independence bogd = board gender diversity aucs = audit committee size mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 102 | p a g e β1 β4 are parameters to be estimated u = error term t = time i = represents cross-sectional our a priori expectations are as follow: β1>0, β2>0, β3>0 and β4>0 which means table 3.1: operationalisation of variables s/ n variabl es definition type of variable measureme nt used by aprior i sign. 1 roa return on asset dependent return on asset is measured as net income to total asset ratio. boshnak (2021), tran and nguyen (2019). + 2 bsiz board size independe nt board size is measured as the number of members on the board of directors. bhattrai (2017) + 3 bind board independenc e independe nt board independence is measured as the percentage of independent members on the board of directors. handriani and robiyanto (2019). + mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 103 | p a g e 4 bogd board gender diversity. independe nt board gender diversity in percentage is computed as the ratio of female director to total board size. streefland (2016). + 5 aucs audit committee size. independe nt audit committee size is measured as the number of audit committee directors. boshnak, (2021). + source: researcher’s compilation (2025). 4. data presentation and analyses 4.1 analysis and interpretation table 4.1: correlation coefficients roa bsiz bind bogd aucs roa 1.000000 bsiz 0.174336 1.000000 bind 0.033584 0.159570 1.000000 bogd 0.122016 0.162456 0.135701 1.000000 aucs 0.074160 0.448985 0.148895 0.074059 1.000000 source: researcher’s computation 2024 (e-view 9.0) (see appendix section for detailed results) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 104 | p a g e table 4.1 presents the correlation coefficients between return on assets (roa) as the dependent variable and independent variables, which comprise board size, board independence, board gender diversity, and audit committee size. all correlation values are positive, with the following coefficients: 0.174336 for board size, 0.033584 for board independence, 0.122016 for board gender diversity, and 0.074160 for audit committee size. these coefficients are relatively low, indicating a weak relationship between these factors and roa. this weak correlation implies that there is no multicollinearity issue in the regression model. multicollinearity occurs when independent variables are significantly correlated with each other, which can distort regression analysis results. to further validate the absence of multicollinearity, the study assessed the variance inflation factor (vif). the vif values for the variables were low, with board size at 1.851665, board independence at 1.700630, board gender diversity at 1.296157, and audit committee size at 1.224726. these vif values are far below the threshold for indicating multicollinearity, confirming that the independent variables are not highly correlated with one another. the correlation findings indicate that, although there are positive associations between roa and corporate governance mechanisms (board size, board independence, board gender diversity, and audit committee size), the strength of these relationships is quite limited. this suggests that these governance factors have a marginal direct effect on firm performance as represented by roa. the weak correlation among these variables may indicate the presence of other factors impacting firm performance that are not included in this model. the confirmation of no multicollinearity is a crucial element of this analysis. multicollinearity complicates the determination of each independent variable's individual effect on the dependent variable by distorting the estimated relationships. the vif results provide reassurance since the values fall within a range indicating that the independent variables are not overly correlated with each other. generally, a vif value exceeding 10 would indicate multicollinearity concerns, so the relatively low vif values reveal that each corporate governance mechanism contributes independently to the model without interference from the other variables. by confirming the lack of multicollinearity, the study enhances the reliability of the regression findings. it shows that the results regarding the relationship between corporate governance mechanisms and roa are solid and not affected by statistical issues like multicollinearity. this assurance is vital for establishing valid conclusions from the data and further supports the idea that corporate governance mechanisms influence firm performance, even if their effect is not consistently strong or direct. diagnostic tests; all the diagnostic tests carried out did not show negative result while the hausman tests favored fixed effect regression. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 105 | p a g e table 4.2: panel least square regression: dependent variable = return on asset (roa) variables fixed effects random effects coefficients t-statistic (pv) coefficients t-statistic (pv) constant 26.11149 1.911686 (0.0570) -4.748144 -0.520080 (0.6034) bsiz 26.11149 -0.951659 (0.3421) 0.898999 -0.520080 (0.0651) bind 0.114755 3.061780 (0.0000) *** 0.222622 0.382257 (0.0089) *** mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 106 | p a g e bogd 0.150342 2.233771 (0.0263) *** 0.055888 0.578776 (0.0163) *** aucs 1.661334 -1.009165 (0.3138) -0.275451 -0.211351 (0.8327) r-square 0.567259 0.412700 adjusted r-square 0.382464 0.300242 standard error of regression 17.93806 18.24200 f-statistic (pv) 2.462105 (0.000002) *** 2.019452 (0.00340) durbin-watson 1.888661 1.574687 hausman test (pv) 14.833454 (0.0051) source: researchers computation (eviews 9.0) 2024. table 4.2 displays the outcomes from both the fixed effects model and the random effects model panel least squares regression, interpreted as follows: fixed effect model: the r-squared (r²) value of 0.567259 for the fixed effect model suggests that approximately 56% of the fluctuations in the dependent variable (return on assets or roa) can be accounted for by the independent variables, which consist of corporate governance mechanisms (board size, board independence, board gender diversity, and audit committee size). the remaining 44% of the variations are not explained by these factors and are captured instead by the error term. after adjusting for degrees of freedom, the adjusted r² value decreases to 0.382464, implying that about 38% of the changes in roa are elucidated by the corporate governance mechanisms. the f-statistic of 2.462105, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 107 | p a g e with a significance level of 0.000002, indicates that the overall model is statistically significant, denoting a linear relationship between roa and corporate governance mechanisms. the durbinwatson statistic, which is 1.888661, reveals that there is no concern regarding serial correlation in the findings. among the corporate governance variables, board independence and board gender diversity were shown to be statistically significant at the 5% level, while board size and audit committee size were not significant. random effect model: in the random effect model, the r-squared value is 0.412700, suggesting that roughly 41% of the variations in roa can be attributed to the corporate governance mechanisms. after adjusting for degrees of freedom, the adjusted r² value is 0.300242, indicating that about 30% of the variations in roa are explained by the independent variables, while the other 70% is captured by the error term. the f-statistic of 2.019452, with a significance level of 0.00340, signifies a substantial linear relationship between the dependent and independent variables. the durbin-watson value of 1.574687 indicates no issues with autocorrelation in the findings. these results imply that the random effect model is also suitable for making predictions. the results are now ready for hypothesis evaluation. 4.2 test of hypotheses this section evaluates the hypotheses formulated in chapter one. the rule for accepting or rejecting the hypothesis is established as follows: if the calculated probability value (pv) exceeds the critical probability value (at a 5% significance level), the hypothesis is accepted. otherwise, it is rejected. test of hypotheses one h01: board size does not have a significant impact on the performance of manufacturing companies listed in nigeria. the regression results indicate a coefficient of 26.11149, a t-value of -0.951659, and a probability value of 0.3421 (which is greater than 0.05). this indicates that board size does not significantly influence firm performance. according to the decision rule, the hypothesis is not rejected, indicating that board size does not significantly affect the performance of listed manufacturing companies in nigeria. test of hypothesis two h02: board independence has no significant effect on the performance of manufacturing companies listed in nigeria. the results from the regression analysis reveal a coefficient of 0.114755, a t-value of 3.06178, and a probability value of 0.0000 (which is less than 0.05). this implies that board independence significantly affects firm performance. therefore, following the decision rule, the hypothesis is rejected, suggesting that board independence significantly impacts the performance of listed manufacturing companies in nigeria. test of hypothesis three h03: board gender diversity does not significantly influence the performance of manufacturing companies listed in nigeria. the regression results present a coefficient of 0.150342, a t-value of 2.233771, and a probability value of 0.0263 (which is less than 0.05). this indicates that board gender mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 108 | p a g e diversity has a statistically significant effect on firm performance. consequently, the hypothesis is rejected, implying that board gender diversity indeed has a significant influence on the performance of listed manufacturing companies in nigeria. test of hypothesis four h04: audit committee size has no significant impact on the performance of manufacturing companies listed in nigeria. the regression results provide a coefficient of 1.661334, a t-value of -1.009165, and a probability value of 0.3138 (greater than 0.05). this suggests that audit committee size does not significantly influence firm performance. therefore, following the decision rule, the hypothesis is not rejected, indicating that audit committee size does not have a significant impact on the performance of manufacturing companies listed in nigeria. 4.3 results and discussion of findings the analysis encompasses outcomes from descriptive statistics, correlation analysis, panel least squares regression, and hypothesis testing. the following discusses the results: board size: in table 4.2, the coefficient for board size is positive at 26.11149, suggesting that increasing board size may result in a 26% enhancement in firm performance, as indicated by return on assets (roa). nevertheless, the hypothesis test revealed that board size does not significantly affect firm performance in nigeria's listed manufacturing firms. this outcome is consistent with the research by oladipupo and adeleye (2024), which found that board size has a minimal impact on firm performance within the nigerian manufacturing sector. board independence: the regression analysis presented in table 4.2 indicates a positive coefficient of 0.114755 for board independence. this implies that enhancing board independence could yield a slight improvement in firm performance, which contradicts initial assumptions. however, the hypothesis test demonstrates that board independence does not significantly influence firm performance. this result aligns with the findings of hassan, nathan, and joshua (2024), which also reported that board independence had an insignificant effect on the financial performance of manufacturing firms in nigeria. board gender diversity: the regression findings regarding board gender diversity show a coefficient of 0.150342, indicating that an increase in gender diversity could enhance firm performance by approximately 10%. the hypothesis test indicates that board gender diversity significantly positively impacts firm performance. this suggests that the presence of female board members can enhance firm performance, representing a key factor in the nigerian manufacturing sector. this conclusion is supported by the research of hassan, nathan, and joshua (2024), which also established that gender diversity positively influenced financial performance in nigerian enterprises. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 109 | p a g e audit committee size: the analysis reveals that the size of the audit committee does not significantly affect firm performance, indicating that it is not a vital element for improving performance in listed manufacturing firms in nigeria. this finding is corroborated by the study conducted by abu (2024), which concluded that audit committee size did not significantly affect the financial performance of industrial goods firms in nigeria. these results add to the ongoing discussion regarding corporate governance and its impact on firm performance, particularly concerning listed manufacturing companies in nigeria. 5.1 summary of findings this research aimed to investigate how various corporate governance mechanisms affect the performance of publicly listed manufacturing companies in nigeria. four primary governance factors were examined: board size, board independence, gender diversity on the board, and audit committee size. the findings are summarized and discussed below: board size the research indicated that the size of the board has a positive but insignificant impact on company performance. this implies that while a larger board may marginally enhance performance, the effect is not strong enough to be deemed meaningful or statistically relevant. this suggests that merely increasing the number of directors does not guarantee better decision-making or improved financial results for manufacturing firms in nigeria. it is possible that beyond a certain threshold, adding more directors may lead to delayed decision-making or conflicting viewpoints that negate any potential advantages. board independence the findings revealed that board independence has a positive and statistically significant effect on company performance. this suggests that a higher number of independent directors (i.e., directors not involved in day-to-day management) correlates with better company outcomes. independent directors can provide objective oversight and help ensure management accountability, thereby enhancing transparency. this aligns with the principles of effective corporate governance and indicates that companies gain from having external individuals who represent the interests of shareholders. board gender diversity the analysis showed that gender diversity on the board significantly positively affects company performance. in essence, firms that have a higher representation of women on their boards tend to perform better. this underscores the importance of diverse perspectives among leadership. women contribute different experiences, risk appetites, and decision-making styles, which enrich discussions and lead to more balanced governance. furthermore, it positively influences a company’s reputation and culture, potentially building greater stakeholder confidence. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 110 | p a g e audit committee size the results indicated that the size of the audit committee has a negative and insignificant effect on company performance. thus, increasing audit committee membership does not improve performance—and may slightly detract from it, though not to a significant degree. larger audit committees may result in inefficiency, overlap, or distraction. what appears to be more critical than size is the proficiency and independence of the audit committee members. the findings suggest that simply enlarging the committee does not necessarily enhance financial supervision or firm value in this context. 5.2 conclusion this research examined how corporate governance structures influence the performance of publicly listed manufacturing firms in nigeria. in the current competitive and regulated business landscape, performance has become a vital measure of how effectively a company utilizes its financial resources to achieve its goals and meet stakeholder expectations. corporate governance plays a crucial role in this context by establishing frameworks to oversee and direct management decisions. effective governance helps alleviate agency problems by aligning the interests of managers (agents) with those of shareholders (principals). it promotes transparency, accountability, and strategic oversight, all of which are essential for long-term success. the governance mechanisms analyzed in this study—board size, board independence, gender diversity, and audit committee size—were chosen due to their potential effects on the quality of oversight and strategic guidance. using secondary data analyzed with statistical software (eviews 9), the study employed both descriptive and inferential methods (including correlation and regression analysis). the results yield important insights: 1. board size does not significantly impact performance, indicating that larger boards may not necessarily be advantageous. 2. board independence enhances firm performance, emphasizing the value of external oversight. 3. gender diversity positively influences performance, reinforcing the need for inclusive leadership. 4. audit committee size shows little to no positive impact, suggesting that efficiency should take precedence over size. in conclusion, the study finds that corporate governance mechanisms—particularly board independence and gender diversity—are significant factors driving firm performance in nigeria. 5.3 recommendations based on the study's findings and conclusions, the following actionable recommendations are provided for policymakers, corporate boards, investors, and regulators: 1. the research indicates that the size of a company’s board should correspond to the company’s scale and specific needs. a smaller firm might only require a few members for effective decision-making, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 111 | p a g e whereas a larger organization may need more directors to encompass various interests and provide extensive oversight. however, excessively large boards can lead to delays or conflicts in decisionmaking. 2. independent board members with expertise in management, finance, or accounting, who are not involved in daily operations, should take an active role in financial decisions and oversight. these individuals offer objective insights and can help mitigate fraud or mismanagement. their knowledge can steer companies toward improved financial results and bolster shareholder trust. 3. the presence of women on corporate boards should not only be promoted but also institutionalized. following nigeria’s corporate governance code, a minimum of 30% of board positions should be held by women. boards with gender diversity have been proven to enhance company performance, present varied perspectives, and elevate decision-making quality. supporting female involvement also fosters equality and aligns with worldwide inclusivity standards. 4. companies must judiciously assess the size of their audit committees and ensure adherence to legal stipulations, such as those outlined in corporate governance guidelines. committees that are either too large or too small may compromise their effectiveness. it is vital not just to fulfill statutory obligations but also to 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(2016). analysis of board size and firm performance: evidence from nse companies using panel data approach. indian journal of corporate governance, 9(2), 148–172. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 115 | p a g e khan, a., nemati, a. r., & iftikhar, m. (2011). impact of corporate governance on firm performance: evidence from the tobacco industry of pakistan. international research journal of finance and economics, 61, 7–14. kyere, m., & ausloos, m. 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(2019). corporate governance and firm performance in sub-saharan africa: evidence from nigeria. journal of economics and business research, 25(1), 7–22. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 116 | p a g e onakoya, a. b., ofoegbu, d. i., & fasanya, i. o. (2012). corporate governance and bank performance: a pooled study of selected banks in nigeria. european scientific journal, 8(28), 155–164. onakoya, a. b., fasanya, i. o., & ofoegbu, d. i. (2014). corporate governance and bank performance: a study of listed banks in nigeria. european journal of business and management, 6(18), 15– 23. oyerinde, d. t. (2014). corporate governance and performance of banks in nigeria. global journal of contemporary research in accounting, auditing and business ethics, 1(2), 272–288. uadiale, o. m. (2010). the impact of board structure on corporate financial performance in nigeria. international journal of business and management, 5(10), 155–166. ujunwa, a. (2012). board characteristics and the financial performance of nigerian quoted firms. corporate governance: the international journal of business in society, 12(5), 656–674. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 22 | p a g e public expenditure and human development index in nigeria gina oghogho olufemi1 jude inanafe adamu2 and elijah omorowa3 department of accounting, wellspring university, benin city, nigeria email: atugina18@gmail.com; inanafe2001@yahoo.com; elijahomorowa@gmail.com doi: https://doi.org/10.5281/zenodo.15625312 abstract: this study determined the effect of government expenditure on human capital index, using government spending on education and health care as the independent variables spanning from 1999 to 2023. the descriptive statistics was used to analyze the data, and multiple regression analysis was employed to test the hypotheses. from the results, the study found that government spending on education has a significant effect on human capital index in nigeria, while the government spending on health has no significant effect on human capital index in nigeria. the f-statistic of the regression is equal to 193.730 and the associated f-statistical probability is equal to 0.00000, implies that government spending has statistically significant effect on human capital index in nigeria. based on the results, the study recommended among others that government of nigeria needs to readdress resources to productive sectors that directly contribute to human capital, such as infrastructure education or healthcare and implement reforms to restructure government processes and reduce bureaucratic overhead. keywords: government spending, education, health care and human capital index introduction public spending policies aim for steady and fair economic growth. rapid economic growth is crucial for developing countries like nigeria to achieve sustainable development, and the government takes an expanded and substantial role in promoting this growth. the challenge of raising living standards for a growing population becomes much more pressing in emerging nations without this kind of growth (odo, eze & onyeisi, 2016). enhancements to healthcare, education, and infrastructure, as well as efforts to attract investment from inside and beyond the country, are the usual culprits for economic expansion (saad & kalakech, 2015). over time, public spending has played a crucial role in influencing both human and physical capital. when factors like a lack of infrastructure or trained workers prevent a country's economy from https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:atugina18@gmail.com mailto:inanafe2001@yahoo.com mailto:elijahomorowa@gmail.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 23 | p a g e reaching its full potential, strategic public expenditure can help alleviate these problems and spur development, although temporarily. investing heavily in human capital is essential for achieving considerable economic growth (adebayo & babajide, 2024). the "asian tigers" (taiwan and singapore) are a good example of a country that has seen fast economic growth thanks to its strong investment in human capital (jaiyeoba, 2021). spending on human capital is essential for a country's economic progress in today's knowledgeand skill-based global economy (uduh & azu, 2017). the conspicuous pursuance of human capital development is no longer confined to the agendas of developing countries struggling to overcome the legacies of economic history, including the consequences of arbitrarily imposed dependence on traditional natural resources as a precursor to sustainable development. it is now a challenge for the growing cosmopolitanism of developed countries (agu, inyiama & ubesie, 2024). in a rather candid approach, international commitment has reinforced the roles of human capital development in form of the human capital project, which is a methodological framework, designed to strengthen and accelerate effective policies and strategy towards expanding human capital investment (world bank, 2018). as noted in the world development report (wdr) (2019) titled “the changing nature of work”, the frontier for skills is moving rapidly, bringing both opportunities and risks. mounting evidence abound signaling that without strengthening human capital, countries cannot sustain economic growth, will not have a workforce prepared for the more highly skilled jobs of the future, and will not compete effectively in the global economy. the cost of inaction on human capital development is increasing in the “knowledge economy” which is the new normal. human capital developments especially for developing countries are spearheaded by the government. this consolidates the need to investigate how expenditures of the government are channeled towards this. health expenditure, public (percent of government expenditure) in nigeria was reported at 131 percent in 2014 while the government expenditure in tertiary institutions counterpart as percent of gdp (percent) in nigeria was reported at 0.50335 percent in 2003 (world bank, 2020). the percentage of government allocation to education steadily declined from 7.14 percent in 2018 to 7.11 percent in 2019 and 6.48 percent in 2020 while aggregate expenditure on health was less than five percent (budgit, 2020). this is a far cry from the unesco recommended minimum benchmark which is 26% budgetary allocation to education while who recommended at least 15% allocation to health. so long as investment in human development remains scars, sustainable economic development will remain illusionary in nigeria. people are the most promising and valuable resource for increasing productivity and the economy, at least in theory. invented by humans, tools and technology are useless unless people actually utilize https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 24 | p a g e them. so, originality and imagination are the keys to a fruitful endeavor. in recent theories of economic growth, human capital spending has been given a lot of attention (romer, 1986; lucas, 1988). their research demonstrates that, even after controlling for all inputs, economic production per unit of input may increase with time. contributing significantly to this ongoing expansion are advances in human capital and an ever-expanding body of knowledge. the growth of people as assets in their own right, both creatively and productively, is central to lucas's notion of human capital investment (harbison, 1962). individuals' capacities to create economic value are enhanced by their human capital, which includes their knowledge, traits, skills, and creativity (adelakun & joseph, 2021). supporting human capital development, investments in healthcare and education are crucial. economic growth is driven by education, which enhances total production and makes individuals more adept. it also encourages new information, innovations, and skills (adebayo & babajide, 2024). investment in education pays dividends in the form of increased money, new technologies, and improved living standards. contrarily, health supports overall wellness, which in turn leads to a competent workforce and, by the acquisition of new skills and knowledge, advances human capital development. oluwakemi (2018) asserts that public expenditure on healthcare, schools, social services, farms, and research greatly quickens the growth of human capital in nigeria, and that more public spending only makes this acceleration stronger. prior studies has been such as, agu, inyiama and ubesie (2024) examined the effect of government expenditure on human capital index in nigeria, using government expenditure on administration, economic services, and social community services were the independent variables of the study 2001 and 2021. ijoko (2023) analyzed the impact of public expenditure on health services delivery in the federal capital territory (fct). yahya, okwonkwo & bassey (2023) looked at how public spending on education, human capital development, and gdp growth were related in nigeria from 1981 to 2020. onazi (2022) evaluated the effect of government expenditure on health and education on human capital development in nigeria from 1986 to 2018. there is a limited study on the effect of government expenditure on education and health on human capital index in nigeria up to 2023. this study therefore sought to determine the effect of government expenditure on human capital index. the specific objectives are to: 1. ascertain the effect of government spending on education on human capital index. 