copyright © cc-by-nc 2020, cribfb | afbr australian finance & banking review; vol. 4, no. 1; 2020 issn 2576-1196 e-issn 2576-120x published by centre for research on islamic banking & finance and business, usa 37 impact of dividend policy on financial performance a study pradip kumar das phd associate professor jagannath kishore college, purulia (west bengal) affiliation under sidho-kanho-birsha university, purulia, india e-mail.: pradip57.prl@rediffmail.com abstract this study is an attempt to evaluate the impact of dividend policy on financial performance of selected companies registered in bombay stock exchange. the study based on correlation matrix and panel regression model shows that the selected companies do not follow consistent pattern of dividend payments and the association between price earnings ratio and dividend payout ratio is low positive. however, there is strong association between return on assets and return on equity. hausman test reveals that random affect model is appropriate thereby indicating that performance of selected companies have momentous impact on dividend policy. divided policy is still contemplated as one of the complicated areas in corporate finance. the findings from this study are worthwhile to be welcomed into account by the board of managers of companies to demonstrate dividend policy for the companies. keywords: dividend policy, performance, earnings per share, price earnings ratio, return on assets, return on equity. 1. introduction corporate dividend policy decision not only emphasizes important demonstration about the possibilities of business growth but also influences other business decisions like investment and finance. dividend policy shows the opportunity for investment, future expansion and growth (afza & mirza,2011). it revolves around decision making between distribution of current return and reinvestment of the same for future return (pandey&ashvini,2016;kouser,luqman,yaseen and azeem,2015).dividend policy is a corporate finance decision on transfer of value in the form of dividend from an organization to its shareholders out of the profits available for a prescribed period of time(okafori and mgbame,2011).pragmatic management of corporate pertains to earnings distribution in the form of dividend to shareholders over time (ajanthan,2013). design of dividend policy details the segment of company’s earnings as return on shareholders’ investment in the form of cash dividend or stock dividend (abdul and muhibudeen,2015). pertinence of dividend policy in the discourse of corporate performance reflects bifurcation yet to be resolved (abdul and muhibudeen,2015). 2. literature review kolawole, e.et al.(2018)observed in their study favorable or positive impact of dividend payout and retention ratios on eps in the nigerian oil and gas firms. kanwal, m. & hameed, s. (2017) found efficacious influence of dividend payout on financial performance of firm. thirumagal, p.g. and vasantha, s. (2018) perceived pessimistic or negative impact of dividend payout on shareholders’ wealth for majority of the indian industries. significant difference was found in share price between pre and post dividend announcements. velmurugan (2015) noticed association of dividend declaration in indian fertilizer industry with previous year’s dividend, current year’s depreciation and current year’s profit after tax, current year’s sales and previous year’s cash flow. labhane & mahakud (2016) distinguished that investment opportunity, financial leverage, company size, business risk, firm life cycle, profitability, tax and liquidity are major determinants of dividend policy for indian companies. das (2017) confirmed that leverage not size is an important determinant of dividend of bombay stock exchange companies in india. abiola (2014) observed that among other things both current and past year’s profits fix dividend policy of firm indicating that performance of firm in terms of profitability is vital in the pattern of dividend policy. pandey & ashvini (2016) propounded that dividend policy of firm is governed by factors including debt-equity ratio, earnings, corporate tax, earnings per share, and firms’ size. kurawa & ishaku(2014)recognized corporate governance as a determinant of dividend policy. sakinc & gungor(2015)acknowledged ownership structure as a determinant of dividend policy of firms. yusof and ismail, (2016) suggested that before deciding payment of dividend, the companies board should consider profit, debts, investments and also the size of shareholders. maladjian and el khoury (2014) studied the effects of size, dividend payments, debt, profitability, liquidity, growth and firm’s risk on dividend payout ratios of banks listed on beirut stock market in lebanese for the period mailto:pradip57.prl@rediffmail.com copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 38 from 2005 to 2011 and observed efficacious relationship between size, risk and lag dividends, and observed pessimistic relationship between profitability and opportunity growth with dividend payout policy of firms. chawla and chadha (2014)and mbuvi(2015)empirically studied the effect of dividend announcement, dividend payout, tax incentives and excess cash flows on shareholders wealth in nairobi securities market and revealed positive influence of dividend announcement, dividend payouts, tax incentives and free cash flows on shareholders’ wealth. yegon, c., cheruiyot, j.