2. determine the effect of government spending on health care on human capital index. literature review government spending https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 25 | p a g e government expenditures are the costs that are usually sustained by the government for the provision and maintenance of itself as an institution, the economy and society. government expenditures usually tend to increase with time as the economy becomes large and more developed or as a result of increase in its scope of activities. ogboru (2010) recognized recurrent and capital budget as one of the major types of budgets in an economy. it is sometimes referred to as revenue budget and it covers recurrent items or expenditure. the capital budget has to do with expenditures necessary to procure capital assets. taiwo (2012) reported that government’s spending is a fiscal instrument which serves a useful role in the process of controlling inflation, unemployment, depression, balance of payment equilibrium and foreign exchange rate stability. in the period of depression and unemployment, government spending causes aggregate demand to rise and manufacture and supply of goods and services follow the same direction. internationally, government expenditure has been a source of interest to both scholars and macroeconomic policymakers due to its effects on the level of growth in an economy. the nigerian public expenditure structure can be segmented into recurrent expenditure and capital expenditure. the components of the recurrent expenditure include expenditure on administration. (interest on loans and maintenance, salaries and wages) while capital expenditure captures government projects on the generation of the electricity, education, telecommunication, airports, roads, and so on (andinyanga & anietie, 2023). the provision of public infrastructural facilities has been one of the fundamental bases for public spending. providing and maintaining these infrastructural amenities cost a huge amount financing. hence, investment on infrastructures and productive activities spending is expected to positively contribute to the growth of the economy whereas spending on consumption by the government retard growth (fasewa & aderinto, 2023). odior (2011) reported that government capital expenditures are funds used to develop buildings, machinery, equipment, educational and healthcare facilities, etc. additionally, it covers the costs incurred by the government to make investments that will yield dividends in the future and to acquire fixed assets. spending on development or investment has benefits that last for years in the future, and these expenditures are referred to as capital spending (okang et’al 2020). purchasing fixed and intangible assets, improving an existing asset, fixing an existing asset, and loan repayment are all considered capital expenditures. repaying a debt is a capital expenditure because it reduces obligation in addition to creating assets. the long-term character of capital investment, which results in the formation of assets, enables the economy to generate income for many years by expanding or upgrading manufacturing facilities and increasing operational effectiveness. additionally, it raises labor force participation, assesses the state of the economy, and increases the economy's potential for https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 26 | p a g e future growth. government spending continues to be a crucial tool in the development process. at all stages of growth and development, it is crucial to the operation of any economy. today, the majority of industrialized and emerging nations employ public spending to alter the composition of national income, improve income distribution, and steer resource allocation in desirable directions (vtyurina, 2020; world bank, 2008).in various emerging nations, the variety in government spending patterns is anticipated to not only ensure stabilization but also to spur economic growth and increase employment possibilities (world bank, 2015). spending on education the literature on economic growth focuses heavily on education because of its long-standing reputation as a crucial investment in human capital. some have suggested that schooling can affect development in several ways. for instance, hanushek and woessmann (2008) documented that education has many positive effects on a nation, including improving the efficiency of its workforce, decreasing inequality, improving health, decreasing fertility rates, fostering good governance, and increasing a nation's potential for knowledge and creativity. investing heavily in education is a smart move since it builds human capital. even though students in nigeria pay exorbitant tuition, especially at the university level, some claim that the government's education budget has never been enough. for example, state expenditure on education, which accounted for 18.2% of total government expenditure in 1962 and 3.6% of gdp in 1962, had dropped to 14.2% of total government expenditure in 1998 from 18.2% of gdp in 1962 (hinchliffe, 2002). even though the national budget increased significantly from 2010 to 2014, education budget allocations decreased even more from 2015 to 2018, falling to 7.05% (ndujihe, 2018). according to the efa worldwide monitoring report for 2000-2015 (adedigba, 2017), education should get 15-20% of a country's budget, however in 2018, nigeria's largest national budget of n8.612 trillion only allotted n605.8 billion, or roughly 7.03%, to the sector. expenditure on education by the public sector, including both private and public schools, is an important measure of a nation's commitment to human capital development (world bank, 2018). capital expenditures include investments in instructional technology, infrastructure, and building expansion, whereas recurrent expenses include things like teacher salaries and facility maintenance. when a government prioritizes investing in its citizens' education, it shows that it values human capital development. the importance of education as a catalyst for societal prosperity, technological advancement, and economic growth is emphasized. investing more in public schools shows that we value education and want to make sure everyone has access to a good one, which helps build a better workforce (hanushek & woessmann, 2012). https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 27 | p a g e spending on public schools in nigeria provides important insight into the government's strategy for human capital development. allotments to educational institutions and projects constitute a substantial portion of this expenditure. to better understand nigeria's initiatives to cultivate a competent labor force, it is instructive to examine the patterns in the country's public education expenditure during the past several years. nigeria has been facing budgetary challenges as of late, making it difficult to meet the demand for high-quality education. funding for public schools has changed throughout time, influenced by budget cuts and other government priorities as it tries to meet the sector's most pressing demands (world bank, 2022). spending on health government budgets, foreign loans and grants, money from required health insurance systems, contributions from worldwide organizations and ngos, and both ongoing and one-time capital expenditures make up public health expenditure (who, 2010). economic expansion has often been sparked by notable strides in public health, illness management, and better nutrition. the national planning commission of nigeria outlined their goals for health reform in the national economic empowerment and development strategy (needs) (npc, 2004). in order to attain poverty reduction levels that are considered acceptable globally, this health reform aims to enhance the health status of nigerians. aranda (2010) reported that investments in health affect health status, and the anticipation of enhanced health outcomes is the main motive for health spending. spending on healthcare and better health conditions are means to an end of increased productivity and national economic growth, which in turn is driven by the demand for health. in a similar vein, berger and messer (2002) outlined how increasing public investment in healthcare infrastructure is a critical strategy for governments to enhance their healthcare delivery systems. numerous demographic and non-demographic variables impact healthcare expenditures, as shown by clement et al. (2011). changing demographics include changes in the distribution of ages, but nondemographic influences include things like increasing incomes, new health technologies, health policies, and institutional frameworks. behavioral, structural, and psychosomatic factors were highlighted by denton et al. (2004) in a relevant research. age, familial traits, occupation, level of education, income, and social networks are all structural variables. public health spending in nigeria is a reflection of the government's desire to foster a healthy and productive populace, which in turn reflects its dedication to human capital development. healthcare access and quality are directly influenced by government investment, which in turn affects the health and well-being of the workforce (world bank, 2023). spending on public health includes things like https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 28 | p a g e healthcare facilities, employee education, illness prevention, and disaster relief, all of which help build human capital. human capital spending a large portion of nigeria's socioeconomic structure is determined by investments in human capital. key to national success, it is defined as investments in healthcare, education, and workforce development (world bank, 2019). it is crucial to evaluate the trends, obstacles, and possible policy actions related to human capital because of its indisputable significance in fostering economic growth and resilience. nigeria has a big and young population, but new statistics reveal that the country isn't making the most of its human resource. poor worker productivity is caused by shortcomings in healthcare and education systems (unesco, 2021). to further harness the demographic dividend and propel sustainable growth, high rates of unemployment and underemployment call attention to the necessity for smart investments in human capital (nbs, 2022). over the years, the government of nigeria has poured a lot of money into the country's educational system. nevertheless, challenges such as inadequate facilities, a lack of qualified educators, and subpar educational outcomes persist in the field (world bank, 2020). in order to address these difficulties and improve the overall quality and relevance of education in nigeria, it is necessary to invest in teacher training, enrich the curriculum, and integrate educational technology. the availability, cost, and quality of healthcare in nigeria are all problems. improving health outcomes nationwide and resolving these issues would need increased healthcare spending on human capital (who, 2021). a holistic approach to enhancing the nation's human capital should prioritize investments in healthcare infrastructure, professional training, and preventative healthcare initiative government initiatives to improve human capital development must be complemented by the private sector. increased funding and specialized knowledge may be brought to bear on healthcare and education projects through public-private partnerships (ppps) (ilo, 2022). in addition, entrepreneurial initiatives and other forms of innovative skill training can help create a more flexible and dynamic workforce. policymakers in nigeria would do well to use a multi-pronged strategy in light of the present difficulties. some examples of this include bolstering public-private partnerships, allocating more funds to healthcare and education, and enacting specific reforms to fix systemic flaws (world bank, 2021). the efficient use of monies and the conversion of investments in human capital into observable advancements in national development can only be achieved with strong monitoring and evaluation mechanisms. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 29 | p a g e the future of nigeria's economy is highly dependent on the country's investment in its human capital. nigeria can maximize its human capital potential and set the stage for long-term economic growth and social advancement by investing in healthcare, education, and workforce development via strategic policy changes and investments. human capital is the sum of a country's workforce's expertise, experience, and education. a definition provided by the oxford learner's dictionary is "the skills, knowledge, and experience of individuals or groups, seen as valuable resources that an organization or country can utilize." all employees, both existing and prospective, are considered part of human resources (yetunde & aluko, 2012). the fundamental duty of any government is to cultivate and enhance the abilities and untapped potential of its inhabitants so that they can contribute significantly to the expansion of the nation. investments in people's education, training, and other professional endeavors to better their understanding, competence, character, and capacity to interact with others are all part of human capital. a nation's human capital includes everything that boosts production, encourages ingenuity, raises human dignity, and improves the general quality of life (yetunde & aluko, 2012). empirical studies agu, inyiama and ubesie (2024) determined the effect of government expenditure on human capital index in nigeria from 2001 to 2021. ex-post-facto research design was adopted. the study employed multiple regression analysis for the data analysis. it was reported that government expenditure on administration has a significant negative effect on human development index in nigeria; government expenditure on economic services has a non-significant positive effect on human development index of nigeria and government expenditure on social community services has a significant positive effect on human development index of nigeria. jolaiya (2024) evaluated the effect of government expenditure on economic growth in nigeria. data was collected from the cbn statistical bulletin. the study employed multiple regression analysis to ascertain the causal association among the variables. the study reported that government expenditure on health was found to have a negative impact on economic growth. government expenditure on environment was found to have a negative impact on economic growth. furthermore, government expenditures on education were found to have a positive impact on economic development. government expenditures on agriculture were found to have a positive impact on economic development. ujam, onuorah and okolie (2024) ascertained the effect of federal government capital expenditures on economic health of nigeria from 1981-2023. ex-post facto and experimental research design. the study covered based on the convenient and systematic sampling techniques. data were collected from cbn statistical bulletin from 1981 to 2023. ordinary least square regression model was employed to test hypotheses. the found that administration https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 30 | p a g e expenditure has negative and significant effect on the real gross domestic product (rgdp) of (p<.5), social and community services expenditure has a positive but insignificant effect on the real gross domestic product (rgdp) of (p>.5), while transfer expenditure shows positive and significant effects on real gross domestic product (rgdp) of (p<.5). fasewa and aderinto (2023) ascertained the effect of government expenditure on inflation in nigeria while disaggregating expenditure into capital and recurrent. secondary data collected from the central bank of nigeria statistical bulletin was employed for a period of thirty-eight years (i.e. 1981-2019). the auto regressive distributed lag technique was employed. for the first model explaining government capital expenditure, short run estimates reveal that in the current period, government capital expenditure has a significantly negative relationship with inflation. andinyanga and anietie (2023) ascertained the effect of government consumptions on performance of annual capital expenditure in nigeria over a period of forty-one years (1981-2021). this study seeks to investigate the effect of government consumptions on performance of annual capital expenditure in nigeria. ex-post facto research design was used and descriptive statistic and ordinary least square regression techniques to analyze the data. the data collected were analyzed using johansen cointegration test and vector error correction model (vecm). the findings revealed that besides administrative consumption, other explanatory variables economic service consumption, social and community services consumption, and transfers’ consumption had positive and significant effect on the performance of annual capital expenditure. yahya et al. (2023) studied how public spending on education, human capital development, and gdp growth were related in nigeria from 1981 to 2020. key drivers of revolutionary and productive economic growth were identified in the study as education and health. using eviews9, post-estimation econometric approaches were applied to the data. public education spending, human capital development and economic growth in nigeria are all positively correlated. asiagwu et al. (2023) studied the correlation between government spending and gdp growth in nigeria. research for the project was based on statistics published in the cbn statistical bulletin from 1981 to 2021. descriptive statistics, granger causality tests, augmented dickey-fuller (adf) unit root tests, and ordinary least squares (ols) regression were among the analytical methods utilized. a number of capital and recurring expenditures from diverse sectors (administration, economic services, social and community services, and transfers) served as independent variables in the model, with real gross domestic product (rgdp) serving as the dependent variable. there was a significant link between the variables, as shown by the statistically significant from the regression analysis. an r-squared score of 0.933599 indicated that the independent factors explained 93.36% of the variation in the dependent variable. euphemia (2022) determined the effect between human capital development and economic growth in https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 31 | p a g e nigeria. the time series data was sourced from central bank of nigeria statistical bulletin and world bank data base from 1981 to 2020. using the autoregressive distributed lag (ardl) framework; the bounds testing analysis indicated the existence of co-integration between economic growth and human capital development indicators. the study found that total government expenditure on education having positive and insignificant long-run relationship with gdp. also, total government expenditure on health and gross capital formation was found having positive insignificant long-run relationship with gdp. nwankwo, nwakoby, anyanwu and ananwude (2022) examined effect of federal government expenditure on economic growth in nigeria from 1986 to 2020. the citizens have seen leadership in nigeria as a failed litmus test; some have left the country to seek for “greener pastures” abroad. auto-regressive distributive lag (ardl) model was employed to test the hypotheses. the study showed that government recurrent expenditure has significant effect on real gross domestic product, gross fixed capital formation, and savings. government recurrent expenditure is negatively related with real gross domestic product, gross fixed capital formation, savings, and manufacturing capacity utilization. onazi (2022) evaluated the effect of government expenditure on health and education on human capital development in nigeria. vector autoregressive (var) model, impulse response function was used to analyze the effect of government expenditure on health and education on human capital development in nigeria using time series data from 1986 to 2018. the result revealed that government expenditure on education and health affected human capital development positively given its indices such as school enrollment rate, life expectancy rate and literacy rate in nigeria. government expenditure on education and health affected human capital development in nigeria negatively through its index known as mortality rate. bareke et al. (2021) analyzed the macroeconomic determinants of human capital development in ethiopia using the autoregressive distributed log (ardl) model. time series data from 1981 to 2018 was considered for the study. the empirical result of the study revealed that gdp per capita, openness, and education policy variables were found to have a positive and significant effect on human capital development in the short and long run. however, inflation has a negative effect on human capital development only in the short run. chinwedu et al. (2021) used data from the nigerian bureau of statistics and the cbn to look at how investments in human capital affected gdp growth and development from 1981 to 2018. this study added human capital investment at the household level, which was not done in earlier research. analytical methods such the vector error correction mechanism, johansen cointegration, augmented dickey-fuller, and phillips-perron were used. public investment in health did not significantly affect economic development, household investment in education had a negative effect on development, and household investment in health had a positive impact on development. among https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 32 | p a g e these, the study found that public investment in education had a positive short-term impact but no long-term effect on development. sankay, ismail and shaari (2020) evaluated the relationship between human capital development and economic growth in nigeria from 1970 to 2018. the study used johansen cointegration approach and vector error correction analysis, measures of human capital development proxied by key macroeconomic indicators such as real gross domestic product (rgdp), real capital expenditure (rce), and recurrent expenditure (rre) on education; real capital stock (rcs), school enrollment (sche), and labor force (lf) were also included. human capital development has a substantial effect on economic growth in nigeria, according to the results. methodology ex-post facto and time series data exploration was employed as the study research design. this involves analyzing events or past information for potential counterproductive factors, ex-post facto identifies factors related to certain conditions, or events. this study is quantitative in nature, so it involves the collection of data from the international monetary fund, world bank and oecd indicators in nigeria. the data extracted are; government spending on education and health for independent variables and human capital index for dependent variable. the time series data covers twenty five (25) years from 1999 to 2023, while firm size represents the control variable. model specification model specification entails identifying the dependent and independent variables that are important in a given situation. the study modified the model adebayo and babajide (2024) with the following mathematical formula: hdi = f (gexa, gexes, gexscs) ……………………………………………..……..i hdi it = β0 + β1gexait + β2gexesit + β3gexscsit + cit + εit ………………….….ii introducing the control variables, we have: hdi it = β0 + β1gexait + β2gexesit + β3gexscsit + β3tdt it + cit + εit …….… iii where; hdi: human development index gexa: government expenditure on administration gexes: government expenditure on economic services gexscs: government expenditure on social community services tdt: total debts (control variables) the model was modified as follows roa= f (gse, gsh) https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 33 | p a g e hciit = β0 + β1gseit + β2gshit + μ--i where: hciit= human capital index i in period t gseit= government spending on education i in period t gshit= government spending on healthcare i in period t β0 is the constant β1, and β2, are the coefficient of μ is error term method of data analysis descriptive statistics was employed to summarily describe the mean, median, standard deviation, kurtosis and skewness of the study variables. inferential statistics will also be utilized with the aid of e-views 9 using: multiple regressions analysis: regression analysis envisages the value of the dependent variable based on the value of the independent variable and clarifies the effect of variations in the values of the variables. decision when the p-statistic appeared at or equal to the critical level of 0.05, we accepted the alternative hypothesis and confirmed that a significant association existed. but when the p-statistic appeared above the critical level of 0.05, we accepted the null hypothesis and rejected the alternative hypothesis. data analysis table 1: descriptive statistics hci log-gse log-gsh mean 0.493560 2.465552 4.167811 median 0.494000 2.549233 4.169116 maximum 0.552000 3.470743 4.974880 minimum 0.412000 1.304563 3.665862 std. dev. 0.039614 0.885581 0.306404 skewness -0.319191 -0.174973 0.861586 kurtosis 2.062250 1.342330 4.163900 jarque-bera 4.021582 8.969790 13.51244 probability 0.133883 0.011278 0.001164 sum 37.01700 184.9164 312.5858 sum sq. dev. 0.116124 58.03478 6.947388 https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 34 | p a g e observations 75 75 75 source: e-view output, 2025 interpretation of descriptive statistics the descriptive statistics in table 1 revealed that the human capital index (hci) is 0.494; the maximum of 0.552 with a minimum of 0.412 and standard deviation of 0.039. the mean value of government spending on education (gse) is 2.466; standard deviation of 0.886; a maximum value of 0.3.471 with a minimum value of 1.305. the mean value of government spending on health (gsh) is 4.168, a standard deviation of 0.0.306; maximum value of 4.975 with a minimum value of 3.666. skewness is the measure of how much the probability distribution of a random variable deviates from the normal distribution. table 1 describes that the probability distribution for gse= 0.011 and gsh= 0.001) are positive but not statistically significant at 0.05. from table 1 above, the jarque-bera (jb) which test for normality or the existence of outlier or extreme values among the variables shows that all the variables are normally distributed and not skewed distribution, significant at 5% level and the result could be generalized. this also implies that a least square regression can be used to calculate the regression models. correlation analysis in examining the association among the variables, we used the pearson correlation coefficient (correlation matix) and the results are presented in table 2. table 2: pearson correlation matrix hci log_gse loggsh hci 1 log_gse 0.91819 1 loggsh 0.24998 0.25654 1 source: e-view 9 output (2025) the use of correlation matrix in most regression analysis is to check for multicolinearity and to explore the association between the each explanatory variables and the dependent variable. table 2 focused on the correlation between human capital index (hci) as the dependent variable and our independent variables which consists of government spending on education (gse), and government spending on health (gse). the findings from the correlation matrix table shows that some of our explanatory variables were positively and strongly correlated with our dependent variable (gse = 0.918 and gsh= 0.250). in checking for multicolinearity, the study discovered that no two independent variables were perfectly correlated. this means that there is the absence of multicolearity problem in our model. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.analyticsvidhya.com/blog/2020/04/statistics-data-science-normal-distribution/?utm_source=blog&utm_medium=what-is-skewness-statistics american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 35 | p a g e multicolinearity between independent variables may result to wrong signs or implausible magnitudes in the estimated model coefficient, and the bias of the standard errors of the coefficients. testing of hypotheses to examine the effect between the dependent variable hci and the independent variables (gse and gsh), and to also test the hypotheses, the study employed a pooled multiple regression analysis. the pooled interaction based multiple regression results are presented and discussed in table 3 below. table 3 regression analysis showing the relationship between gse, gsh and hci dependent variable: hci method: panel least squares date: 04/14/25 time: 11:03 sample: 1999 2023 periods included: 25 cross-sections included: 3 total panel (balanced) observations: 75 variable coefficient std. error t-statistic prob. c 0.384411 0.025241 15.22946 0.0000 log_gse 0.040895 0.002159 18.94066 0.0000 log_gsh 0.001996 0.006240 0.319896 0.7500 r-squared 0.843294 mean dependent var 0.493560 adjusted r-squared 0.838941 s.d. dependent var 0.039614 s.e. of regression 0.015898 akaike info criterion 5.406090 sum squared resid 0.018197 schwarz criterion -5.313391 log likelihood 205.7284 hannan-quinn criter. 5.369076 f-statistic 193.7302 durbin-watson stat 0.568675 prob(f-statistic) 0.000000 source: e-view 9.0 in table 3, the regression analysis was conducted to test the relationship between government spending on education, government spending on health and human capital index. adjusted r squared is coefficient of determination which tells us the variation in the dependent variable due to changes in the independent variable. from the findings in the table 3, the value of adjusted r squared was 0.84, https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 36 | p a g e an indication that there was variation of 84% on human capital index due to changes in government spending on education, government spending on health. this implies that only 84% changes in human capital index of the firms could be accounted for by independent variables; gse, and gsh, while 16% was explained by unknown variables that were not included in the model. the durbin-watson statistic of 0.569 suggests that the model contain serial correlation. the fstatistic of the regression is equal to 193.730 and the associated f-statistical probability is equal to 0.00000, implies that government spending has statistically significant effect on human capital index in nigeria. hypothesis one h01: government spending on education has no significant effect on human capital index in nigeria. the probability of the slope coefficients indicate that; p-value =0.000<0.05). the co-efficient value of; β1= 0.040895; t = 18.941, implies that government spending on education is positively related to human capital index and also statistically significant at 5%. since the p-value of 0.000 is less than the critical value of 5% (0.05), then, it would be upheld that government spending on education has a significant effect on human capital index in nigeria. hypothesis two h01: government spending on health has no significant effect on human capital index in nigeria. the probability of the slope coefficients indicate that; p-value =0.750.>0.05. the co-efficient value of; β1= 0.001996; t = 0.320, implies that government spending on health is positively related to human capital index but not statistically significant at 5%. since the p-value of 0.000 is less than the critical value of 5% (0.05), then, it would be upheld that government spending on health has no significant effect on human capital index in nigeria. discussion of findings hypothesis one found that the p-value of 0.000 is less than the critical value of 5% (0.05), then, it would be upheld that government spending on education has a significant effect on human capital index in nigeria. this result is in line with yahya et al. (2023) who found that public education spending; human capital development and economic growth in nigeria are all positively correlated, according to the data, both in the short and long term. erasmus (2021) shows that public education expenditure had significant impact on human development index. evidence shows that public health expenditure had positive significant impact human development index. however, onazi (2022) disagreed and revealed that government expenditure on education affected human capital development in nigeria negatively through its index known as mortality rate. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 37 | p a g e hypothesis two indicates the p-value of 0.000 is less than the critical value of 5% (0.05), then, it would be upheld that government spending on health has no significant effect on human capital index in nigeria. this finding was disagreed with onazi (2022) showed that government expenditure on health affected negatively the human capital development in nigeria through its index known as mortality rate. conclusion and recommendations this study determined the effect of government expenditure on human capital index, using government spending on education and health care as the independent variables. the multiple regression analysis was employed for the hypotheses. the found that government spending on education has a significant effect on human capital index in nigeria. another finding is that the government spending on health has no significant effect on human capital index in nigeria. this means that the investment by government through human capital for education and health can enhance productivity. the quality of human resources connotes the state of education and health that can raise productivity when increased. conclusively, the study found that government spending on education and health has significantly impacted on human capital in nigeria based on the results, the study recommended that followings; 1. government of nigeria needs to readdress resources to productive sectors that directly contribute to human capital, such as infrastructure education or healthcare and implement reforms to restructure government processes and reduce bureaucratic overhead. 2. though from the result, spending on healthcare may not provide instant human development advantages. government agencies need to involve in a generous valuation of their existing health expenditure plans. reference adedigba, a. (2017). efa global monitoring report 2000-2015: achievements and remaining gaps in nigeria. education for all (efa) report. unesco. agu, p. c., inyiama, o.i. & ubesie, c. m. (2024). effect of government expenditure on human capital index in nigeria. european journal of accounting, auditing and finance research 12(2), 18-33, 2024. print issn: 2053-4086(print), online issn: 2053-4094(online) website: https://www.eajournals.org/ publication of the european centre for research training and development-uk https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 38 | p a g e adelakun, o. j., & joseph, a. (2021). the role of human capital in economic growth: evidence from developing countries. journal of development studies, 59(3), 407-420. adebayo, o. p., & babajide, v. i. (2024). government spending on human capital: a pivotal for economic development in nigeria. ssr journal of economics, business and management (ssrjebm) 1(1), journal homepage: https://ssrpublisher.com/ssrjebm/ issn: xxxx-xxxx andinyanga, u.s. & anietie, p.a (2023) effect of government consumptions on performance of annual capital expenditure in nigeria. saudi journal of economics and finance. 7(1): 5767. aranda, c. (2010). the role of health investment in economic growth: a macroeconomic perspective. journal of economic development studies, 8(2), 123-141. bareke, m. l., agezew b. h., dedho, n. h., lebeta, m. f., demissie, m. m., yimer, b. m. & herut, a. h. (2021). determinants of human capital development in ethiopia: implications to education policy. https://www.hindawi.com/journals/edri/2021/6619674/ berger, m. c., & messer, j. (2002). public financing of health expenditures, insurance, and economic growth. journal of health economics, 21(4), 751-771. budgit (2020). 2020 budget analysis and opportunities. https://www.yourbudgit.com clement, f., kraemer, m., & maynard, a. (2011). determinants of public health spending in developing economies. global health policy and economics, 9(3), 102-120. chinwedu, e., uche, k., & okoro, a. (2021). impact of human capital investments on nigeria's gdp growth (1981-2018). journal of nigerian economic studies, 29(4), 201-225. denton, f. t., spencer, b. g., & walters, v. (2004). health expenditures and their demographic determinants. journal of health economics, 23(1), 55-74. erasmus, e. g. (2021). public expenditure and human capital development in nigeria. journal of accounting and financial management, 7(2); 26-43. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.hindawi.com/journals/edri/2021/6619674/ https://www.yourbudgit.com/ american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 39 | p a g e https://www.researchgate.net/publication/349737435_ public_expenditure_and_human_capital_development_in_nigeria euphemia, l.-b. i. 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(2018). public expenditure on healthcare and its impact on human capital development in nigeria. journal of african health sciences, 14(1), 99-112. onazi, e. (2022). the effect of government expenditure on health and education on human capital development in nigeria 1986-2020. international journal of social science and economic research, 7(9); 3147-3166 romer, p. m. (1986). increasing returns and long-run growth. journal of political economy, 94(5), 1002-1037. saad, m. & kalakech, k. (2015). economic growth and government spending in developing countries: a case study of nigeria. world journal of development economics, 8(2), 34-45. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 2, april-june 2025 issn: 2836-4037 impact factor: 8.36 journal homepage: https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 41 | p a g e sankay, o., ismail, a., & shaari, a. (2020). human resource development and its impact on gdp growth in nigeria. journal of development and economic analysis, 12(3), 345-356. taiwo, m. 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(2024). effect of federal government capital expenditure profiling on economy health of nigeria (1981 -2023). journal of accounting and financial management e-issn 2504-8856 p-issn 2695-2211 vol 10. no. 8 2024 www.iiardjournals.org online version. iiard – international institute of academic resea rch and development page 309 vtyurina, s. (2020). effectiveness and equity in social spending: the case of spain. imf working paper, no. wp/20/16. world bank (2020) world bank open data catalogue. https://data.worldbank.org/ world bank. (2018). world development report 2018: learning to realize education’s promise. world bank. (2020). challenges in the nigerian education system: a critical review. world bank policy reports. world bank. 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(2022). education budget allocations in nigeria: past and present trends. world bank education sector reports. world bank. (2023). public health expenditure and its role in economic growth in nigeria. world bank health reports. world health organization (who). (2010). determinants of health expenditure in developing economies. who global health report. world health organization (who). (2021). healthcare in nigeria: challenges and policy recommendations. who annual health review. yahya, m., okwonkwo, n., & bassey, e. (2023). public spending on education and human capital development in nigeria (1981–2020). journal of development economics, 18(1), 143-159. yetunde, o., & aluko, j. (2012). human capital development in africa: the role of education and healthcare. journal of african economic development, 10(4), 307-318. https://americaserial.com/journals/index.php/arjefm mailto:contact@americaserial.com mailto:contact@americaserial.com https://www.world_bank.org/en/publication/wdr2018 american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 157 | p a g e effect of green management innovation on organizational sustainability in south east nigeria 1peterson nwokorie, ph. d and 2egbo doris ebenouvbe, ph. d 1department of management, faculty of management science, imo state university (imsu), owerri 2department of business education, escet, enugu state, nigeria. doi: https://doi.org/10.5281/zenodo.17964872 abstract: the study examined the effect of green management innovation on organizational sustainability in south east nigeria. the specific objectives were to examine the effect of energy efficiency practices on organizational sustainability and evaluate the effect of waste management systems on organizational sustainability in south east nigeria. a descriptive cross-sectional research design was adopted for this study. a structured questionnaire design with a five-point likert scale was used to collect data for the study. the data collected were analyzed using spss version 26.0, and simple linear regression analysis was employed to test the hypotheses. the result revealed that energy efficiency practices have a significant positive effect on organizational sustainability with a p-value of (0.019 < 0.05). waste management systems has a significant positive effect on organizational sustainability with a p-value of (0.019 < 0.05) in south east nigeria. the study concluded that green management innovation has a significant positive effect on organizational sustainability in south east nigeria. the study concluded that green management innovation has a significant positive effect on organizational sustainability in south east nigeria. organizations should invest in energyefficient technologies and processes, such as the use of led lighting, energy-efficient appliances, and renewable energy sources. conducting energy audits can help identify areas for improvement and track savings. keywords: green innovation, management, organizational sustainability 1.1 introduction in the face of mounting global concerns about climate change, environmental degradation, and unsustainable resource exploitation, businesses are under increasing pressure to adopt practices that balance profitability with environmental responsibility. one prominent response to these demands is green management innovation (gmi), which entails the development and integration of environmentally oriented managerial practices, processes, and strategies that simultaneously enhance organizational performance and promote sustainability (chen et al., 2022). green management american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 158 | p a g e innovation emphasizes not only eco-friendly technologies and processes but also renewed managerial philosophies anchored on environmental stewardship, cost-efficiency, and long-term competitiveness. globally, organizations are turning to gmi as a means of achieving organizational sustainability, which embodies the integration of economic, social, and environmental dimensions into long-term business strategies (kraus et al., 2020). green management initiatives such as sustainable supply chain practices, adoption of renewable energy, eco-design, green human resource management, and efficient waste management have been shown to improve stakeholder trust, reduce operating costs, and strengthen resilience against regulatory and environmental risks (yusliza et al., 2020; zhang et al., 2022). in addition, gmi has been linked to greater reputational capital and competitive advantage in markets where environmental awareness significantly influences consumer behavior (fernando et al., 2019). in the nigerian context, particularly in the south east region, organizations face unique sustainability challenges. these include inconsistent regulatory enforcement, infrastructural deficits, rising production costs, and societal pressure to balance rapid industrial growth with environmental conservation (okafor & onuoha, 2021). many firms in south east nigeria, particularly in manufacturing and service industries, operate in environmentally sensitive areas where ecological concerns—such as waste pollution, carbon emissions, and resource depletion—are prevalent. thus, adopting green management innovations is increasingly seen not as an optional initiative but as a strategic necessity for ensuring long-term organizational sustainability within the local socio-economic and ecological environment (amah & nwokah, 2019). the effect of gmi on sustainability in south east nigeria is particularly important because it provides a dual opportunity: on one hand, it allows firms to align with global sustainability standards (such as the united nations’ sustainable development goals), and on the other hand, it enables organizations to enhance operational performance and resilience in a volatile business environment (un, 2021). recent studies argue that integrating environmentally friendly innovations into management practices boosts not only environmental outcomes but also financial strength, employee engagement, and brand positioning (chen et al., 2022; garcía-machado & martínez-ávila, 2019). therefore, examining the effect of green management innovation on organizational sustainability in south east nigeria is of practical and theoretical importance. practically, it addresses how firms in the region can achieve ecological balance while improving growth and competitiveness. theoretically, it contributes to the growing discourse on sustainability management by exploring how gmi functions in developing economies where environmental pressures are high, but institutional support systems for green practices remain relatively weak. american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 159 | p a g e 1.2 statement of the problem in recent years, the concept of green management innovation has gained prominence as organizations strive to integrate sustainable practices into their operations. however, in south east nigeria, there is a notable gap in understanding the effect of green management innovation on organizational sustainability. despite the increasing awareness of environmental issues and the potential benefits of adopting sustainable practices, many firms in this region continue to face challenges in effectively implementing green innovations. the lack of empirical evidence regarding how green management innovations influence organizational sustainability raises critical concerns for businesses aiming to enhance their environmental performance and competitive advantage. additionally, contextual factors such as economic constraints, regulatory environments, and cultural attitudes toward sustainability may further complicate the adoption of green practices in this region. this problem is exacerbated by insufficient research that specifically addresses the unique challenges and opportunities faced by organizations in south east nigeria. as a result, there is an urgent need to explore the relationship between green management innovation and organizational sustainability, identifying key drivers and barriers to effective implementation. understanding this relationship is essential for developing strategies that not only promote environmental stewardship but also ensure the long-term viability of organizations in the region. 1.3 objective of the study the main objective of the study is to examine the effect of green management innovation on organizational sustainability in south east nigeria. the specific objectives were to; i. examine the effect of energy efficiency practices on organizational sustainability in south east nigeria. ii. evaluate the effect of waste management systems on organizational sustainability in south east nigeria. 1.4 hypotheses of the study i. energy efficiency practices have no significant effect on organizational sustainability in south east nigeria. ii. waste management systems has no significant effect on organizational sustainability in south east nigeria. american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 160 | p a g e review of related literature 2.1 conceptual review green management innovation (gmi) for many people, minimizing negative environmental effects is becoming a way of life. businesses have also come to embrace this practice. the term "green management innovation" describes an organization's attempts to reduce its environmental impact by using effective procedures. the company's first concern should be environmental issues. green innovation in management, according to weng, chen, and chen (2015), is creating new business models and procedures that lessen their negative effects on the environment and increase resource efficiency while preserving or boosting a company's competitiveness. song and yu (2018). in order to achieve sustainable growth and competitive advantage through eco-friendly inventions, green management innovation is a strategic approach that incorporates environmental considerations into organizational management processes. according to ilvitskaya and prihodko (2018), recent research defines gmi as "the new or modified products and processes, including technology, managerial, and organizational innovations, which help to sustain the surrounding environment." gmi is separated into two categories: "green process inventions," often known as "greening" business methods, and "green product innovations," which include offering new green goods to customers (tang et al., 2018). furthermore, ecological management has emerged as a crucial component of many businesses' strategic goals and tactical strategies as a result of the rising customer-centered concerns regarding environmental preservation (khan et al., 2019). the adoption of novel management techniques, processes, and strategies that assist businesses in achieving environmental sustainability and improving organizational performance by lowering resource consumption and environmental degradation is known as "green management innovation," according to xie, huo, and zou (2019). green innovation, according to the oecd (2020), refers to new or enhanced goods, procedures, advertising, or organizational improvements that lessen environmental damage. in particular, green management innovation entails managerial or organizational adjustments that promote this environmental performance. according to yusliza et al. (2020), green management innovation is the process of incorporating environmental practices and technology into an organization's strategic management in order to promote environmental stewardship and sustainability objectives. in order to attain both ecological and economic benefits, tang, walsh, and lerner (2022) define "green management innovation" as "managerial practices and policies that encourage environmental innovation in goods, services, and business models." american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 161 | p a g e energy efficiency practices brown and dekay (2014) define energy efficiency techniques as the proportion of a system, process, or technology's usable energy output to its energy input. it gauges how well energy is transformed and used to carry out a certain operation or produce a desired result while reducing waste and losses. the goal of energy efficiency methods is to reduce energy input while preserving occupant comfort and functionality through deliberate interventions in building design, construction, and operation. techniques and tools that reduce energy use in commercial, residential, and industrial settings without sacrificing output or productivity are known as energy efficiency techniques. capehart, turner, and kennedy (2020). energy efficiency is "the ratio between the useful output of an energy conversion process and the input, in energy terms," according to the international energy agency (2020). heat, electricity, or mechanical labor might be the valuable output. energy efficiency techniques are efforts made to use energy more efficiently, according to the united states environmental protection agency (2022). to lower energy demand and greenhouse gas emissions, these strategies include modernizing machinery, streamlining procedures, and altering consumer behavior. according to the european commission (2023), energy efficiency is the use of less energy to accomplish the same activity. energy efficiency techniques are important steps in technological and regulatory frameworks to cut down on energy waste and meet sustainability targets. energy efficiency methods, according to the u.s. department of energy (2024), include putting in place systems, technology, and behavioral adjustments that lower the energy needed to produce goods and services. a more precise definition of energy efficiency is given by shehabi et al. (2016), who define it as "the ratio of useful energy output from an energy conversion device to the energy input to that device." the core idea of energy efficiency is emphasized by these definitions, which stress the need to maximize energy efficiency and cut waste across a variety of sectors, such as buildings, appliances, transportation, and industry. by lowering greenhouse gas emissions and dependency on finite energy supplies, energy efficiency is essential for energy security, sustainable development, and environmental impact mitigation. organizational sustainability according to varsei et al. (2014), workplace sustainability entails incorporating sustainable development principles—such as social equity, economic efficiency, and environmental awareness— into daily business operations. sustainability in organizations refers to tactics and procedures that improve the organization's long-term financial performance as well as its social and environmental impact (epstein & buhovac, 2014). according to varsei et al. (2014), organizational sustainability refers to the process of incorporating the objectives of sustainable development, such as economic efficiency, social justice, and environmentally friendly practices, into the operational environment of various enterprises. conversely, "adopting organizational strategies and activities that meet the needs of the american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 162 | p a g e enterprise and its stakeholders today while protecting, sustaining, and enhancing the human and natural resources that will be needed in the future" is what is meant by organizational sustainability. three rings were emphasized by elkington (2015) as indicators of sustainability: profit, planet, and people, which stand for social, environmental, and economic sustainability, respectively. according to engert, rauter, and baumgartner (2016), the "triple bottom line" (tbl) concept highlights how businesses are working toward sustainability by meeting customer demands, improving products and services, and maximizing profits while continuously addressing social and ecological issues. nonetheless, hunt (2016) asserts that organizational sustainability is a multifaceted process founded on efficacy and efficiency that emphasizes knowledge, capacity building, networks of partners, outcomes, and goods and services. accordingly, sustainability concerns must be continuously integrated into an organization's strategy, management, operations, and production (rodríguez-olalla and avilés-palacios, 2017; lozano, 2018). over time, organizational sustainability issues frequently change. sustainability in the manufacturing sector refers to the fundamentals of environmentally friendly products or services, while the methods used to achieve them differ in their intended use. sustainability might differ amongst industries, such as manufacturing and services. waste management systems according to igbinomwanhia (2011), waste management is the application of a deliberate combination of techniques to effectively move garbage from its source to its ultimate disposal site in order to maintain a safe environment and save expenses. many governments have acknowledged waste management as a complicated global issue, with emerging countries receiving particular attention. sridhar (2017) defines waste as any material that, given its composition, has no future use, such as trash, rubbish, junk, household items, or ashes. it might be contagious, dangerous, non-hazardous, or domestic. every country in the twenty-first century has demonstrated a remarkable dedication to addressing the worldwide problem of solid waste management, particularly when formulating environmental and public health policies (okoli et al., 2020). due to ongoing economic expansion, urbanization, and industrialization, solid and hazardous waste volumes and varieties have rapidly increased. several techniques are used to dispose of solid waste in urban areas. nonetheless, techniques include recycling, anaerobic digestion, composting, landfilling, and incineration (abila & kantola, 2017). according to demirbas (2021), waste management is the process of collecting, moving, and processing waste before disposing of any leftovers. the efficient supervision and management, storing, collecting, transporting, treating, and disposing of garbage in a way that protects the environment and the general public is also how tchobanoglous defines solid waste management. in order to handle waste management difficulties daily, tchobanoglous continued, solid waste management uses expertise and american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 163 | p a g e knowledge from a variety of disciplines, including legal, financial, and administrative. according to demirbas (2021), the primary goal of waste management is to maintain a safe environment. 2.2 theoretical review institutional theory institutional theory posits that organizations adopt environmentally sustainable practices due to regulatory, normative, and cultural pressures (dimaggio & powell, 1983). institutional theory focuses on the variety of institutions that are responsible for external and internal pressures on the organization, as well as the corresponding organizational responses that have been established within each business. institutional theory is well adapted to explain the factors related to organizational supply because of the nature of green logistics management practice. governments enforcing green logistics regulations and consumer demand for eco-friendly products drive firms to incorporate sustainability. the concepts of sustainability, as measured in the three dimensions of social, economic, and environmental, are primarily associated with the triple bottom line approach and its varied expectations. institutional theory posits that organizations are influenced by their external environment, including the norms, values, and expectations of their stakeholders (lok, 2019). 2.3 empirical reviews ziolkowska and ziolkowski (2015) used a dynamic dematerialization paradigm to examine energy efficiency in the transport sector of the european union (eu)-27. the analysis assesses whether the industry has attained sustainable patterns of energy use and how advancements in energy efficiency fit in with more general environmental and financial objectives. the analysis used yearly data from the eu-27 nations from the early 1990s until 2012. the findings showed that over the research period, the eu-27's transportation industry had modest gains in energy efficiency. llorca and jamasb (2017) investigated rebound effects and energy efficiency enhancements in the european road freight transport industry. the study investigates whether advances in energy efficiency resulted in fuel consumption reductions that were proportionate or whether the anticipated advantages were negated by a rebound effect. the research used econometric methods for panel data. the findings demonstrated that increased freight activity counteracted a significant amount of energy efficiency benefits, indicating that energy efficiency measures by themselves are not enough to provide proportionate drops in energy use. research by venkateshwarlu (2020) examined waste management and its effects on social, economic, health, and environmental factors. with an emphasis on improved water quality, less indoor and outdoor air pollution, and mitigating the effects of climate change, this study reviews the literature on valuation studies that extract monetary values linked to decreased environmental risk. a journalistic investigation was used in the study, along with data from regulatory and environmental sources. the american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 164 | p a g e findings showed that improving access to clean energy, sanitation, and drinking and bathing water sources, as well as reducing exposure to environmental risk factors through improved air quality, is linked to significant health benefits and can help achieve the millennium development goals of environmental sustainability, health, and development. in nigeria, olayiwola et al. (2023) studied environmental sustainability and waste management administration. the purpose of this study was to ascertain how environmental sustainability and waste management administration relate to each other in lagos, nigeria. even though garbage creation is an unavoidable consequence of human activity, many countries still struggle with effective refuse management. we carried out this inquiry with this notion in mind. 250 of the 700 waste administrators in the ikeja local government area that made up the research population were selected using the yamen sampling method. of the 250 issued surveys, however, 233 were recovered. using linear regression (at a significance threshold of 5% or 0.05), the anova and coefficient findings were determined. the findings showed that garbage disposal, waste separation, and environmental cleanliness were negatively correlated with the operations of waste management agencies and environmental sustainability. additionally, it was shown that pollution control and garbage recycling were negatively correlated. 