&sang,j.(2014)found pragmatic relationships between dividend policies of organizations and firm’s profitability, between dividend policy and investments, and between dividend policy and eps. masum, a. (2014) watched in the study with the help of panel data approach positive correlation between dividend and stock price considering eps, roe, retention ratio; while dividend yield and profit after tax have negative relation with stock prices. khan, et al (2016) showed negative relation of dividend payout ratio and leverage with the return on equity on the stock listed in pse; while positive relation between roa, dividend policy, and growth in sales. labhane, n.b. & mahakud jitendra (2016) advocated positive impact of dividend policy on profitability and eps. 3. purpose behind the study dividend policy is a controversial subject to many researchers. a universe hypothesis that dividend plays a considerable role has been examined by many empirical studies and behavioral surveys. a strong perception as to the passion behind dividend yields opportunity to more study. literature suggests dividend provides additional worth to company in the eyes of investors; but it is uncertain what financial factors management exercises to support their reasoning behind initiating dividend policy. the study searches potential factors influencing dividend decision of a large sample of dividend paying companies. 4. objective the prime objectives of the study are: ▪ to explore how dividend policy of the selected companies influence their profitability; ▪ to check how dividend policy of companies and their profitability is associated; ▪ to analyze the impact of dividend policy on companies roe; ▪ to evaluate the impact of dividend policy on companies roa. 5. methodology the study in essence rests on secondary data. the researcher, being an external analyst, has to depend substantially on current literature available in the form of books, journals, articles, research studies, official websites, etc. editing, classification and tabulation of data assembled from these sources have been accomplished as per necessities of the study. different statistical techniques and tools have also been applied for the purpose of the analysis. calculations have been done approximately. correlation matrix and panel regression model (fixed effect and random effect) are used to accomplish the objectives of the study. haussmann test has been used for the hypothesis. dpr, eps and per are used as proxy variables for dividend policy. roa and roe are applied to proxy for firm’s performance. this paper analyzes the dividend policy of reputed fifty(50)bse registered indian companies comprising the group of cement industry, pharmaceutical industry, information technology industry, iron and steel industry during the study period from 2012–2013 to 2018-2019.the companies were selected on the basis of market capitalization obtained from the official website of bse. moreover, ratios have been calculated from the data published by the companies in their annual reports. 6. results and discussions with a view to attaining the results and the conclusions drawn there from for the study, the methods administered are correlation matrix and panel regression model. performance indicators of dividend policy and profitability are estimated by the following ratios (table.1). table 1. measuring dividend policy and performance (i.e. profitability) performance indicators performance drivers performance measures dividend policy (independent variable) dividend payout ratio (dpr) dividend paid to equity shareholders÷ earnings available to equity shareholders price earnings ratio (per) market per share ÷earning per share earnings per share (eps) (profit after tax –preference dividends)÷ copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 39 number of shares held by equity shareholders profitability (dependent variable) return on assets (roa) profit after tax ÷ total assets return on equity (roe) (profit after tax ₋ preference dividend)÷shareholders’ equity 6.1 use of correlation matrix correlation matrix has been used to demonstrate the strength of relationship within the independent variables and between the dependent variables and independent variables. it helps in finding out the pair of variables having the highest correlation. table 2. correlation matrix dpr eps per dpr pearson correlation 1 -0.128 .285 sig.(2-tailed) .380 .048 n 52 52 52 eps pearson correlation -0.128 1 .067 sig.(2-tailed) .380 .650 n 52 52 52 per pearson correlation .285 .067 1 sig.(2-tailed) .048 .650 n 52 52 52 notecorrelation significant at 0.05 level interpretation (1): table-2 evidences that values of coefficient between the independent variables dpr-eps, dpr-per and per-eps are -0.128, 0.285 and 0.650 respectively; each value is less than 0.80. the result demonstrates that there is no multicolinearity existence among the independent variables. however, correlation coefficient between the dependent variables e.g. roa and roe is significantly high at 0.915. 