3.0 research design and methods a descriptive cross-sectional research design was adopted for this study. respondents were randomly selected from organizations across southeast nigeria, covering departments such as administration, operations, human resources, and finance. a structured questionnaire design with a five-point likert scale was used to collect data for the study. a simple random sampling technique was employed to select respondents and firms. data were analyzed using spss version 26.0, and simple linear regression analysis was employed to test the hypotheses. the purpose of this study was to examine the effect of green management innovation on organizational sustainability in southeast nigeria. 3.1 model specification based on the link between predictors and dependent variables, simple linear regression analysis is the model specification employed in this study endeavor. y = β0 + β1x1 + β2x2 + µ………………………(1) y = f(x) where, y=dependent variable represented by organizational sustainability xi= predictors variable (energy efficiency practices) x2= predictors variable (waste management systems) β0= slope or intercept american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 165 | p a g e β1= regression coefficients µ= error term 4. data analysis and interpretation the data collected from respondents in the various firms under study are presented, analyzed, and interpreted in this part. to meet our goal for this study, the replies were categorized by categorizing them using a likert scale approach. a study of the structured questionnaire was conducted utilizing a social science statistical software (spss version 26.0). table 1: response rate frequency percentage cumulative percent returned 151 86.29 86.29 unreturned 24 13.71 100 total 175 100 source: field work 2024 one hundred seventy-five (175 copies) of the questionnaires were distributed, but only one hundred and fifty-one (151) of them were returned, and the remaining copies were not. there were 24 unreturned items (24). the following are some of the causes for the unreturned.  a few respondents lost the questionnaire given to them.  a few respondents reluctantly did not respond to the questionnaire and lastly few others ticked two answers for a question, and this was recorded as a void to avoid incorrected interpretations. energy efficiency practices the instrument sought to find out about energy efficiency practices. table 2: energy efficiency practices statement strongly agree agree neutral strongly disagree a well-defined energy efficiency practices enhances the overall performance of my organization. 47(30.9%) 69(45.4%) 24(15.8%) 12(7.2%) clear reporting lines in the organization improve accountability. 55(36.2%) 63(41.4%) 14(14.5%) 10(6.6%) the energy efficiency practices support effective communication among employees. 53(34.9%) 64(42.1%) 23(15.1%) 12(7.8%) american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 166 | p a g e the energy efficiency practices of my organization allows quick decision-making. 41(26.9%) 66(43.4%) 31(20.4%) 14(9.2%) source: field work 2025 energy efficiency practices enhances the overall performance of an organization, the findings revealed that 31% strongly agreed and 45% agreed. because a greater percentage of respondents agreed, this implies that there is clear evidence that a well-defined energy efficiency practices contributes positively to organizational performance. the study sought to determine whether clear reporting lines in the organization improve accountability. according to table 2, 36% of employees strongly agreed, 41% agreed, 15% were neutral, and 7% strongly disagreed. furthermore, 35% of employees strongly agreed that the energy efficiency practices supports effective communication among employees. 42% agreed, 15% were neutral, and 8% strongly disagreed, showing that most respondents believed communication is strengthened by the structure in place. the study went on to determine whether energy efficiency practices allows quick decision-making. according to table 2, the majority of respondents (27% strongly agreed, 43% agreed, 20% were neutral, and only 9% strongly disagreed). waste management systems this instrument seeks to find out about the waste management systems. table 3: waste management systems statement strongly agree agree neutral strongly disagree my organization promotes waste management systems among teamwork. 73(48%) 62(40.8) 11(7.2%) 6(3.9%) the values and beliefs of waste management systems shared in my organization positively influence performance. 55(36.2) 61(40.1) 16(10.5) 20(13.2%) employees in my organization are open to waste management systems. 66(43.3%) 60(39.5) 17(11.2%) 9(5.9%) the waste management systems encourages employees to take initiative. 55(36.2%) 32(21.1%) 26(17.1%) 39(25.7%) source: field work 2025 according to the findings, 48% of respondents strongly agreed, 41% agreed, 7% were neutral, and 4% strongly disagreed that their organization promotes waste management systems among teamwork. the results indicate 36% of the participants strongly agreed, 40% agreed, 11% were neutral, and 13% strongly disagreed that the values and beliefs of waste management systems shared in their american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 167 | p a g e organization positively influence performance. table 3 shows that 43% of the respondents strongly agreed, 40% agreed, 11% were neutral, and 6% strongly disagreed that employees in their organization are open to waste management systems. from the study, 36% of the participants strongly agreed, 21% agreed, 17% were neutral, and 26% strongly disagreed that the waste management systems encourages employees to take initiative. organizational sustainability this instrument seeks to find out about organizational sustainability. table 3: organizational sustainability statement strongly agree agree neutral strongly disagree my organization has experienced consistent growth in recent years. 73(48%) 62(40.8%) 11(7.2%) 6(3.9%) employees’ productivity in my organization has significantly improved. 20(13.2%) 16(10.5%) 61(40%) 55(36.2%) my organization adapts quickly to market or environmental changes. 9(5.9%) 17(11.2%) 66(43.3%) 60(39.5%) customer satisfaction in my organization has improved over time. 55(36.2%) 32(21.1%) 26(17.1%) 39(25.7%) source: field work 2025 according to the findings, 48% of respondents strongly agreed, 41% agreed, 7% were neutral, and 4% strongly disagreed that their organization has experienced consistent growth in recent years. the results indicate that 13% of the participants strongly agreed, 11% agreed, 40% were neutral, and 36% strongly disagreed that employees’ productivity in their organization has significantly improved. table 3 shows that 6% of the respondents strongly agreed, 11% agreed, 43% were neutral, and 40% strongly disagreed that their organization adapts quickly to market or environmental changes. from the study, 36% of the participants strongly agreed, 21% agreed, 17% were neutral, and 26% strongly disagreed that customer satisfaction in their organization has improved over time. 4.2 hypothesis testing decision rule: accept the null hypothesis if the probability value >0.05; otherwise, accept the alternative hypothesis. 4.2.1 hypothesis one iii. ho1: energy efficiency practices have no significant effect on organizational sustainability in south east nigeria. american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 168 | p a g e 4.2.2 hypothesis two i. ho1: waste management systems has no significant effect on organizational sustainability in south east nigeria. table 4: model summary model r r square adjusted r square std. error of the estimate 1 .494a .722 .689 3.08124 a. predictors: (constant), energy efficiency practices; waste management systems 4.3.2 model testing and interpretation the model summary above explains the percentage of the dependent variable (organizational sustainability) that can be determined by the independent variables (energy efficiency practices and waste management systems). according to this table, the independent variables account for 72.2% (r square, 0.722) of the variation in organizational performance, while the remaining 27.8% can be explained by other factors outside the scope of this model. this implies that energy efficiency practices and waste management systems have a direct influence on organizational sustainability. the pearson correlation coefficient (r) result also showed a positive value of 0.494, which lends credence to the fact that the predictor variables have a direct relationship with the response variable. table 5: anova table model sum of squares df mean square f sig. 1 regression 129.014 1 129.014 4.860 .001a residual 3982.249 151 26.548 total 4111.263 152 a. dependent variable: organizational sustainability. b. predictors: (constant): energy efficiency practices; waste management systems. the extent to which the independent variables (energy efficiency practices and waste management systems) relate to the dependent variable (organizational sustainability) was tested, and the result showed that the p-value obtained (0.001) was lower than the 5% level of significance specified in spss software for this analysis. therefore, according to the decision rule, the alternative hypothesis is accepted, while the null hypothesis is rejected. this implies that energy efficiency practices and waste management systems have a significant influence on organizational sustainability. table 6: coefficients model unstandardized coefficients standardized coefficients t sig. american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 169 | p a g e b std. error beta 1 (constant) 18.968 2.415 7.855 .000 energy effici practices 0.318 0.104 0.177 3.057 .019 waste mgt systems 0.098 0.061 0.005 1.606 .024 a. dependent variable: organizational sustainability simple linear regression analysis was also conducted to determine if the result established by the anova statistic is similar to that of the regression coefficient. the result shows that the p-value obtained (i.e., 0.019) for the regression coefficient of energy efficiency practices was lower than the alpha level of significance of 5% specified in spss for this analysis. therefore, it can be inferred from this result that the anova statistic is similar to that of the regression coefficient. thus, the alternate hypothesis will be accepted while the null hypothesis will be rejected, which means that energy efficiency practices have a significant positive effect on organizational sustainability. also, the result shows that the p-value obtained (i.e., 0.024) for the regression coefficient of waste management systems was also lower than the alpha level of significance of 5% specified in spss for this analysis. therefore, it can be inferred from this result that the anova statistic is consistent with that of the regression coefficient. thus, the alternate hypothesis will be accepted while the null hypothesis will be rejected, which means that waste management systems equally has a significant positive effect on organizational sustainability. 4.0 discussion of results the result of this study indicates that energy efficiency practices have a significant positive effect on organizational sustainability. this was confirmed by the result of the statistical analysis, which shows that the p-value obtained (0.019) was lower than the significance value of 5% specified in spss for this analysis. similarly, the result of this study indicates that waste management systems also has a significant positive effect on organizational sustainability. this was confirmed by the result of the statistical analysis, which shows that the p-value obtained (0.024) was lower than the significance value of 5% specified in spss for this analysis. therefore, both energy efficiency practices and waste management systems are significant determinants of organizational sustainability, implying that improving the internal structure and culture of an organization will enhance its overall performance and sustainability. 5. conclusion in conclusion, green management innovation plays a pivotal role in enhancing organizational sustainability in south east nigeria. the findings highlight that energy efficiency practices significantly contribute to sustainable operations, enabling organizations to reduce costs, minimize american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 170 | p a g e environmental impact, and improve their overall efficiency. by prioritizing energy conservation and implementing innovative energy-efficient technologies, organizations not only optimize their resource use but also strengthen their reputation as environmentally responsible entities. additionally, the establishment of effective waste management systems emerges as another critical factor positively influencing organizational sustainability. these systems mitigate the risks associated with waste generation by promoting recycling, reducing landfill use, and fostering a circular economy. organizations that adopt robust waste management practices demonstrate a commitment to environmental stewardship and compliance with regulatory requirements, further enhancing their long-term viability and competitiveness. the combined effect of these green management innovations illustrates that organizations operating in south east nigeria can achieve significant sustainability gains by integrating environmentally friendly practices into their operations. this not only contributes to their profitability and operational efficiency but also aligns with broader global efforts to combat climate change and promote sustainable development. therefore, it is essential for organizations in the region to actively pursue and invest in green management innovations, thereby securing a sustainable future that benefits both their business and the environment. the study concluded that green management innovation has a significant positive effect on organizational sustainability in south east nigeria. recommendations to enhance organizational sustainability in south east nigeria through green management innovation, the following recommendations are proposed: i. organizations should invest in energy-efficient technologies and processes, such as the use of led lighting, energy-efficient appliances, and renewable energy sources. conducting energy audits can help identify areas for improvement and track savings. ii. organizations must develop and adopt comprehensive waste management systems that prioritize waste reduction, recycling, and responsible disposal. collaborating with local waste management authorities can help streamline processes and improve community engagement. references abila, b. & kantola, j. 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(2019). green process innovation, green product innovation, and corporate financial performance: a content analysis method. journal of business research. yusliza, m. y., et al. (2020). top management commitment and green human resource management: a moderated mediation model of green knowledge sharing and green organizational culture. sustainability. ziolkowska, j., &ziolkowski, b. (2015). energy efficiency in the transport sector in the eu-27: a dynamic dematerialization analysis. energy economics, 51, 21–30. american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 1 | p a g e board committee and bankruptcy risk: a study of deposit money banks in nigeria omowumi olanike oshatimi, dinatu nna alabadan and abiloro rafiyat bosede department of accounting, federal university oye-ekiti, ekiti state email: omowumi.oshatimi@fuoye.edu.ng; dinatu.alabadan@fuoye.edu.ng; bosede.olaniyi@fuoye.edu.ng. doi: https://doi.org/10.5281/zenodo.17370304 abstract: this ascertained the effect of board committee on bankruptcy risk in deposit money banks in nigeria, using audit committee independence and board gender diversity, while altman model for bankruptcy was employed for bankruptcy risk. ex post facto research design was adopted for the study. data were extracted from 2012 to 2024 from the audited annual reports and accounts of the sampled deposit money banks in nigeria. from the analysis, the study show that audit committee independence had a positive and significant effect on bankruptcy risk for nigerian deposit money banks. the study showed that board gender diversity had a negative and significant effect on bankruptcy risk for nigerian deposit money banks. based on the analysis, the study recommended among others that the audit independence should be encouraged to create an avenue for mutual reflection on matters that are significant to the banks such as straighten their operations, as well preventing it from going bankruptcy. keywords: board committee, bankruptcy risk, audit committee independence and board gender diversity. introduction the gruesome impact of ill health in the banking sector has affected almost all facets of the society the government, regulatory authorities, creditors, equity investors, the bankers as well as the general public. bankruptcy risk (br), sometimes, also known as bankruptcy likelihood, or financial distress likelihood, is a source of concern to corporate shareholders, boards, creditors (lenders), market participants, scholars and regulators in recent time. furthermore, there are growing concerns about firms titling toward bankruptcy and many factors have been traced to be responsible for this scenario (mohammed & onipe, 2023). however, these concerns continue to generate more inconclusive findings and therefore creating room for more research in the area. prior studies have mainly utilized ordinary least square, fixed or random effects; these techniques despite offering certain advantages are weak in the presence of endogenous variables that can lead to mailto:contact@americaserial.com mailto:contact@americaserial.com mailto:omowumi.oshatimi@fuoye.edu.ng mailto:dinatu.alabadan@fuoye.edu.ng mailto:bosede.olaniyi@fuoye.edu.ng american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 2 | p a g e biased and inconsistent estimates. in addition, prior studies on the bankruptcy prediction were carried out both locally and internationally using altman z score model. in foreign countries; begum, sarker and nahar (2023); khiem (2022); handriani et al. (2021) and safrida et al. (2021) tested the effect of corporate governance on bankruptcy prediction risk. a review of several empirical studies from continents in the world shows different results. the prior literature ended their financial data in 2022, this present study seek to improve the existing study to 2024. the study therefore, assesses the effect of board committee on bankruptcy risk in deposit money banks in nigeria form 2012 to 2024. specifically, the study sought to ascertain the effect of audit committee independence and board gender diversity on bankruptcy risk of deposit money banks in nigeria. review of related literature board committee characteristics refer to features of corporate boards that are tasked with overall management of the firms. some other studies marwa et al. (2017) refer or attribute these characteristics to the concept of corporate governance. the success or collapse of firms is thus associated with the role acted by the management and firm governance as a process. while studies, (modest & khaled 2020) consider a broad variety of matters in corporate management, some process such as exposes, rights of voting, rules among others since audit committee independence can strengthen internal control systems, audit procedures may increase and thus audit fees will decrease (ohidoa & okun, 2018). the auditors discovered that in the uk, the existence of audit committee independence has a positive and significant effect on audit fees; in contrast, ho and hutchinson (2010), find that in hongkong, auditors expect that the presence of audit committee independence lower audit risk, thereby leading to lower audit fee charged. finally, it can be argued that each industry has its own peculiar characteristics and this might dictate the audit style and audit approach which could invariably impinge on the annual fee charge by the auditor. auditors take different audit procedures for different industries. in this sense, audit fees charged will be different. for instance, gonthier-besacier & schatt (2007) subdivided french listed firms into firms in information technology (it) sector and others to test the impact of industrial sector on audit fees. the result indicates that audit fees paid by companies in it sector were much higher than that paid by the others. however diversity, which is a key attribute of teams, is a complex construct because individuals can differ on several characteristics (jackson, joshi & erhardt, 2003; harrison & klein, 2007; joshi & roh, 2009). moreover, research remains inconclusive concerning its effects on performance (johnson, schnatterly, & hill, 2013). board gender diversity is regarded as the ratio of female directors to total board size. traditionally, corporate boards are predominantly made up of male directors. the presence of the female gender on the board constitutes gender diversity (onatuyeh & ukolobi, 2020).gender diversity is a part of the mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 3 | p a g e board diversity concept, which suggests that boards should reflect society’s structure, with appropriate representation of gender and professional backgrounds. for a number of reasons, including a moral obligation to shareholders, creative decision making process, corporate altruism, and financial considerations, board diversity is encouraged (onourah & imene, 2016). since diversity in the boardroom encourages improved decision-making and inventiveness, board gender diversity is vital for enhancing corporate governance practices in a company (wang, 2015). central to this view is the notion that unobservable or cognitive diversity may produce differences in information, knowledge, heuristics and perspectives (akpokerere & onatuyeh, 2023). through encouragement of greater questioning, information elaboration and search for solutions, taskoriented diversity is expected to have positive effects on team performance (mengge, codou & seemantini, 2016). altman prediction models of bankruptcy business failure models can be broadly divided into two groups: quantitative models, which are based largely on published financial information; and qualitative models, which are based on an internal assessment of the company concerned. both types attempt to identify characteristics, whether financial or non-financial, which can then be used to distinguish between surviving and failing companies (robinson and maguire, 2001). most credit managers use traditional ratio analysis to identify future failure of companies. altman (1968) is of the opinion that ratios measuring profitability, liquidity, and solvency are the most significant ratios. however, it is difficult to know which is more important as different studies indicate different ratios as indicators of potential problems. for example, a company may have poor liquidity ratios and may be heading for liquidation. that same company’s good profitability may undermine the potential risk that is highlighted by the poor liquidity ratios. as a result, interpretation using traditional ratio analyses may be incorrect (odipo & sitati, 2008). altman set out to combine a number of ratios and developed an insolvency prediction model the z– score model. this formula was developed for public manufacturing firms and eliminated all firms with assets less than $1 million. this original model was not intended for small, nonmanufacturing, or non-public companies, yet many credit granters today still use the original z score for all types of customers. two further prediction models were formulated by altman (sometimes referred to as model ‘a’ and model ‘b’) to the original z score (altman, 1968). the model ‘a’ z-score was developed for use with private manufacturing companies. the weighting of the various ratios is different for this model as well as the overall predictability scoring. in addition, while the original score used the market value of equity to calculate the equity to debt formula, model ‘a’ used shareholder’s equity on the balance sheet. model ‘b’ was developed for private general firms and included the service sector. in this statistical model, the ratio of sales to total assets is not used, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 4 | p a g e the weighting on this model is different, and the scoring again, different. although computerized statistical modeling would aid in determining the weighting of each ratio, common sense helps us understand the purpose of each ratio (odipo & sitati, 2008). empirical review mohammed and onipe (2023) examined the extent firms overall quality of board of directors reduces their bankruptcy risk from 2017 to 2021. the study used the generalized method of moments approach to cope with possible endogeneity. the study revealed that board of directors’ characteristic show that board independence, board female gender, board size show negative significant effects and board meetings (positive) and board ownership (negative) show insignificant effects. aliyu, onipe and samuel (2023) determined the effects of board characteristics on financial performance in nigeria from 2018 to 2022. data were extracted from the annual reports and accounts of the listed banks. correlational research and regression method employed was panel data regression. the study showed that board meetings, board gender diversity and board independence show insignificant effects on financial performance. begum, sarker and nahar (2023) ascertained the relationship between corporate governance and the likelihood of financial distress. altman z-score was used to show financial distress. the study imply that financial distress is effected by corporate governance variables (board independence, auditor independence, auditor opinion, sponsor directors ownership, and foreign shareholders), and firm-level variables (sales growth, performance, liquidity, firm size). rabiu, muhammed, umar and ramatu (2023) determined the effect of board characteristics on financial performance of listed consumer firms in nigeria. data were extracted from annual report and account of the sampled companies from 2011 to 2021. correlation and regression analysis has been used in order to determine the relationship between the dependent and the independent variables. the study established that board size and experience have positively influenced financial performance while board independence and women director have negatively influenced the financial performance of listed consumer goods firms. dalia (2023) determined the effect of intellectual capital and corporate governance mechanisms on the bankruptcy risk of egyptian companies listed on the egx 100 index from 2017-2021. the modified altman z score model was used to measure bankruptcy risk, and the value-added intellectual coefficient (vaic) model was used to measure intellectual capital. the study found that board size, board meetings, and audit committee meetings have a significant positive effect on intellectual capital efficiency with its three components of human capital efficiency, structural capital efficiency, and capital employed efficiency. keerthana and balagobei (2022) ascertained the effect of board characteristics on the financial distress of listed companies in sri lanka from 2019 to 2021. panel regression analysis was used and 36 listed companies representing the consumer service sector in sri lanka were selected as the sample. the study revealed that board size, board composition, and directors' ownership have a positive mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 5 | p a g e significant effect on financial distress whereas ceo duality has a significant negative effect on financial distress. lamidi et al, (2022) determined the characteristics of risk committees as well as their effects on the financial performance of deposit money banks (dmbs) in nigeria. data were analyzed using the panel regression approach. the study discovered that the size and independence of risk management committees have a negative impact on the financial performance of deposit money banks in nigeria, while the size of the committees is insignificant. khiem (2022) ascertained the effect of corporate governance on the relationship between the macro and micro factors causing financial distress in 240 vietnamese listed non-financial firms. the study used an endogenous switching regression model (esrm). moreover, the risk of financial distress is significantly reduced when improving the corporate governance practice. alberto, et al (2022) compared the performance of corporate governance variables in predicting corporate defaults, using both the logit and random forest models, which previous researchers have deemed to be the most efficient machine learning techniques. they study show that the use of corporate governance variables – especially with regards to ceo renewal and stability in the composition of the board of directors – increases the accuracy of the random forest technique and influences the success of the turnaround process. okoye and okoye (2022) determined the effect of corporate governance on bankruptcy risk in deposit money banks in nigeria. ex post facto research design was adopted for the study. a sample of nine deposit money banks was used for the study. data were obtained from the annual reports and audited accounts of the banks under assessment. altman's original model for public companies was used to extract data and the formulated hypothesis was tested with regression analysis with aid of e-view 9.0. the study indicated that board of directors’ independence has a positive significant effect on bankruptcy risk of deposit money banks in nigeria. maier and yurtoglu (2022) estimated classic zscore models using panel data comprising 2,519 listed non-financial firms from 29 european countries over the 2012 to 2020 period. they found that board independence is associated with lower risk of bankruptcy. the presence of female directors on board reduces bankruptcy risk. while board independence and diversity decrease bankruptcy risk in financially non-distressed firms, they have the opposite effect in financially distressed firms. cho et al. (2021) examined the effect of the genderdiversity on bankruptcy risks in chinese-listed manufacturing firms from 2005–2016. the study found that at the executives’ level, firms with greater gender-diversity have a propensity for bankruptcy risk compared to firms with lower gender-diversity. handriani et al. (2021) examined the effect of board size, board independence, and institutional ownership on financial distress for a sample of nine manufacturing companies listed on the indonesia stock exchange from 2010 to 2018. the study revealed that institutional ownership and board independence have a significant positive impact on avoiding financial distress. however, board size was found to have an insignificant positive effect on financial distress. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 6 | p a g e methodology this study adopted the ex-post facto research design. in ex-post facto studies investigation starts after the fact has occurred without interference from the researcher. the population of the study comprised of listed banks in nigeria. given the above, the study population is made up of twenty eight (28) banks in nigeria. as a result, the "purposive sampling technique was applied. the study selected eight banks based on data availability up to date. the data were extracted from the annual reports and accounts of the selected banks in nigeria from 2012 to 2024. model specification altman prediction model (working capital, retained earnings, earnings before interest and tax, equity as well as total assets and total book debts) and independent variables: committee independence and board gender diversity. this was obtaining from the audited reports and accounts of the banks under assessment. the study used altman model given as zeta “z” z=1.2x1 + 1.4x2+ 3.3x3 + 0.6x4 + 1.0 x5, where: x1 = working capital to total assets x2 = retained earnings to total assets x3 = earnings before interest and taxes to total asset x4 = value of equity to total book debt x5 = gross earnings to total assets the decision rule is that: (i). for z<1.81 bankruptcy region (ii). for 1.81<z>2.675 high bankruptcy potential (iii). for 2.675<z<2.99 low bankruptcy potential (iv). for z>2.99 strong (no sign of bankruptcy at all). the following regression equation can be derived from the model. y= x1 + x2 where y = altman x1 = audit committee independence x2 = board gender diversity β1 = regression weights coefficients a (constant) mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 7 | p a g e the model for this study took the following form: y = βo + β1x1 + β2x2 + µ where: y = bankruptcy risk (dependent variable) x = board committee characteristics (explanatory/independent variable) β0 = constant term (intercept) β1β2 = coefficients of job performance µ = error term (stochastic term) explicitly, the equation can be defined as: board committee characteristic = ƒ (altman) + µ the altman model was modified thus to incorporate corporate governance: atmnit = a0 + β1aci +β2bgdit + it urt ……………..........................i where; atmn= altman prediction model aci= audit committee independence bgd = board gender diversity method of data analysis data were analyzed with descriptive statistics, and the hypotheses were tested with pearson correlation, and multiple regression analysis. since the focus of the study is to examine the effect of asset composition on financial performance, regression analysis becomes appropriate tool for it. descriptive statistics employed to summarily describe the mean, median, standard deviation, kurtosis and skewness of the study variables. inferential statistics will also be utilized with the aid of e-views 9 using panel regressions analysis: regression analysis predicts the value the dependent variable based on the value of the independent variable and explains the impact or effect of changes in the values of the variables. decision rule accept the alternative hypothesis, if the probability value (p-value) of the test is less than 0.05 (5%). otherwise reject. data analysis and results table 1 descriptive statistics atmn aci bgd mean 54.87547 4.000000 0.274615 median 0.210044 4.000000 0.300000 maximum 652.9549 5.000000 0.330000 minimum 0.055106 3.000000 0.240000 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 8 | p a g e std. dev. 174.1820 0.682656 0.033120 skewness 3.132913 0.000000 0.041185 kurtosis 10.90951 2.166667 1.337082 jarque-bera 441.2242 3.009259 12.01235 probability 0.000000 0.222100 0.002463 sum 5707.049 416.0000 28.56000 sum sq. dev. 3124955. 48.00000 0.112985 observations 104 104 104 source: e-views 9 (2025) from the above table 1, the analysis revealed the mean values of the bankruptcy risk (atmn) at 54.875. also, the mean value of audit committee independence (aci) run using the dummy value of showed an average value of 4.000. the mean values of board gender diversity (bgd) showed that nigerian bgd were jointly 0.275. the kurtosis of 10.90951, 2.166667, and 1.337082 for atmn, aci, and bgd showing a distribution that is strong, suggesting a concentration of values around the mean with potential outliers, while 4.563804, 4.681818 and 1.023810 for banks atmn, aci and bgd, showed similar results. the jarque-bera probability of 0.000000, 0.222100, and 0.002463 confirms that the atmn, aci and bgd data is significantly non-normally distributed showed that traditional parametric analyses may need to be approached with caution. hypothesis one ho1: audit committee independence has no significant effect on bankruptcy risk of deposit money banks in nigeria. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 9 | p a g e table 2: regression analysis between aci and atmn dependent variable: atmn method: panel least squares date: 08/25/25 time: 07:47 sample: 2012 2024 periods included: 13 cross-sections included: 8 total panel (balanced) observations: 104 variable coefficient std. error t-statistic prob. c -419.0138 90.78364 -4.615521 0.0000 aci 118.4723 22.37548 5.294738 0.0000 r-squared 0.415591 mean dependent var 54.87547 adjusted r-squared 0.407901 s.d. dependent var 174.1820 s.e. of regression 155.0219 akaike info criterion 12.94405 sum squared resid 2451242. schwarz criterion 12.99491 log likelihood -671.0908 hannan-quinn criter. 12.96466 f-statistic 28.03425 durbin-watson stat 2.296975 prob(f-statistic) 0.000001 source: e-views 9 output (2025) in table 2, a simple least square regression analysis was conducted to test the effect on audit committee independence (aci) on bankruptcy risk (atmn) in nigerian deposit money banks. the rsquared is coefficient of determination which explains the changes in the dependent variable due to changes in the independent variable. from the findings in the table indicate that the value of r squared was 0.41, showing that there was variation of 41% on atmn due to changes in aci. the durbin-watson statistic of 2.30 suggests that the both model does not contain serial correlation. the f-statistic of the regression is equal to 28.034. the associated f-statistic probability is equal to 0.000. the evidence provided by the regression result of model showed that the variable of audit committee independence had a positive coefficient of 118.4723 and a p-value of 0.000 which was significant at 5% level for nigerian deposit money banks. this study therefore reject null hypothesis and accept alternative hypothesis which stated that audit committee independence has a significant effect on bankruptcy risk of deposit money banks in nigeria. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 10 | p a g e hypothesis two ho2: board gender diversity has no significant effect on bankruptcy risk of deposit money banks in nigeria. table 2: regression analysis between bgd and atmn dependent variable: atmn method: panel least squares date: 08/25/25 time: 08:31 sample: 2012 2024 periods included: 13 cross-sections included: 8 total panel (balanced) observations: 104 variable coefficient std. error t-statistic prob. c 533.1327 135.9004 3.922966 0.0002 bgd -1741.553 491.3490 -3.544432 0.0006 r-squared 0.309660 mean dependent var 54.87547 adjusted r-squared 0.300931 s.d. dependent var 174.1820 s.e. of regression 165.1580 akaike info criterion 13.07073 sum squared resid 2782272. schwarz criterion 13.12158 log likelihood -677.6778 hannan-quinn criter. 13.09133 f-statistic 12.56300 durbin-watson stat 2.498224 prob(f-statistic) 0.000595 source: e-views 9 output (2025) in table 3, a simple least square regression analysis was conducted to test the effect of board gender diversity (bgd) on bankruptcy risk (atmn) in nigerian deposit money banks. the r-squared is coefficient of determination which tells us the changes in the dependent variable due to changes in the independent variable. from the result, the value of r squared was 0.30, an indication that there was variation of 30% on atmn due to changes in bgd. the durbin-watson statistic of 2.50 suggests that the model does not contain serial correlation. the f-statistic of the regression is equal to 12.563. the associated f-statistic probability is 0.000. the hypothesis stated that board gender diversity has no significant effect on bankruptcy risk of deposit money banks in nigeria. the evidence provided by the regression result of model showed that the variable of board gender diversity had a negative coefficient of -1741.553 and a p-value of 0.000 mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 11 | p a g e which was significant at 5% level for nigerian deposit money banks. it meant that board gender diversity has significant effect on bankruptcy risk in nigeria. discussion of findings the evidence from hypothesis one regression result showed that audit committee independence had a positive coefficient of 118.4723 and a p-value of 0.000 which was significant at 5% level for nigerian deposit money banks; while the outcome of model 2 showed a positive coefficient of 5.845797 (pvalue 0.000) for deposit money banks in south africa, and also has a significant effect. the result is in collaboration with safrida et al. (2021) who demonstrated a significant positive effect of the audit committee on the prediction of bankruptcy; maina (2020) established the relationship between audit committee and independent directorship and financial distress of commercial banks; partha, widanaputra, ratnadi and mimba (2019) found that audit committee independence had positive and significant moderating effect on the relationship between financial distress and income maximization actions. the hypothesis two regression result revealed that board gender diversity had a negative coefficient of -1741.553 and a p-value of 0.000 which was significant at 5% level for nigerian deposit money banks; while showed a positive coefficient of 0.484690 (p-value 0.607) for deposit money banks in south africa, but has no significant effect. this result agreed with maier and yurtoglu (2022) who found that presence of female directors on board reduces bankruptcy risk, also the result of mohammed and onipe (2023) who reported that board female gender, show negative significant effects. however, the study disagreed with aliyu, onipe and samuel (2023) showed that board gender diversity show insignificant effects. conclusion and recommendations this ascertained the effect of board committee on bankruptcy risk in deposit money banks in nigeria, using audit committee independence, ad board gender diversity, while altman model for bankruptcy was employed for bankruptcy risk. data were extracted from 2012 to 2024 from the audited annual reports and accounts of the sampled deposit money banks in nigeria. from the analysis, the study show that audit committee independence had a positive and significant effect on bankruptcy risk for nigerian deposit money banks. the study showed that board gender diversity had a negative and significant effect on bankruptcy risk for nigerian deposit money banks. based on the analysis, the following recommendations were made; 1. the audit independence should be encouraged to create an avenue for mutual reflection on matters that are significant to the banks such as straighten their operations, as well preventing it from going bankruptcy. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 12 | p a g e 2. as the female board has negative and insignificant in nigerian banks, the presence of the female gender on the board should be increased to reflect society’s structure, with appropriate representation of gender and professional backgrounds. references aliyu, a. b and yahaya, o. a. and mohammed, n.a., (2021). board features and financial performance of nigerian banks," international journal of finance & banking studies, center for the strategic studies in business and finance, vol. 10(1), 11-19, january. altman, e.i., (1994). corporate distress diagnoses: comparisons using linear discriminant analysis and neural networks (the italian experience), journal of banking and finance 18, pp 505-29. altman, e. i., (2000).predicting financial distress of companies: revisiting the z score model. http://www.zscore. pdf.5-10. altman, e., (1968). financial ratios, discriminant analysis and the prediction of corporate bankruptcy, the journal of finance, september, pp 589-609. balogun, j. e., agbi, s. e., yahaya, o. a., and joshua, s. g. (2023). institutional ownership and firm value of listed manufacturing companies in nigeria: the moderating role of dividend payout. nigerian journal of accounting and finance, 15 (1), 85-111 gonthier, b., & schatt, a. (2007). determinants of audit fees for french quoted firms. managerial auditing journal, 22(2), 139-160. http://dx.doi.org/10.1108/02686900710718654 handriania, e., ghozalib, i and hersugodob (2021). corporate governance on financial distress: evidence from indonesia. management science letters 11 1833–1844 contents lists available at growing science. management science letters homepage: www.growingscience.com/msl harrison, d.a., and klein, k.j. (2007). what’s the difference? diversity constructs as separation, variety, or disparity in organizations. academy of management review, 32: 1199–1228. joshua, efiong, e. j. and imong, n. r. (2019). effect of corporate governance on financial performance of listed deposit money banks in nigeria. global journal of social sciences vol 18, 2019: 107-118 mailto:contact@americaserial.com mailto:contact@americaserial.com https://ideas.repec.org/a/rbs/ijfbss/v10y2021i1p11-19.html https://ideas.repec.org/a/rbs/ijfbss/v10y2021i1p11-19.html https://ideas.repec.org/s/rbs/ijfbss.html http://dx.doi.org/10.1108/02686900710718654 http://www.growingscience.com/msl american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 13 | p a g e jackson, s. e., joshi, a., & erhardt, n. l. (2003). recent research on team and organizational diversity: swot analysis and implications. journal of management, 29: 801–830. johnson, s., schnatterly, k., and hill, a. (2013). board composition beyond independence social capital, human capital, and demographics. journal of management, 39: 232– 262. joshi, a., & roh, h. (2009). the role of context in work team diversity research: a meta-analytic review. academy of management journal, 52(3): 599–627. khiem d.t. (2022). corporate governance and financial distress: an endogenous switching regression model approach in vietnam, cogent economics & finance, 10:1, 2111812, doi: 10.1080/23322039.2022.2111812 lamidi, w. a., adebayo, a. o., olorede, t. e., and oyekanmi, m. o. (2022). risk management committees’ characteristics and the financial performance of deposit money banks (dmbs) in nigeria. journal of accounting and management. 12(1) (2022) 109. issn: 2284 – 9459 jam mengge, l., codou, s. and seemantini, p. (2016). audit committee diversity and financial restatements. conference paper in academy of management annual meeting proceedings · january 2016 mohammed m. u. and onipe a.y. (2023). board of directors and bankruptcy risk using gmm approach. applied finance and accounting 9(1), august2023issn2374-2410e-issn2374429publishedbyredfamepublishingurl:http://afa.redfame.com miller, t. and triana, m. (2009). demographic diversity in the boardroom: mediators of the board diversity–firm performance relationship. journal of management studies, 46: 755–786. okoye, n. j. and okoye p. v.c. (2022). effect of corporate governance on bankruptcy risk of deposit money banks in nigeria. research journal of management practice. 2(12) issn: 2782-7674 (december, 2022) | www.ijaar.org/rjmp onatuyeh, e. a., and ukolobi, i. (2020). tax aggressiveness, corporate governance and audit fees: a study of listed firms in nigeria. international journal of financial research,11(6), 278-295. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 14 | p a g e onatuyeh, e. a., and odu, v. (2019). corporate board characteristics and tax aggressiveness: a study of manufacturing firms in nigeria. global journal for research analysis, 8(4), 245-251 ohidoa, t. and okun, o. o. (2018). firm’s attributes and audit fees in nigeria quoted firms. international journal of academic research in business and social sciences, 8(3), 685–699. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 38 | p a g e green financial management practice and corporate financial performance in nigeria nwachukwu basilia chiamaka (phd) and odo john onyemaechi (ph.d) department of accountancy, godfrey okoye university, enugu doi: https://doi.org/10.5281/zenodo.15878435 abstract: the study examined the effect of green financial management practice on corporate financial performance in nigeria. the specific objectives are to; examine the effect of loan loss provision on the financial performance in nigeria and evaluate the effect of green bonds on the financial performance in nigeria. an ex-post factor research design was adopted for the study. the data was collected from the annual account statement and corporate financial reporting listed in the nigeria exchange group. the data collected was analyzed using a panel data analysis. the results reveal that loan loss provision has a significant effect on financial performance with a coefficient of 1025.15 (0.006). while green bonds have no significant effect on the financial performance -813.624 (0.617) in nigeria. the study concludes that green financial management practice has a significant effect on corporate financial performance in nigeria. the study recommended among others that corporations should prioritize the establishment and maintenance of robust loan loss provisioning frameworks. this will not only mitigate financial risks but also contribute to improved financial performance. keywords: corporate, financial, management, practice, performance 1.1 introduction green financial management practice (gfmp) is a strategic approach that integrates environmental sustainability into financial decision-making (srivastava et al 2022). it involves adopting eco-friendly investment strategies, sustainable budgeting, and responsible resource allocation to minimize environmental impact while ensuring long-term financial stability. gfmp encompasses various practices such as green investments, carbon footprint reduction, energy-efficient cost management, and adherence to environmental regulations (tien, et al 2020). as businesses face increasing pressure from stakeholders, regulators, and consumers to operate sustainably, green financial management has emerged as a crucial tool for achieving both financial and environmental objectives (srivastava et al 2022). companies that embrace gfmp can benefit from reduced operational costs, enhanced corporate reputation, and improved access to green financing opportunities. additionally, it helps mitigate risks associated with environmental challenges, regulatory non-compliance, and shifting market expectations. the adoption of gfmp reflects a broader shift towards sustainable corporate governance, where financial strategies are aligned with environmental responsibility (park, and kim, 2020). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 39 | p a g e as organizations strive to balance profitability with sustainability, green financial management plays a vital role in shaping a resilient and competitive business landscape. the effect of gfmp on corporate financial performance has become a critical area of study, as companies seek to balance sustainability with profitability (meng, and shaikh, 2023). while some argue that green investments and sustainable financial strategies lead to cost savings, improved operational efficiency, and increased investor confidence, others highlight the potential financial burden associated with adopting eco-friendly initiatives (küçükbay, & sürücü. 2019). understanding the relationship between green financial management and financial performance is essential for businesses aiming to achieve both economic success and environmental sustainability. in nigeria, where environmental challenges such as pollution, deforestation, and climate change pose significant economic and social risks, the role of green financial management in corporate financial performance has become increasingly relevant (srivastava et al 2022). companies that embrace gfmp can potentially achieve cost savings through energy efficiency, attract environmentally conscious investors, and comply with evolving regulatory frameworks, all of which may contribute to improved financial performance (meng, and shaikh, 2023). however, the extent of this impact remains a subject of debate, as firms must navigate the balance between the initial costs of green investments and their long-term financial benefits. this study explores the effect of green financial management practices on corporate financial performance in nigeria, assessing whether firms that adopt sustainability-driven financial strategies experience improved profitability, efficiency, and competitive advantage. by examining key financial indicators and case studies of nigerian firms implementing gfmp, this research aims to provide insights into the potential benefits and challenges of integrating sustainability into corporate financial management. 1.2 statement of the problem the growing emphasis on environmental sustainability has led businesses to adopt green financial management practices (gfmp) as a means of integrating ecological responsibility into financial decision-making. in nigeria, where environmental challenges such as pollution, deforestation, and climate change pose significant risks, companies are increasingly pressured to implement sustainable financial strategies. however, the impact of gfmp on corporate financial performance remains uncertain, with firms facing challenges in balancing the costs of green investments with potential financial benefits. while some studies suggest that adopting green financial practices can lead to cost savings, enhanced corporate reputation, regulatory compliance, and increased investor confidence, others argue that the initial costs and operational adjustments required may negatively affect profitability, especially in developing economies like nigeria. many nigerian firms struggle with limited access to green financing, mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 40 | p a g e regulatory inconsistencies, and inadequate infrastructure to support sustainability initiatives, raising concerns about the feasibility and effectiveness of gfmp in enhancing financial performance. despite the growing interest in sustainability-driven financial strategies, there is a lack of empirical evidence on the direct relationship between gfmp and corporate financial performance in the nigerian business landscape. this study aims to bridge this gap by examining whether green financial management practices positively or negatively impact key financial performance indicators such as profitability, return on investment, and market competitiveness. understanding this relationship is crucial for businesses, policymakers, and investors seeking to align financial growth with sustainability goals in nigeria’s evolving economic environment. 1.3 objective of the study the main objective of the study is to examine the effect of green financial management practice on corporate financial performance in nigeria. the specific objectives are to; i. examine the effect of loan loss provision on the financial performance in nigeria ii. evaluate the effect of green bonds on the financial performance in nigeria 1.4 hypothesis of the study i. loan loss provision has no significant effect on the financial performance in nigeria. ii. green bonds have no significant effect on the financial performance in nigeria. 2.0 review of related literature 2.1 conceptual framework green financial management green financial management, also known as sustainable finance, is a rapidly growing field in the financial industry. it aims to promote environmentally friendly practices and investments while also considering the financial risks and opportunities associated with climate change (park and kim, 2020). green finance is a broad term that can refer to financial investments flowing into sustainable development projects and initiatives, environmental products, and policies that encourage the development of a more sustainable economy.” green financing includes but is not limited to climate financing. it also includes a wider variety of other environmental goals, such as industrial pollution control, and water pollution (srivastava, dharwal, and sharma, 2021). therefore, green management can provide opportunities to reduce costs and increase revenues. ambec and lanoie (2008) point out that there are four opportunities companies can make use of to reduce costs (risk management and relations with external stakeholders; cost of material, energy, and services; cost of capital; and cost of labour) and three opportunities to increase revenues (better access to certain markets; differentiating products; and selling pollution-control technology) (molina-azorin, clavercortes, lopez-gamero and tari, 2009). green financial management refers to the integration of environmental, social, and governance (esg) factors into financial decision-making processes. it involves the assessment of environmental risks and opportunities in investment decisions, as well as mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 41 | p a g e the incorporation of sustainability principles into financial products and services. green financial management also encompasses the measurement and reporting of esg performance, allowing investors and stakeholders to make informed decisions (meng and shaikh, 2023). loan loss in the context of bank lending, loan loss recognition is an important accrual process through which banks recognize future expected loan losses in the current period. banks make reserves to capture expected losses. making these reserves immediately reduces bank profits and regulatory capital, which, in turn, can alert the board, managers, and external stakeholders to problems the bank is facing (bushman, 2014). more so, timely loan loss recognition thus serves as an early warning mechanism for problem loans, including those that arise from lending corruption. as a result, the corrupt bank personnel have less time or opportunity to conceal and/or escape with the gains from corruption. in anticipation of the sequence of events that could be triggered by earlier loan loss recognition, loan officers are more likely to refrain from lending corruption at loan origination (akins, dou, and ng, 2016). also, timely loan loss recognition is linked to a greater willingness to lend during a financial crisis because the earlier recognition of credit loss means less credit loss has to be recognized during recessionary periods when regulatory capital declines and external financial frictions increase. bushman and williams (2012) found that timely loan loss provisioning reduces excessive risk-taking. loan loss provisions, an accounting item to cover credit losses, are the natural tools to be used. proper recognition of credit risk and credit losses along the lending cycle will enhance the soundness of each bank as well as that of the banking system, helping to curb procyclicality in lending. there is nothing more procyclical than a badly managed bank (caruana, 2005). therefore, loan loss provisions that account for the credit risk increase in the upturn can help to cope with the potential damage that lending cycles can inflict on the real economy, the growth potential, and the level of employment and welfare of any society. such provisions, which are sometimes referred to as dynamic, statistical, or countercyclical loan loss provisions, merit attention from regulators and supervisors as a tool to enhance financial stability (saurina, 2009). next, we focus on the fact that banks that are more timely in loan loss recognition and that maintain higher loss reserves are typically considered prudent and more prepared for economic shocks (beatty and liao 2014). from an accounting perspective, prior loan loss reserves play an important role in determining the amount of loan loss provisions in the current period. in practice, loan loss provisions for a specific accounting period are typically not directly estimated, and two steps are usually taken to arrive at an estimated number. first, bank managers estimate the total losses for all outstanding loans at each period end and present this number as the loan loss reserve in the balance sheet. second, current-period loan loss provisions are calculated as the increase in the reserve, compared to the reserve at the prior period end, and adjusted for net charge-offs. hence banks are expected to make fewer loan mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 42 | p a g e loss provisions in times of higher policy uncertainty when they have already accrued more loan losses in previous periods (ng, saffar, and zhang, 2020). green bonds as innovative financial instruments, green bonds provide an opportunity to tap into new pools of private capital to finance green projects (ey 2018). the term ‘green bonds’ refers to bonds whose proceeds are used to finance environmentally friendly projects (mercer, 2015), such as renewables, water and energy efficiency, bioenergy, and low-carbon transports (campiglio, 2016). the term “green bond” is typically used to indicate a bond that supports climate change or other environmental projects. most of the green bonds issued to date have focused on climate change projects. some green bonds also include consideration of other environmental (markandya, galarraga, and rubbelke, 2017). green bonds, that is, asset-backed securities, have turned out to be an advanced tool for debt finance. the basic number of green bonds issued is related to international development banks (european investment bank, world bank, european bank of reconstruction and development (ebrd), and international finance corporation (ifc)) as well as major corporations and state and municipal entities (andreeva, vovchenko, ivanova and kostoglodova, 2018). as such, green bonds are of significant importance to both investors and policymakers. on one hand, governments need access to affordable and reliable financial resources to fulfill their commitment under the 2015 paris agreement, which aims to hold the increase in the global average temperature to well below 2° celsius above pre-industrial levels (united nations, 2015). on the other hand, investors are increasingly encouraged to adapt their business models to create not only financial value but also social and environmental value (schoenmaker, 2017). during the 2008 financial crisis, green bonds were a concept of limited interest to investors (united nations secretary-general 2015), since environmental projects were deemed risky and non-profitable by traditional investors (wharthon, 2015). surprisingly, there has been an exponential growth in green bond issuance since then, attributable to increased awareness from traditional investors about the benefits of green investments (shishlov, morel, and cochran 2016) and the potential impacts of climate change on financial assets (caldecott 2017). investors’ appetite for green bonds has therefore grown rapidly (pham 2016), as they realize that climate change is a new investment return variable, that deserves significant attention (mercer 2015). many investors, especially those in the carbon-intensive sectors of the economy, have now become very reactive to climate-related technologies, such as carbon capture and sequestration (ccs). more importantly, an increasing number of investors began to incorporate climate change risk assessments into their investment strategies (byrd and cooperman 2018). green bonds provide an opportunity for long-term and sustainable infrastructure financing. the fact that green bonds are ranked pari passu with conventional bonds in terms of yield to maturity is to some extent a key element that boosts investor’s appetite for green bonds. furthermore, investors have mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 43 | p a g e realized that investing in environment-related projects does not necessarily jeopardize the return on investment (banga, 2019). the main difference between green bonds and conventional bonds is that unlike the latter the proceeds of the former must be entirely allocated for environmentally-friendly projects (cbi and hsbc 2017). moreover, green bonds often require a more complex-issuance process, since their deal typically involves at least three market players, whose roles are discussed in the next subsection (banga, 2019). corporate financial performance to achieve the goal of market capitalization maximization, sustainable development focuses on preserving society and the environment for the benefit of future generations. even with the growing awareness of corporate sustainable development, there are still concerns about how to quantify the impact of sustainable development on corporate business performance, particularly about the cfp. for instance, küçükbay and sürücü (2019) presented a novel approach to measuring corporate business performance that includes two environmental, four social, and four economic and financial sub-criteria. we are focusing on the financial component of corporate business success in this area, as shown by a unique system or collection of indicators. numerous indicators are available in the financial literature that quantify cfp; however, the two primary groups of indicators that are most frequently employed in research studies are as follows: there are two types of indicators: (a) short-term, linked to accounting value ratios and profitability coefficients; and (b) long-term, linked to market value factors, or asset growth factors (tien, anh and ngoc, 2020). return on equity (roe) and return on assets (roa) are the two most often employed profit objectives. one might utilize net profit, either before or after taxes, to compute these two indexes (tian & estrin, 2008). researchers, however, contend that the most appropriate term to employ is pre-tax profit after interest, which is defined as profits before interest and taxes, or after interest, depreciation, and amortization, which is defined as earnings before interest, taxes, depreciation, and amortization. there will be many financial repercussions from this decision. the disparity in profit computation techniques might perhaps be attributed to limitations in the database. many times, different calculations will be made by certain researchers due to the incompleteness of the database (tien, anh, and ngoc, 2020). financial performance financial performance refers to the extent to which a firm increases its effectiveness and efficiency in transforming the usage of its assets into profits. according to nzewi (2015), maximization of shareholders’ wealth, of which profit maximization is one aspect, is the ultimate goal of organizations such that all the policies designed and activities performed are meant to realize this grand objective. however, this does not mean that companies have no other goals. financial performance measures the extent of profitability of a firm. profit is the excess of revenue generated over the cost in the production process within a definite period (karim, kamruzzaman & kamruzzaman, 2018). mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 44 | p a g e it means the excess of revenue over net operating expenses (nworie & ofoje, 2022). in line with the submission of omari (2020), financial performance means a firm’s ability to generate a satisfactory return on invested capital through which shareholders are happy and prospective investors are motivated to invest. relatedly, shareholders are always interested in the ability of the company to use their limited assets efficiently and effectively to produce the desired profits. return is judged by assessing earnings relative to the level and sources of financing in that a profit is not made when the operating expenses are not yet covered (kajola, sanyaolu, alao & ojunrongbe, 2020). financial performance evaluates the effectiveness and efficiency with which equipment, plant, and current assets are transformed into profits (nworie & mba, 2022). financial performance could be determined through gross profit margin, return on assets (roa), return on equity (roe), net profit margin (nmp), and profit after tax (pat) (wuave, yua & mkuma, 2020). 2.2 theoretical review operating cycle theory the theory postulates that incorporating working capital measures such as accounts receivable and inventory turnover into an operating cycle concept provides an appropriate view of liquidity management than does the use of traditional measures such as current and acid-test ratios. weston (1979) noted that the additional liquidity measures recognize that life expectancies of some working capital components depend on the extent to which production; sales and collection are noninstantaneous and unsynchronized. accounts receivable turnover indicates the speed with which firm receivables are converted to cash. a change in the credit and collection policy of a firm would influence the outstanding accounts receivable balance maintained relative to the firm’s annual sales. where firms grant more liberal terms to their customers, larger and potentially less liquid current investments in receivables arise. if the sales do not increase relative to the increase in receivables then liquidity would be affected as lower receivables turnover and extended collection periods would be observed. inventory turnover indicates the frequency with which firms convert their stock of raw materials, work in progress, and finished goods into product sales. purchasing, production scheduling and distribution strategies adopted by firms require more inventory commitments about anticipated sales. this produces a lower turnover ratio which in turn reflects a longer and potentially less liquid inventory holding period. if firms do not alter the payment practices with trade creditors and their access to shortterm financing, decisions creating longer or less liquid holding periods will arise and lead to a higher current ratio. a higher current ratio implies that firms have accumulated current assets such as inventory that lie idle and therefore do not generate profits (weston 1979). it is further argued that the length of the firm's operating cycle is based on the cumulative days per turnover for receivables and inventory investments. incorporating the two measures of working capital measures provides an arguably realistic approach to a firm’s liquidity position. however, the operating cycle concept fails as mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 45 | p a g e a cash flow measure since it doesn’t consider the liquidity requirements imposed on a firm by the dimension of its current liability commitments. option pricing theory the capital asset pricing model provides a positive theory for the determination of expected returns and thus links today’s asset price with expected future payoffs. in addition, many important corporate policy problems require knowledge of the valuation of assets which, like call options, have payoffs that are contingent on the value of another asset. black/scholes (1973) provides a key to this problem in their solution to the call option valuation problem. an american call option gives the holder the right to buy a stock at a specific exercise price at any time before a specified exercise date. they note that a risk-free position can be maintained by a hedge between an option and its stock when the hedge can be adjusted continuously through time. to avoid opportunities for riskless arbitrage profits, the return to the hedge must equal the market risk-free rate; this condition yields an expression for the equilibrium call price. black/scholes note that if the firm’s cash flow distribution is fixed, the option pricing analysis can be used to value other contingent claims such as the equity and debt of a levered firm. in this view, the equity of a levered firm is a call option on the total value of the firm’s assets with an exercise price equal to the face value of the debt and an expiration date equal to the maturity date of the debt. the black/scholes analysis yields a valuation model for the firm’s equity and debt. an increase in the value of the firm’s assets increases the expected payoffs to the equity and increases the coverage on the debt, increasing the current value of both. an increase in the face value of the debt increases the debtholder’s claim on the firm’s assets, thus increasing the value of the debt, and since the stockholders are residual claimants, reduces the current value of the equity; an increase in the time to repayment of the debt or in the riskless rate lowers the present value of the debt and increases the market value of the equity. an increase in the variance rate or in the time to maturity increases the dispersion of possible values of the firm at the maturity date of the debt. since the debt holders have the maximum payment that they can receive, an increase in dispersion increases the probability of default, lowering the value of the debt and increasing the value of the equity (jensen and smith, 2001). empirical review pool, de haan, and jacobs (2015) examined loan loss provisioning, bank credit, and the real economy on how credit risk affects bank lending and the business cycle. we estimate a panel vector autoregression model for an unbalanced sample of 12 oecd countries over the past two to three decades, consisting of the output gap, inflation, the short-term interest rate, bank lending, as well as loan loss provisioning by banks (as a proxy for credit risk). our main findings are that: (i) bank lending and loan loss provisioning are important drivers of business cycle fluctuations, (ii) loan loss provisioning decreases in relative terms as bank lending increases, and (iii) bank lending is primarily affected by output fluctuations. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 46 | p a g e akins, dou, and ng (2016) examined the effect of country-level timely loan loss recognition by banks on lending corruption using a unique world bank dataset that covers more than 3,600 firms across 44 countries. we find evidence consistent with timely loan loss recognition constraining lending corruption because it increases the likelihood of problem loans being uncovered earlier. in further analysis, we find timely loan loss recognition to be less associated with reduced corruption in countries where there is significant government ownership in the banking system and deposit insurance schemes. this evidence is consistent with timely loan loss recognition being less of a deterrent to lending corruption when banks are less disciplined by their capital providers. banga (2018) carried out a study that examined the potential of green bonds in mobilizing adaptation and mitigation finance for developing countries. building upon a theoretical approach, it identifies the key drivers of the green bond market over the last few years and the barriers that impede its appropriation by developing countries. the results suggest that the rise of green bonds is a fact in developed and emerging countries, backed by an increasing climate awareness from investors. however, in developing countries, the market remains incipient, and its full potential seems to be underappreciated. hachenberg and schiereck (2018) conducted a study to answer the question, are green bonds priced differently from conventional bonds? however, it is an open question whether this new asset class is also offering attractive risk-return profiles compared to conventional (non-green) bonds. to address this question, we match daily i-spreads of green-labeled and similar non-green-labeled bonds and look at their pricing differentials. we find that rating classes aa–bbb of green bonds as well as the full sample trade marginally tighter for the respective period compared to non-green bonds of the same issuers. furthermore, financial and corporate green bonds trade tighter than their comparable nongreen bonds, and government-related bonds on the other hand trade marginally wider. issue size, maturity, and currency do not have a significant influence on differences in pricing but industry and esg rating. 3. methodology the study adopts an ex-post factor research design. the data collected for this study is sourced from corporate financial reporting under the nigeria exchange group. the estimated pooled ols equation was formulated similarly to the main regression equation. the pooled ols estimation process involved minimizing the sum of squared residuals. the parameters were estimated simultaneously to achieve the lowest possible sum of squared residuals (wooldridge, 2012). the estimated pooled ols regression is presented as follows: �̂� = �̂�0 + �̂�1𝑥1 + �̂�2𝑥2 + �̂�3𝑥3 + ⋯ + �̂�𝑘𝑥𝑘 … … … … … … … … … . (1) where �̂�0is the estimate of constant, and �̂�𝑖 are the estimates of slopes corresponding to each explanatory variable? mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 47 | p a g e panel data incorporates both cross-sectional and time-series dimensions, which may introduce crosssectional effects, time effects, or both. these effects can be modeled using either fixed effects or random effects. in a fixed effects model, it is assumed that cross-sectional or time-series intercepts vary, whereas a random effects model focuses on how error variances change. estimation in a fixed effects model can be performed using two approaches: the within effect and the between effect estimates. while these methods yield different parameter estimates, they produce identical slopes for non-dummy independent variables (wooldridge, 2012). the between-effect estimation is further divided into between-time and between-group estimators. in a random effects model, the error variance is analyzed concerning cross-sections and/or time series. this model is particularly suitable for cases where individuals (cross-sectional units) are randomly selected from a larger population. two estimators are available for the random effects model: the generalized least squares (gls) method, used when the variance-covariance matrix is known, and the feasible generalized least squares (fgls) method, which estimates the variance structure. both fixed and random effects models allow for one-way and two-way analyses. a one-way analysis considers only cross-sectional variables, while a two-way analysis accounts for both cross-sectional and time-series data. table 1 presents the equations for the fixed and random effects models under the one-way approach, which will be adopted for this study. table 1: fixed and random effect panel data models terms fixed effect model random effect model equation one-way: 𝑦𝑖𝑡 = (𝛼 + µ𝑖) + 𝑥𝑖𝑡𝜋 + ∈𝑖𝑡 one-way: 𝑦𝑖𝑡 = 𝛼 + 𝑥𝑖𝑡𝜋 + (µ𝑖 +∈𝑖𝑡) intercept differing across crosssectional/time series constant error variance constant differing across cross-sectional/time series slope constant constant estimation between, within fgls, gls were 𝑦𝑖𝑡 = dependent variable 𝑥𝑖𝑡 = independent variable ∈𝑖𝑡 = zero mean random disturbance µ𝑖 = unobserved individual-specific effect 𝛼 = model coefficient referring to table 1, fixed effects models account for individual-specific effects µ𝑖 by allowing variations in intercepts while maintaining a consistent slope and constant variances across cross-sections. since these individual-specific effects remain unchanged over time, µ𝑖 can be correlated with other mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 48 | p a g e independent variables (wooldridge, 2009). in contrast, random effects models assume that both the intercept and slope remain constant, treating individual-specific effects as part of the error variance. 3.2 panel unit root test to study the stationary of variables we apply levin, lin, and chu (llc) (e.g., levin et al., 2002). im, pesaran, and shin (ips) (e.g., im et al., 2003), are mentioned by madala and wu (1999) (e.g., mandala and shaowen, 1999). these tests are among the most significant unit root tests for panel data, while different approaches may yield inconsistent findings. the null hypothesis in each of these tests suggests that there is a unit root. 3.2.1 result of panel unit root test the results of the panel unit root tests are displayed in table 2. two test statistics are calculated for each variable. the results show that all the variables are stationary in the level form. table 2: panel unit root test llc ips intergration order comments llp -3.4219 [0.0332] -8.0231 [0.0000] i (0) stationary at the level stage grb -2.6849 [0.0021] -8.9475 [0.0000] i (0) stationary at the level stage roa -3.9482 [0.0001] -5.21567 [0.0000] i (0) stationary at the level stage llp = loan loss provision, grb = green bond, roa = return on assets 3.2.2 correlation the correlation statistic reveals how linearly related two variables are (meaning they change together at a constant rate). it's a common strategy for explaining simple relationships without specifying cause and effect. the sample correlation coefficient quantifies the magnitude of the link; however, correlation cannot test for the existence or impact of any other variables outside the two under examination. additionally, correlation reveals nothing about causation and effect. as a result, for the variable employed in this inquiry, we have produced the correlation table below. table 3: bivariate correlation of all the variables correlation llp grb roa llp 1 grb -0.5769 1 roa 0.6825 0.9984 1 llp = loan loss provision, grb = green bond, roa = return on assets mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 49 | p a g e the above table 4 shows the bivariate correlation of the variables under study, it’s obvious that there is a degree of relationship that exists between the roa, llp, and grb. table 4: model summary model 1 (roa) fixed effect random effect pooled ols llp 16579.81 [0.000] * 1025.15 [0.006] * 1719.091 [0.005] grb 721.4312 [0.3012] -813.624 [0.617] -764.023 [0.713] table 4 clearly states the coefficients and probability values for all the predictor variables for the different models. each model represents a different dependent variable of interest to the researcher; the table also presented the fixed/random effect model as well as the pooled regression. the result indicates that for the models only loan loss provision (llp) with a coefficient of 1025.15 (0.006) was found to be statistically significant at a 5% level of significance. the result of the green bond states that at a 5% level of significance, the green bond has no significant effect on return on assets having a coefficient of -813.624 (0.617). based on the selection criteria for choosing the model between the fixed effect and random effect we made use of the hausman test in the below table 5 table 5: hausman test model test cross-section random effect roa 1 test summary chi-sq. statistic prob cross-section random 13.43 0.0623 it’s notable from table 5 above that we accept the null hypothesis of the hausman test and conclude that the best regression model to estimate the unobserved effect in models 1 and 2 is the random effect model rather than the fixed effect model. 5. conclusion in conclusion, the study of green financial management practices and their impact on corporate financial performance in nigeria reveals critical insights. loan loss provisions play a significant role in enhancing financial performance, highlighting the importance of effective risk management within mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 50 | p a g e the corporate sector. this suggests that firms that prioritize prudent provisioning are better positioned to navigate financial uncertainties and maintain robust performance metrics. conversely, the analysis indicates that green bonds do not exhibit a significant effect on corporate financial performance in nigeria. this may reflect the nascent stage of green financing in the region, where market awareness and investor confidence in such instruments are still developing. as the green finance landscape evolves, companies need to explore innovative approaches to integrate sustainability into their financial frameworks effectively. overall, while loan loss provisions are critical for financial stability and performance, the limited impact of green bonds underscores the need for a more supportive regulatory environment and enhanced market education to leverage green finance's full potential in nigeria. the study concludes that green financial management practice has a significant effect on corporate financial performance in nigeria. recommendations based on the findings regarding the effect of green financial management practices on corporate financial performance in nigeria, the following recommendations are proposed: i. corporations should prioritize the establishment and maintenance of robust loan loss provisioning frameworks. this will not only mitigate financial risks but also contribute to improved financial performance. regular training and updates on best practices in risk management should be implemented to ensure that financial teams are well-equipped to handle loan provisions effectively. ii. to improve the impact of green bonds on corporate financial performance, it is essential to enhance awareness and understanding of these instruments among corporate managers and investors. educational programs and workshops can help stakeholders recognize the potential benefits and opportunities presented by green financing. references akins, b., dou, y., and ng, j. (2017). corruption in bank lending: the role of timely loan loss recognition. journal of accounting and economics, 63(2-3), 454-478. andreeva, o. v., vovchenko, n. g., ivanova, o. b. and kostoglodova, e. d. (2018). green finance: trends and financial regulation prospects. in contemporary issues in business and financial management in eastern europe (pp. 9-17). emerald publishing limited. banga, j. (2019). the green bond market: a potential source of climate finance for developing countries. journal of sustainable finance & investment, 9(1), 17-32. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 51 | p a g e byrd, j., and cooperman. e. s. (2018). “investors and stranded asset risk: evidence from shareholder responses to carbon capture and sequestration (ccs) events.” journal of sustainable finance & investment 8 (2): 185–202. https://doi.org/10.1080/20430795.2017.1418063. caldecott, b. 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(2015). loan loss provisioning, bank credit and the real economy. journal of macroeconomics, 45, 124-136. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 3, july-september 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 52 | p a g e schoenmaker, d. 2017. investing for the common good: a sustainable finance framework. bruegel. http://bruegel.org/2017/07/investing-for-the-common-good-a-sustainablefinance-framework/ shishlov, i., morel, r. and cochran, i. (2016). beyond transparency: unlocking the full potential of green bonds. paris: institute for climate economics. https://www.i4ce.org/wp-core/wpcontent/uploads/2016/06/i4ce_green_bonds.pdf. srivastava, a. k., dharwal, m., & sharma, a. (2022). green financial initiatives for sustainable economic growth: a literature review. materials today: proceedings, 49, 3615-3618. tian, l., & estrin, s. (2008). retained state shareholding in chinese plcs: does government ownership always reduce corporate value? journal of comparative economics, 36(1), 74–89. tien, n. h., anh, d. b. h., & ngoc, n. m. (2020). corporate financial performance due to sustainable development in vietnam. corporate social responsibility and environmental management, 27(2), 694-705. mailto:contact@americaserial.com mailto:contact@americaserial.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 50 | p a g e modern financial management practices and fraud mitigation in the public sector: the nigerian experience obarisiagbon maureen iroghama, fca and eke robert ike phd, fca. department of accounting and finance, college of social and management sciences, wellspring university benin city, edo state. email: mobarisiagbon2080@gmail.com; and robbyeke19@yahoo.com; phone number: 08035569223, 08034712733 doi: https://doi.org/10.5281/zenodo.17911755 abstract: this study examined the impact of modern financial management practices on fraud mitigation in the nigerian public sector, focusing on federal government parastatals operating in edo state. the study specifically assessed the effectiveness of the treasury single account (tsa), integrated payroll and personnel information system (ippis), and government integrated financial management information system (gifmis) in reducing fraudulent activities and improving financial transparency. a descriptive survey research design was adopted, and structured questionnaires were administered to staff in the accounting, audit, and budget departments of selected federal mdas. data collected were analyzed using descriptive statistics and multiple regression analysis. the findings revealed that all three financial management reforms—tsa, ippis, and gifmis—have significant positive effects on fraud mitigation, with ippis exhibiting the strongest influence. the regression model showed an r value of 0.899 and an r² of 0.808, indicating that 80.8% of the variation in fraud mitigation is explained by the combined effect of the independent variables. the study concludes that modern financial management practices play a crucial role in enhancing accountability and reducing fraud in nigeria’s public sector. it recommends strengthening compliance with tsa, expanding ippis coverage, enhancing gifmis functionality, and investing in capacity building and digital infrastructure to sustain improvements in public financial integrity. keywords: treasury single account (tsa), ippis, gifmis, fraud mitigation, public sector financial management. 1.0 introduction the nigerian public sector continues to grapple with entrenched issues of financial mismanagement, systemic corruption, and pervasive fraud, which have collectively hindered sustainable development mailto:mobarisiagbon2080@gmail.com;%20and mailto:robbyeke19@yahoo.com american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 51 | p a g e and the effective delivery of public services. practical evidence reveals how these issues have not only strained the fiscal capacity of the government but have also significantly eroded public trust and institutional credibility (akinyemi & adegbite, 2023). given the huge efforts by successive anticorruption campaigns and institutional reforms, fraudulent practices—ranging from embezzlement and misappropriation of public funds to procurement-related malfeasance—remain deeply institutionalized within the bureaucracy (oni & salisu, 2022). the persistence of these malpractices underscores the structural weaknesses within nigeria’s public financial management architecture. scholars argue that the lack of robust internal control systems, deficient audit practices, and the politicization of oversight bodies have created an enabling environment for fraud to flourish (obiora et al., 2023). moreover, the inadequacy of digital financial tracking systems and the continued reliance on manual processes have compounded issues of poor record-keeping and financial opacity (ezeani, 2024). these systemic inefficiencies not only weaken resource mobilization and allocation but also fuel a culture of impunity among public officials, particularly in ministries, departments, and agencies (mdas) with minimal external scrutiny (ogundipe & uche, 2023). the policy environment has often been reactive rather than preventive, lacking in the strategic foresight needed to address governance gaps. while frameworks such as the integrated financial management information system (ifmis) and the treasury single account (tsa) have shown promise, their uneven implementation and circumvention by vested interests limit their efficacy (nwokedi, 2024). consequently, fraud in the nigerian public sector persists not merely as an isolated set of criminal acts but as a symptom of deeper governance and accountability crises. addressing these challenges demands a rethinking of institutional design, political will, and the integration of real-time digital monitoring systems capable of detecting and deterring financial irregularities in public administration. in response to the persistent inefficiencies, fraud and systemic corruption that have historically plagued nigeria's public financial management, the federal government has implemented a series of reformative measures aimed at institutional modernization, transparency, and accountability. these reforms, deeply embedded in nigeria’s broader public sector transformation strategy, points out a shift from manual, opaque bureaucracies to technology-driven governance (world bank, 2023). a flagship initiative in this regard is employment of modern financial management practices such as the integrated payroll and personnel information system (ippis), which seeks to eliminate the entrenched problem of “ghost workers”—a phenomenon that has long facilitated payroll fraud and fiscal leakages. through digital centralization of staff records and payroll processes across ministries, departments, and agencies (mdas), the integrated payroll and personnel information system has led to the discovery and removal of thousands of fictitious employees, saving the government billions of naira (olaniyan & american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 52 | p a g e adetoro, 2023). however, critics argue that while the integrated payroll and personnel information system (ippis) has made strides in personnel management, it remains vulnerable to manipulation by internal actors, reflecting broader concerns about technological reforms outpacing institutional capacity (akinwale & eze, 2024). complementing this is the treasury single account (tsa), launched in 2015, which consolidates government revenue inflows into a singular account maintained by the central bank of nigeria. this reform aims to curtail the proliferation of fragmented bank accounts held by mdas—a practice that previously enabled opaque transactions and illicit financial diversions. recent evaluations suggest that the treasury single account has improved fiscal discipline and enhanced the government’s cash management framework (imf, 2024). nonetheless, its implementation has not been without challenges, including resistance from powerful political and institutional actors who benefited from the status quo ante (ajayi & okechukwu, 2023). while these reforms mark significant steps toward more transparent governance, they also reveal the tension between digital innovation and entrenched institutional inertia. a key concern remains the lack of robust enforcement mechanisms and the absence of citizen engagement in monitoring government expenditures. as such, experts contend that technological reforms like ippis and tsa must be embedded within a broader framework of public accountability, civil society oversight, and institutional reform to yield sustained impact (oecd, 2023). the deployment of the government integrated financial management information system (gifmis) in nigeria represents a significant stride toward modernizing public financial administration. as a comprehensive digital platform, government integrated financial management information system is designed to automate and integrate essential fiscal operations, including budgeting, treasury management, accounting, and financial reporting (world bank, 2023). its real-time data processing capabilities allow for enhanced oversight by enabling government institutions to track expenditures, reconcile accounts, and generate accurate reports efficiently. however, while such digitization ostensibly promises improvements in transparency and accountability, its practical effectiveness has been mixed. contemporary evaluations reveal that although gifmis has contributed to reducing some forms of manual errors and limiting certain avenues for financial mismanagement, systemic challenges persist. for example, high-profile cases of procurement fraud, budget padding, and unauthorized virements continue to surface, highlighting the adaptive nature of corruption in the public sector (ibrahim & udeh, 2023). moreover, entrenched bureaucratic resistance to technological reforms, coupled with inadequate digital literacy among civil servants, significantly impedes the full potential of government integrated financial management information system (adewole et al., 2022). crucially the issue is not merely technical but institutional. weak enforcement mechanisms, limited political will, and compromised oversight bodies often undermine the integrity of public financial systems, regardless american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 53 | p a g e of the technological tools in place (okonkwo & ekong, 2024). the nigerian experience thus exemplifies that while digital financial platforms like government integrated financial management information system can serve as catalysts for reform, they are not panaceas. effective implementation must be supported by robust institutional frameworks, continuous capacity building, and unwavering political commitment to transparency and accountability. the adoption of technology-driven public financial management systems—such as the integrated payroll and personnel information system (ippis), treasury single account (tsa), and government integrated financial management information system (gifmis) has enhanced transaction visibility and traceability in nigeria. however, systemic issues such as institutional inertia, inadequate technical expertise, and entrenched corruption continue to hinder their effectiveness (adegbite & olayiwola, 2023). while these systems are designed to curb payroll fraud, eliminate ghost workers, and consolidate government revenues, their success remains contingent upon rigorous enforcement, independent audits, and institutional accountability (ezeani et al., 2022). despite incremental gains, study conducted by okonkwo and ahmed (2024) reveal that the sustainability of these reforms is undermined by weak political will and a persistent culture of impunity in the public sector. this research critically evaluates the extent to which these systems have contributed to fraud reduction. moreover, it addresses broader structural and cultural barriers to reform implementation, offering policy-relevant insights for enhancing transparency and accountability in nigeria’s public financial landscape. thus, the motivation for this study therefore, lies in addressing these compelling teething issues in the nigerian clime. there is a compelling need to re-examine the efficacy of modern financial management tools not merely as technological innovations, but as instruments embedded within a broader sociopolitical and institutional context. a critical understanding of these dynamics is essential to inform policy realignment, improve financial accountability, and restore public sector credibility (ezenwa & mohammed, 2024). the study is also motivated by the paucity of conceptual frameworks that integrate governance theory, institutional capacity, and digital infrastructure in explaining the outcomes of financial reforms. by bridging this gap, the paper aims to contribute to both theory and praxis—offering insights that are academically rigorous and practically relevant to stakeholders involved in public financial governance in nigeria. to this end, the following research questions are raised for the purpose of investigation of this study: 1.2 research question i. what is the impact of integrated payroll and personnel information system (ippis) on fraud mitigation in the nigerian public sector? ii. what is the relationship treasury single account (tsa) and fraud mitigation in the nigerian public sector? american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 54 | p a g e iii. what is the implication of government integrated financial management information system (gifmis) on fraud mitigation in the nigerian public sector? 1.3 objective of the study the general objective of this study is to investigate the impact of modern fraud management instruments on fraud reduction in the nigerian public sector. however, the specific objectives are to: i. examine the impact of integrated payroll and personnel information system (ippis) on fraud mitigation in the nigerian public sector; ii. ascertain the relationship between treasury single account (tsa) and fraud mitigation in the nigerian public sector; and iii. assess the implication of government integrated financial management information system (gifmis) and fraud mitigation in the nigerian public sector. 1.4 scope this study focuses on examining the impact of modern financial management practices on fraud mitigation in the nigerian public sector, with particular emphasis on federal government parastatals operating within edo state. geographically, the study is limited to selected federal parastatals in the state, as they represent key public institutions where modern financial reforms such as digital payment platforms and integrated accounting systems have been actively implemented. the study specifically investigates three major financial management practices introduced by the federal government of nigeria—treasury single account (tsa), integrated personnel and payroll information system (ippis), and the government integrated financial management information system (gifmis). these constitute the independent variables. the research assesses how each of these reforms has contributed to enhancing transparency, tightening internal controls, and reducing opportunities for fraudulent practices in public financial transactions. 2.0 literature review 2.1 conceptual review 2.1.0 modern financial management practices 2.1.1 integrated payroll and personnel information system (ippis) modern financial management practices encompass the adoption of contemporary tools, technologies, and methodologies aimed at enhancing transparency, accountability, and efficiency in financial operations. in the public sector, especially in countries like nigeria, these practices are pivotal in combating financial mismanagement and fraud (ojo & adesina, 2022). modern financial management practices involve the integration of advanced technologies, standardized procedures, and strategic frameworks to enhance transparency, accountability, and efficiency in financial operations. in nigeria's public sector, these practices are pivotal germane in tackling issues related to financial mismanagement american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 55 | p a g e and fraud. effective financial management is pivotal for the efficient operation of the public sector, particularly in developing economies like nigeria. over the years, nigeria has embarked on various reforms to enhance transparency, accountability, and efficiency in public financial management (pfm) (okwu, & etekpe, 2022) the integration of digital technologies into nigeria's public financial management has been a significant step toward enhancing efficiency, reducing fraud and corruption. njoku et al. (2023) highlight the adoption of digital tools such as forensic accounting, e-governance platforms, and icts in financial management processes. their study indicates that approximately 63% of surveyed public sector employees reported the use of digital technologies in tasks like tax compliance and reporting. the benefits identified include improved transparency, enhanced decision-making, and increased efficiency. however, challenges such as resistance to change and high implementation costs persist. the connection between financial management and fraud in nigeria's public sector is evident through systemic weaknesses, the role of professionals in facilitating fraud, and the challenges in implementing technological and forensic solutions (olagunju & olufemi, 2021). effective financial management is crucial for ensuring transparency, accountability, and the efficient use of public resources. in nigeria, however, weaknesses in financial management systems have been closely linked to the prevalence of fraud within the public sector. recent investigations and reports highlight how lapses in financial controls, procurement processes, and oversight mechanisms have facilitated fraudulent activities across various government ministries, departments, and agencies (mdas). the office of the auditorgeneral for the federation uncovered irregular payments totaling over ₦197.72 billion across multiple mdas between 2020 and 2021. these included payments for contracts that were either partially executed or not executed at all, as well as violations of procurement laws and financial regulations. such systemic weaknesses in financial management create opportunities for fraud and misappropriation of public funds (olagunju & olufemi, 2021). 2.1.2 treasury single account (tsa) the treasury single account (tsa) is a financial policy implemented by the nigerian government to consolidate all inflows from various ministries, departments, and agencies (mdas) into a single account at the central bank of nigeria (cbn). this system aimed to enhance transparency, reduce financial mismanagement, and improve fiscal discipline within the public sector (. ). introduced in 2012 under president goodluck jonathan and fully implemented during president muhammadu buhari's administration, the tsa was designed to centralize government revenue and payments, thereby minimizing the risk of corruption and inefficiency. the international monetary fund (imf) supports such systems, noting that they can reduce borrowing costs and improve fiscal policy outcomes. american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 56 | p a g e in recent years, the nigerian government has made notable adjustments to the tsa policy: in october 2023, president bola tinubu approved the removal of the fct administration from the tsa (ekperi, & anokwu, 2023). this decision was made to allow the fct easier access to its internally generated revenue (igr) for infrastructural development, as the tsa's centralized nature had previously hindered timely funding for projects. in september 2024, the federal government directed that thirdparty research grant funds for federal universities and research institutions be excluded from the tsa (wikipedia, 2025). this move aimed to enhance the financial autonomy of these institutions and promote innovation by allowing them direct access to research funds. in january 2024, the government announced the shutdown of the tsa for revenue collection, directing all mdas to remit revenues into a sub-recurrent account, a component of the crf (emetaram & ofor (2025). this change was intended to improve revenue generation and fiscal discipline. on the overall, the tsa has been credited with improving fiscal responsibility by providing the government with a consolidated view of its cash resources, thereby facilitating better planning and allocation (olanrewaju, & afolabi, 2022). by centralizing government revenues, the tsa has helped in curbing mismanagement and embezzlement of public funds (muhammad, 2023). 2.1.3 integrated payroll and personnel information system (ippis) enakirerhi and temile (2017) see ippis as an it-enabled facility being put in place to establish a reliable and comprehensive database for the public service, facilitate manpower planning, eliminate record and payroll fraud, facilitate easy storage, update and retrieval of personnel records for administrative and pension processes and staff remuneration payment with minimal wastages and leakages. according to them, since the inception of the project. ippis has saved the federal government of nigeria billons of naira by eliminating thousands of ghost workers via personnel verification exercise and salary payment process. while enakirerhi and temile (2017) conceptualized ippis from it-enabled facility which has assisted the government in saving billions of naira, ugada and eze (2024) noted that proper implementation of ippis can eliminate payroll fraud in nigeria civil service. farajimakin and anichebe (2019) view ippis as intervention scheme and reform when they observed that, integrated personnel and payroll information system (ippis): is a world bankassisted project under the economic reform and government project (ergp) which was aimed at establishing a reliable and comprehensive database for the public service, facilitate manpower planning, assist in providing information for decision making, eliminate double dipping and credentials falsification, facilitate easy storage, update and retrieval of personnel record for administrative and pension process, and to facilitate staff remuneration payment. to them, ippis programme enable the mdas to fish out the ghost workers for the attainment of public probity in governance (farajimakin & anichebe, 2019). american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 57 | p a g e 2.1.4 government integrated financial management information system (gifmis) an integrated financial management information system (ifmis) refers to the application of technology in managing financial activities to enhance fiscal decision-making, ensure fiduciary accountability, and streamline the preparation of financial reports and statements. in the public sector context, ifmis represents the digital transformation of public financial management (pfm) processes (usaid, 2008). it is a comprehensive, it-based budgeting and accounting system that integrates all financial management functions within government institutions into a unified platform. this system supports the formulation and execution of annual budgets, tracking of expenditures, financial reporting, and delivery of efficient and cost-effective public services. by operating on a standardized framework, ifmis promotes consistency and interoperability of fiscal data across agencies, thereby reducing the need for fragmented and expensive standalone accounting systems in individual government entities (oyinlola et al., 2017). in 2011, during the initial implementation of the government integrated financial management information system (gifmis), the office of the accountant-general of the federation uncovered that nigeria's ministries, departments, and agencies (mdas) maintained approximately 12,622 bank accounts across various commercial banks. this fragmented banking structure hindered the government's ability to ascertain its consolidated cash position, leading to inefficiencies in cash management and necessitating additional borrowing, which adversely affected the national budget. gifmis was introduced to address these challenges by centralizing and automating public financial management processes (ibrahim & dauda, 2014) the system integrates budget preparation and execution, treasury management, financial reporting, procurement, and revenue management into a unified platform; this integration enhances real-time monitoring of government expenditures and revenues, thereby improving transparency and accountability (clement, 2023). recent initiatives underscore the government's commitment to leveraging gifmis for improved fiscal discipline. in preparation for the 2024 budget, the budget office of the federation commenced training for mda personnel on the use of the gifmis budget preparation sub-system (bps) (mathew, 2024). this training aimed to equip budget officers with the necessary skills to efficiently utilize the system, ensuring accurate budget preparation and execution. furthermore, the federal government has unveiled plans to deploy a central revenue system integrated with gifmis to enhance financial transparency and accountability. this system will monitor revenue generation and provide a consolidated dashboard of the revenue situation for all federal governmentowned enterprises, facilitating direct payments to beneficiaries and reducing opportunities for revenue leakage. in a nutshell, the implementation of gifmis has been pivotal in reforming nigeria's public financial management by centralizing financial operations, enhancing transparency, and improving american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 58 | p a g e budgetary controls. these reforms contribute to more efficient public service delivery and bolster the government's efforts to combat financial mismanagement. 2.1.5 fraud and fraud mitigation fraud is still a significant issue for all businesses, regardless of their size or complexity. it's a phenomenon that eats away at both growth and profit margins ((larson,2016). people frequently question why there is so much fraud and why it is not identified sooner to prevent damages. fraud is defined as a willful disdain for an organization’s structure and a concerted effort to circumvent it for personal gain. fraud is commonly defined as intentional deception aimed at securing unlawful gain or depriving others of their rightful resources (bello & thomas, 2023). in the nigerian public sector, one of the most pervasive forms of fraud is payroll fraud, particularly involving ghost workers—non-existent or unauthorized individuals listed on government payrolls. this malpractice results in significant financial losses, with estimates indicating that nigeria loses over ₦100 billion annually due to ghost worker schemes. ghost worker fraud encompasses various deceptive practices, including the inclusion of fictitious names, impersonation of former employees, and manipulation of employment records to illicitly obtain salaries (stransact, 2024). these fraudulent activities are often facilitated by individuals with access to payroll systems, exploiting weaknesses in oversight and verification processes. 2.2 conceptual framework dependent variable: independent variables: source: researcher’s conceptual framework design, 2025 2.3 theoretical framework this study employed fraud triangle theory to discuss the study. the fraud triangle theory, developed by donald cressey in the 1950s, originally emerged from criminological studies of embezzlers, which fraud reduction tsa ippis gifmis e e profit (capital ) appreciatio n) american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 59 | p a g e was termed “trust violators.” cressey posited that three-elements, namely, pressure, opportunity, and rationalization—must coexist for occupational fraud to occur (cressey, 1953). in financial management literature, the theory has become a foundational framework for understanding internal fraud, particularly in public sector institutions where weak controls create opportunities for misappropriation. in the nigerian public sector, reforms such as the treasury single account (tsa), integrated payroll and personnel information system (ippis), and government integrated financial management information system (gifmis) are directly aligned with the fraud triangle framework by targeting the opportunity leg of the triangle. these systems introduce automation, centralization, and real-time monitoring, thereby closing loopholes that previously allowed for mismanagement and fraud (omodero & alege, 2023). for instance, tsa reduces opportunities for fund diversion by consolidating government accounts. ippis minimizes payroll fraud through biometric verification and centralized staff records, while gifmis ensures transparent budgeting and expenditure tracking. by mitigating opportunity and increasing transparency, these reforms make rationalization and concealment more difficult, thereby reducing fraud incidence (nwaiwu & adigwe, 2022). 2.4 empirical review several financial management practices have been introduced to reform and improve public sector performance in nigeria. the treasury single account (tsa), government integrated financial management information system (gifmis), and integrated personnel and payroll information system (ippis) are notable examples of the modern financial management practices into the nigerian public sector space. bashir (2016) evaluated the effects of treasury single account on public finance management in nigeria. the study examined the extent to which treasury single account can block financial leakages, promotes transparency and accountability in the public financial management. both primary and secondary data was employed. the populations of study were drawn from ministries, department and agencies (mdas) within bauchi metropolis and a sample of 72 respondents were chosen through judgment sampling technique. pearson correlation technique was used to analyze using the pearson correlation techniques. the result of this research showed that adoption of a treasury single account (tsa) is capable of plugging financial loopholes, promoting transparency and accountability in the public financial system. the study recommends that for the success of this policy government should promulgate more legislation to make it mandatory for all the three tiers of government in nigeria. kanu (2016) assessed the positive effect of implementation of tsa on the economy, the public accounting system and the undesired consequences on the liquidity base and presentation of banking sector in nigeria. the populations of the study were drawn from 24 banks in nigeria and the samples of ten banks were chosen through descriptive and inferential statistics. the data were analyzed using american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 60 | p a g e chi-square. the results obtained established that the implementation of tsa in the public accounting system impacted negatively on the liquidity base and the performance of banking sector in nigeria. the study recommends that cbn and the government should come up with an arrangement to address the issue of tsa considering the impact of the activities as the important factor for efficient management, control of government's cash resources as well as sustainability of banks. badejo et al (2017) using exploratory study of the nexus of tsa policy in nigeria: an exploratory discourse observed that the implementation of the policy is critical towards curbing financial leakages, excesses as in public finance, it eliminates financial indiscipline and ensure adequate fund flow that will be channeled to critical sectors of the economy. thus, guiding government in its’ spending and receipts towards accelerating the rate of national growth and development. this is made in line with trajectory of the extant mismanagement of government resources. the study drew references from previous experiences of developed countries such as france, uk and other countries. oyedokun (2016) using meta-analysis to study the imperative of tsa in nigeria focusing on public federal institutions as the case study reported mixed results. he recommended tsa for the prevention of fraudulent activities and enable government to monitor its resources at a glance. he further noted that despite the legion of benefits of tsa, its challenges are abounded in nigeria. though, care must be taken in order not to allow the unenthusiastic effect of tsa to overpower the meaning of government. kankpan et al., (2022) examined the extents to which the implementation of the tsa policy has affected the minimization of corruption and other unwholesome fraudulent practices in the nigerian public sector. the study was conducted as a conceptual study by reviewing the works of several other researchers regarding the effect of tsa. the study concluded that notwithstanding the various strategies put in place by successive administrations in nigeria to combat corruption and public sector fraud, it has persisted because of the lack of political will to put a definite end to the monster. the study recommended that the government through appropriate agencies should strengthen the process of tsa compliance ajao, et al., (2022) study examined the effect of government integrated management information system on fraud prevention in nigerian. survey design was adopted. one hundred and thirty-seven (137) copies of questionnaires were administered to government employees in the selected agencies and one hundred and thirty-three (133) were returned. descriptive and inferential (multiple regression) were used to analyse the data. the result of the finding shows that integrated financial management information has significant effect on fraud prevention in nigerian public sector. adj. r2= 0.64, f statistics 35.862, pvalue. the study concluded that integrated financial management information system has significant effect on fraud management. the study recommended that the federal government should maintain the integrated financial management system so that when power changes, american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 61 | p a g e they will continue to use the system that is already in place to avoid stagnating economic growth and development. izang et al., (2024) study looked at how integrated management information systems affected fraud monitoring and detection in the nigerian public sector. a survey design was used. government employees in the chosen agencies were given 137 questionnaires; 133 of them were returned. both descriptive and inferential (multiple regression) methods were used to analyze the data. integrated financial management information has a significant impact on fraud detection in the nigerian public sector, according to the findings. information from integrated financial management has a significant impact on nigeria’s public sector’s ability to monitor fraud. the integrated financial management information system can monitor and detect fraud, according to the study’s findings, and it is recommended that the federal government’s gifmis officers make sure the system is upgraded to include new capabilities. instances of fraud should not be kept secret; instead, they should be made known, and those responsible should be held accountable. micah and ngerobo-a (2025) examine the effect of the integrated payroll and personnel information system on wage fraud control in nigeria’s federal ministry of education. specifically, it assessed the influence of biometric verification, payroll automation, real-time staff record updating, and compliance with audit protocols on reducing wage fraud. the research adopted a survey design, targeting administrative, finance, and human resource personnel from the nigeria’s federal ministry of education. a stratified random sample of respondents was selected, and data were collected through a structured questionnaire. descriptive statistics and multiple regression analysis were employed using spss. findings revealed that biometric verification and payroll automation contributed significantly to wage fraud control. however, real-time staff record updating and compliance with audit protocols did not have statistically significant effects. the study concluded that while ippis has improved payroll integrity through biometric and automation mechanisms, its full potential is hindered by weak implementation of real-time updates and audit compliance. this study contributes to public administration literature by empirically validating key ippis mechanisms in a high-risk ministry. it is recommended that government agencies enhance biometric data updates, strengthen automation infrastructure, improve training for hr and payroll staff, and enforce strict audit compliance to maximize ippis effectiveness. emetaram and ofor (2025) examined the effect of integrated payroll and personnel information system (ippis) on the reduction of payroll malpractices in public service. the independent variable used was integrated payroll and personnel information system (ippis) while ghost workers and payroll fraud were dependent variables. to achieve this purpose, research questions were raised, hypotheses were formulated and review of related literature was made. the study used a well-structured american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 62 | p a g e questionnaire designed in likert 5point scale and was administered on the federal civil servants from different mdas at the federal secretariat complex, awka, anumbra state. the stated hypotheses were tested with the t-test technique. findings revealed that integrated payroll and personnel information system had a positive and significant effect on the reduction of ghost workers as well as payroll fraud in nigerian public service. the research concluded that integrated payroll and personnel information system exerted a positive and significant effect on the reduction of payroll malpractices in nigerian public service. okonkwo et. al., (2023) examined the effect of implementation of ippis on the payment of staff of nigeria universities. the specific objectives were to examine the influence of ippis implementation on the gains of staff of nigerian universities and assess the influence of ippis implementation on the pains of staff of nigerian universities. the study adopted survey research design because it had to sort the opinions of respondents as regard to the issue of ippis implementation in nigeria. the study population was two hundred and seventy-eight (278) respondents. the entire population was adopted as the sample size. data were collected through a structured questionnaire, presented in tables and analyzed using simple percentages. formulated null hypotheses were tested using one sample t-test statistical tool at 0.05 level of significance through statistical package for social sciences (spss, version 23). the study found that ippis implementation had both significant influence of on the gains of staff of nigerian universities [pvalue=0.004, at 0.05 level of significance] and on the pains of staff of nigerian universities [pvalue=0.000, at 0.05 level of significance]. the study concluded that there is influence of ippis implementation on the gains and pains of staff of nigerian universities. recommendations were made among other things that the implementation of ippis should be fully emphasized to consolidate on its gains and that more attention been given to ippis implementation in tackling the aforementioned challenges (pains of staff of nigerian universities). idris et., al (2015) examined integrated personnel payroll and information system (ippis) panacea for ghost workers syndrome in nigerian public service. the study used data from both primary and secondary sources. the data were analyzed using the simple percentage, frequency tables, mean score and spearman rank order correlation technique. the study found that ghost workers syndrome was rampant in the public service and that the integrated personnel payroll and information system (ippis) if properly adopted in the public service, it would ensure a virile economy through enhance productivity. effiong etal., (2017) examined the effects of treasury single account (tsa), integrated payroll and personnel information system (ippis), and integrated financial management information system (ifmis) on fraud management in the public sector in nigeria. the study was conducted using descriptive research design with questionnaire administered on respondents randomly selected from the studied ministries. the linear regression model was employed in establishing the relationship american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 63 | p a g e between variables and the study finding showed that tsa, ippis, and ifmis have positive and significant relationship with fraud and fraud management as well as jointly impact the performances of public interest entities. 3. methodology the study adopted a descriptive survey research design. this design is appropriate because it enables the researcher to obtain quantitative data from respondents regarding the implementation of modern financial management practices—treasury single account (tsa), integrated personnel and payroll information system (ippis), and government integrated financial management information system (gifmis)—and their influence on fraud mitigation in federal government parastatals in edo state. the design also allows for objective analysis through statistical tools. the population of this study comprises staff of federal ministries, departments, and agencies (mdas) operating in edo state, specifically those working in the accounting, audit, and budget departments. these departments were selected because they are directly involved in the implementation and use of key modern financial management systems such as the treasury single account (tsa), integrated payroll and personnel information system (ippis), and government integrated financial management information system (gifmis). for the purpose of this study, an estimated 12 federal mdas were considered. each mda typically maintains an average of 10 relevant staff across the accounting (4 staff), audit (3 staff), and budget (3 staff) units. based on this estimate, the total population for the study is: 12 mdas×10 staff per mda=120 .thus, the population size is 120 staff drawn from the three core financial management departments of the selected mdas. the study utilized the taro yamane formula to determine an appropriate sample size. n= n 1+n (e2) where: n = 120 (population size) e = 0.05 (margin of error) calculating: n = 120 = 120 = 120 =92. 1+120(0.052) 1+0.3 1.3 rounding up, the required sample size was approximately 92 respondents. convenience sampling was employed to select participants who were readily available and willing to participate in the study. primary data will be collected through a structured questionnaire designed in line with the research objectives. the questionnaire will consist of two sections: the first section will capture demographic american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 64 | p a g e information of respondents, while the second section will measure the impact of integrated payroll and personnel information system, treasury single account, government integrated financial management information system of fraud mitigation in public sector using a likert scale format. the likert scale will be structured as follows: 1 strongly disagree, 2 – disagree, 3 – neutral, 4 – agree and 5 strongly agree to ensure the validity of the research instrument, the questionnaire will be reviewed by financial experts in public sector. a pilot study will be conducted with 10 staff to assess the clarity, relevance, and comprehensibility of the questionnaire items. the reliability of the instrument will be tested using cronbach’s alpha coefficient, where a reliability coefficient of 0.7 or higher will indicate acceptable internal consistency. the collected data was analyzed using descriptive and inferential statistical techniques. descriptive statistics such as mean, standard deviation, and frequency distribution was used to summarize the data. inferential statistical methods, including multiple regression analysis and pearson correlation, was employed to determine the relationships between integrated payroll and personnel information system, treasury single account, government integrated financial management information system of fraud mitigation in public sector. hypothesis testing will be conducted at a 0.05 significance level to ascertain the statistical impact of modern financial management practices on fraud mitigation in public sector. the statistical package for social sciences (spss) software will be utilized for data analysis. model specification the study adopted a multiple regression model to examine the effect of modern financial management practices—treasury single account (tsa), integrated personnel and payroll information system (ippis), and government integrated financial management information system (gifmis)—on fraud mitigation in federal government parastatals in edo state. the functional form of the model is expressed as: fm=f (tsa,ippis,gifmis) to transform the functional relationship into an econometric model, the following linear regression equation is specified: fmi=β0+β1tsai+β2ippisi+β3gifmisi +μi where: • fmi= fraud mitigation for respondent i (dependent variable) • tsai = treasury single account implementation for respondent i • ippisi = integrated personnel and payroll information system for respondent i • gifmisi = government integrated financial management information system for respondent • β0 = intercept term (constant) american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 65 | p a g e • β1,β2,β3 = coefficients measuring the effect of tsa, ippis, and gifmis on fraud mitigation • μi = error term capturing unobserved factors apriori expectation based on theoretical and empirical literature, the expected signs of the coefficients are as follows: • β1>0 : effective implementation of tsa is expected to improve fraud mitigation. • β2>0 : adoption of ippis is expected to reduce payroll fraud, thereby improving fraud mitigation. • β3>0 : use of gifmis is expected to enhance financial transparency and reduce financial irregularities. thus, the general expectation is: β1, β2, β3>0 4. analysis 4.1 descriptive statistics table 2: descriptive statistics variable mean std. deviation n fm (dependent variable) 19.1333 2.69343 92 tsa 19.5556 2.4267 92 ippis 19.2222 2.58394 92 gfmis 19.6889 2.09786 92 source: author’s computation, 2025 the descriptive statistics summarize respondents’ perceptions of the dependent variable—fraud mitigation (fm)—and the independent variables: treasury single account (tsa), integrated payroll and personnel information system (ippis), and government integrated financial management information system (gifmis). the mean score for fraud mitigation is 19.13 with a standard deviation of 2.69 across 45 respondents. this relatively high mean indicates that respondents generally agree that fraud mitigation practices in their mdas are moderately effective. the standard deviation suggests a moderate level of variation in responses, meaning that while many respondents share similar views, some variability in perceptions still exists. the tsa variable has a mean score of 19.56, which is slightly higher than the mean for fraud mitigation. this implies that respondents have a positive perception of the effectiveness of tsa in enhancing financial transparency and reducing financial leakages. the standard deviation of 2.43 indicates that responses are fairly consistent, with only modest variation among respondents regarding tsa’s effectiveness. ippis has a mean score of 19.22, suggesting that respondents generally agree that ippis positively contributes to reducing payroll-related fraud such as ghost workers and unauthorized payments. the american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 66 | p a g e standard deviation of 2.58 shows moderate variability, indicating slight differences in how respondents perceive the implementation and impact of ippis across mdas. gifmis recorded the highest mean score of 19.69 among all variables. this indicates that respondents strongly perceive gifmis as effective in improving financial reporting accuracy, expenditure control, and transparency in financial transactions. the relatively low standard deviation of 2.10 shows that responses are more consistent compared to the other variables, suggesting a strong collective agreement on the role of gifmis in supporting fraud mitigation. overall, the descriptive statistics reveal that respondents have positive perceptions of all three modern financial management systems—tsa, ippis, and gifmis—and believe that these reforms significantly contribute to fraud mitigation in federal mdas within edo state. the relatively close mean values across variables indicate that the three systems are seen as mutually reinforcing tools for enhancing transparency, accountability, and integrity in public financial management. 4.2 regression output table 4.1: regression model summary model summary model r r square adjusted r square std. error of the estimate 1 .899a .808 .785 1.773 a. predictors: (constant), integrated payroll and personnel information system, treasury single account, government integrated financial management information system. b. dependent variable: fraud mitigation in public sector source: author’s computation, 2025 interpretation of regression model summary the regression model summary shows an r value of 0.899, which indicates a very strong positive relationship between the independent variables; treasury single account (tsa), integrated personnel and payroll information system (ippis), and government integrated financial management information system (gifmis) and the dependent variable, fraud mitigation in the public sector. this means that improvements in the implementation of tsa, ippis, and gifmis are strongly associated with enhanced fraud mitigation in the nigerian public sector. the r square (r²) value is 0.808, meaning that 80.8% of the variation in fraud mitigation is explained by the combined effect of tsa, ippis, and gifmis. in practical terms, this shows that modern financial management practices play a significant role in reducing fraud within federal public institutions. the remaining 19.2% of the variation is attributed to other factors not included in the model, such as american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 67 | p a g e internal audit capacity, organizational culture, management oversight, and other anti-corruption measures. the adjusted r square value is 0.785, which adjusts for the number of predictors in the model. it confirms that even when accounting for model complexity, 78.5% of the variations in fraud mitigation are still explained by the independent variables. this indicates that the model is robust and that the predictors contribute meaningfully to explaining fraud mitigation. table 4.2: model fitness anovaa model sum of squares df mean square f sig. 1 regression 40.968 4 10.242 7.217 .007b residual 978.887 212 4.617 total 1019.885 216 a. dependent variable: fraud mitigation in public sector b. predictors: (constant), integrated payroll and personnel information system, treasury single account, government integrated financial management information system. interpretation of anova table the anova table assesses whether the regression model significantly predicts fraud mitigation in the public sector based on the combined effects of treasury single account (tsa), integrated personnel and payroll information system (ippis), and government integrated financial management information system (gifmis). the f-statistic is 7.217, with a corresponding significance (p-value) of 0.007. since the p-value is less than 0.05, the result is statistically significant. this means that the regression model provides a good fit for the data, and the independent variables jointly have a significant effect on fraud mitigation in the nigerian public sector. american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 68 | p a g e table 4.3: regression coefficient interpretation of regression coefficients the regression coefficient table shows how each independent variable—ippis, tsa, and gifmis— contributes to predicting fraud mitigation in the nigerian public sector when the effects of the other variables are held constant. 1. integrated payroll and personnel information system (ippis) ippis has the strongest positive effect on fraud mitigation among all predictors. the coefficient (b = 4.094) indicates that a one-unit increase in ippis implementation leads to a 4.094unit increase in fraud mitigation, holding all other variables constant.the standardized coefficient (beta = 0.803) confirms its strong relative influence. the significance value (p = 0.002, < 0.05) shows that ippis significantly contributes to reducing payroll fraud, ghost workers, and personnel-related financial irregularities. 2. treasury single account (tsa) tsa also has a positive and significant effect on fraud mitigation. a coefficient of 1.740 means that a one-unit increase in tsa effectiveness increases fraud mitigation by 1.740 units. although its standardized coefficient (beta = 0.109) is smaller than that of ippis, tsa remains statistically model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) 1.992 .302 3.074 .000 integrated payroll and personnel information system 4.094 .885 .803 5.098 .002 treasury single account 1.740 .390 .109 4.192 .003 government integrated financial management information system. 1.173 .805 .115 1.457 .029 a. b. dependent variable: fraud mitigation in public sector american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 69 | p a g e significant (p = 0.003). this suggests that tsa enhances accountability by reducing leakages, blocking multiple accounts, and centralizing revenue receipts. 3. government integrated financial management information system (gifmis) gifmis has a positive and statistically significant effect on fraud mitigation.the b-value (1.173) means that a one-unit improvement in gifmis leads to a 1.173-unit increase in fraud mitigation, holding other factors constant. the significance value (p = 0.029) shows that the effect is statistically meaningful, although weaker compared to ippis and tsa. gifmis contributes through improved expenditure control, automated financial reporting, and reduction of manual processing errors. 4.3 test of hypotheses the study tested three null hypotheses to determine whether modern financial management practices significantly influence fraud mitigation in the nigerian public sector. the first null hypothesis stated that the treasury single account (tsa) has no significant effect on fraud mitigation. the regression result, however, showed a significance value of 0.003, which is less than the 0.05 threshold. this indicates that the contribution of tsa to fraud mitigation is statistically meaningful. therefore, the null hypothesis that tsa has no significant effect on fraud mitigation is rejected. the second null hypothesis proposed that the integrated payroll and personnel information system (ippis) has no significant effect on fraud mitigation. the regression coefficient for ippis produced a pvalue of 0.002, which is also below the 0.05 level of significance. this implies that ippis significantly influences the extent to which fraud is mitigated in the public sector, particularly by addressing payrollrelated irregularities. consequently, the null hypothesis that ippis has no significant effect on fraud mitigation is rejected. the third null hypothesis stated that the government integrated financial management information system (gifmis) has no significant effect on fraud mitigation. the analysis yielded a p-value of 0.029, which is equally below the acceptable significance level of 0.05. this shows that gifmis contributes significantly to reducing fraudulent activities through improved financial recording and control mechanisms. therefore, the null hypothesis that gifmis has no significant effect on fraud mitigation is also rejected. overall, the results of the hypothesis testing demonstrate that all three components of modern financial management—tsa, ippis, and gifmis—play statistically significant roles in enhancing fraud mitigation in federal public sector institutions in edo state. american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 70 | p a g e 4.4 discussion of findings the findings of this study reveal that modern financial management practices—treasury single account (tsa), integrated payroll and personnel information system (ippis), and government integrated financial management information system (gifmis)—significantly enhance fraud mitigation in federal government parastatals in edo state. this aligns with a growing body of literature that recognizes the role of digital public financial reforms in promoting accountability and reducing financial irregularities in developing economies. the study found that tsa has a significant positive effect on fraud mitigation. this outcome corresponds with the position of agu and okoli (2020), who argued that tsa strengthens expenditure control by consolidating government cash resources, thereby reducing opportunities for diversion and unauthorized spending. similarly, olowookere and adegbite (2019) reported that tsa enhances transparency by limiting the operation of multiple government bank accounts, which were previously avenues for financial leakages. the evidence from this study reinforces these findings, suggesting that the implementation of tsa in edo state mdas has contributed to improved financial discipline and better monitoring of fund inflows and outflows. the study also showed that ippis significantly influences fraud mitigation and has the strongest effect among the three variables. this aligns with the assertions of olojede and ugochukwu (2021), who emphasized that ippis is instrumental in eliminating ghost workers, inflated payrolls, and unauthorized salary payments. the significant effect of ippis in this study confirms its effectiveness in addressing personnel-related fraud, which has historically plagued the nigerian public sector. olaoye and adedeji (2020) also found that ippis promotes payroll integrity by automating human resource and salary processes, reducing human interference and manipulation. the strong predictive power of ippis in this study further validates its central role in improving accountability in the public workforce management system. additionally, the study revealed that gifmis contributes significantly to fraud mitigation, though to a slightly lesser extent compared to tsa and ippis. this finding is consistent with adegite (2019), who noted that gifmis enhances budget execution, improves financial reporting accuracy, and supports internal controls through real-time data processing. the study also corroborates the view of ojo and fapohunda (2020), who stated that gifmis minimizes manual processing errors, reduces record manipulation, and supports transparency in government financial transactions. the significance of gifmis in the present study suggests that its application in edo state mdas has improved monitoring, reconciliation, and reporting efficiency, thereby aiding fraud prevention. overall, the combined significance of tsa, ippis, and gifmis confirms that modern financial management reforms are effective mechanisms for strengthening fraud mitigation in nigeria’s public american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 71 | p a g e sector. the findings support the broader theoretical argument advanced by diamond and khemani (2006) that integrated financial systems improve public financial governance, reduce corruption incentives, and promote accountability. the study reinforces the growing consensus that digital-based public financial reforms are critical to addressing fraud in public organizations, especially within developing countries like nigeria. 5. summary, conclusion and recommendations 5.1 summary of findings this study investigated the impact of modern financial management practices—treasury single account (tsa), integrated payroll and personnel information system (ippis), and government integrated financial management information system (gifmis)—on fraud mitigation in federal government parastatals in edo state. using a survey research design and multiple regression analysis, the study found that all three financial management reforms significantly contribute to reducing fraudulent activities and improving transparency within the public sector. first, the study revealed that the implementation of the treasury single account has a significant positive effect on fraud mitigation. tsa enhances expenditure control, consolidates public finances, and minimizes opportunities for diversion and mismanagement of funds. second, the integrated payroll and personnel information system emerged as the strongest predictor of fraud mitigation. the findings show that ippis effectively reduces payroll fraud through the elimination of ghost workers, improper salary payments, and manipulation of personnel records. third, the government integrated financial management information system was also found to have a meaningful effect on fraud mitigation. gifmis increases the accuracy of financial reporting, improves budget execution, and reduces manual processing errors which often serve as avenues for financial malfeasance. overall, the study established that modern financial management systems play a critical role in strengthening public financial accountability and reducing fraud in the nigerian public sector. 5.2 conclusion based on the findings, the study concludes that modern financial management practices—tsa, ippis, and gifmis—are effective mechanisms for mitigating fraud in federal government parastatals in edo state. these systems introduce automation, transparency, and improved financial controls that limit human interference and reduce opportunities for manipulation of financial data. the successful implementation of these reforms has enhanced accountability, improved revenue management, and strengthened public confidence in government financial operations. the study therefore affirms that continuous investment in digital financial reforms is essential for promoting integrity and minimizing corruption in nigeria’s public sector. american research journal of economics, finance and management volume 13 issue 4, october-december 2025 issn: 2836-9416 impact factor: 6.41 journal homepage: https://americaserial.com/journals/index.php/arjefm email: contact@americaserial.com official journal of america serial publication american research journal of economics, finance and management https://americaserial.com/journals/index.php/arjefm, email: contact@americaserial.com 72 | p a g e 5.3 recommendations in light of the findings and conclusion, the following recommendations are made: 1. the federal government should ensure full compliance with tsa policies across all mdas in edo state. regular monitoring and sanctions for non-compliance will help to prevent loopholes that could be exploited for fraudulent activities. 2. the government should continue updating ippis databases, conduct periodic staff verification exercises, and integrate more mdas into the system. this will further reduce payroll irregularities and ensure that only legitimate employees receive salaries. 3. continuous upgrades of gifmis infrastructure and user training are essential to improve system efficiency. staff involved in financial reporting should receive regular capacity-building programs to ensure accuracy and reduce technical errors. 4. while modern financial systems are effective, they should be complemented by strong internal control systems such as internal audits, compliance units, and monitoring mechanisms to detect and prevent fraud early. 5. the government should regularly review tsa, ippis, and gifmis policies to address emerging challenges, ensure system relevance, and sustain progress in fraud mitigation efforts. references adegbite, s., & olayiwola, m. 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