6.2 use of panel regression model regression model is employed to establish the fact that how the particular value of dependent variable changes with any change in one of the independent variables keeping other independent variables constant. panel regression model has been applied in administering multidimensional analysis over a period of time. two methods are available for panel regression:(1) fixed effect model and(2) random effect model. (1) fixed effect model: with the assumption that properties of certain variables do not vary across time and may or may not be correlated with the individual dependent variables, it is tested to establish that whether fixed effects or random effects are necessary to upgrade the model. it can be dissected adopting hausman test. (2) random effect model: in this model, parameters are random variables and have similarity with hierarchy liner model. it is used to examine panel data with the assumption of no fixed effects. 7. results and discussions: model. i: (roa c dpr per eps) 7.1 interpretation (2):µ01 there is no significant impact of dpr, per and eps on roa across the panel. the model with random effect is evaluated and then hausman test is exercised to ratiocinate about the method to be used for testing the hypothesis. if prob. value of hausman test is less than 0.05, null hypothesis is rejected indicating appropriateness of the fixed effect model for the study. if null hypothesis is accepted, it is suitable to use random effect model. as prob. value copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 40 (0.113) is higher than 0.05, null hypothesis is accepted extrapolating that fixed effect regression model is inappropriate, rather, random effect model is appropriate to use (table-3). table 3. correlation random effects (hausmantest) test cross section random effects test summary chi-sq. statistic chi-sq. d.f. prob. cross section random 5.986 3 0.113 table-3.1. cross section random effects test comparison variable fixed random var (diff.) prob. dpr 2.327 2.281 0.386 0.940 per 0.225 0.178 0.009 0.630 eps 0.084 0.097 0.001 0.472 variable coefficient std. error t-statistic prob. c 11.548 3.527 3.275 0.003 dpr 2.327 2.711 0.859 0.397 per 0.225 0.170 1.325 0.194 eps 0.084 0.035 2.443 0.019 table-3.2. effects specification cross section fixed (dummy variables) r-squared 0.836 mean dependent variable 19.466 adjusted r-squared 0.783 s.d. dependent variable 7.318 s.e. of regression 3.416 akaike info criterion 5.514 sum squared resid. 431.635 schwarz criterion 6.011 log likelihood -124.836 hannan quinn criterion 5.703 f statistic 15.658 durbin watson statistic 2.315 prob.(f-statistic) 0.000 other prerequisite conditions also support the model and its result. probability value of the model being less than 0.05 (0.0000) suggests that inference drawn from the model is correct and the result justified. this also recommends that there is no potency of type i and type ii errors. r-square value is 0.83 prescribing that variation in the dependent variable is explained by the independent variable with a percentage value of 83% and the rest 17% may be due to the appearance of other factors having indeterminate behavior and approach. durbin-watson(d-w) statistics deal with the problem of autocorrelation and stationary alike. d-w statistic value is between 2 and 3 (considered acceptable under the lenient approach). hence, there is no problem of autocorrelation and adaptability in the model(table-4). table-4. random effect model variable coefficient std. error t-statistic prob. c 11.428 3.204 3.568 0.001 dpr 2.327 2.639 0.865 0.392 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 41 per 0.225 0.139 1.278 0.208 eps 0.084 0.029 3.328 0.002 table-4.1. effects specification s.d. rho cross section random 4.753 0.659 idiosyncratic random 3.416 0.341 table-4.2. weighted statistics r-squared 0.186 mean dependent variable 5.956 adjusted r-squared 0.133 s.d. dependent variable 3.785 s.e. of regression 3.525 sum squared resid. 571.450 f-statistic 3.500 durban watson statistics 1.632 prob.(f-statistic) 0.023 table-4.3. unweighted statistics rsquared 0.287 mean dependent variable 19.465 sum-squared resid. 1871.364 durban watson statistics 0.564 8. results and discussions: model. ii (roe c dpr per eps) 8.1 interpretation (3):µ02 there is no significant impact of per, per and eps on roa across the panel. prob. value of hausman test (0.488) is greater than 0.05. thus, null hypothesis is accepted indicating significant result. it can be inferred that fixed effect regression model is inappropriate and random effect model is appropriate to use(table-5). table-5. correlated random effects(hausmantest) test summary chi-sq statistic chi-sq d.f. prob. crosssection random 2.432 3 0.488 table-5.1. cross-section random effects test comparison variable fixed random variable (diff) prob. dpr 1.817 2.161 0.992 0.730 per 0.087 0.068 0.026 0.905 eps 0.078 0.098 0.001 0.515 table-5.2. cross-section random effects test equation variable coefficient std. error t-statistic prob. c 22.665 6.550 3.461 0.002 dpr 1.817 5.033 0.361 0.721 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 42 per 0.087 0.313 0.275 0.785 eps 0.078 0.064 1.224 0.30 table-5.3. effects specification cross-section fixed (dummy variable) r-squared 0.801 mean dependent variable 28.456 adjusted r-squared 0.735 s.d. dependent variable 12.351 s.e. of regression 6.343 akaike info criterion 6.752 sum-squared resid 1490.338 schwarz criterion 7.24 91 log likelihood -156.797 humann-quinn criterion 6.940 f-statistic 12.40 durbin-watson statistic 2.45 prob. (f-statistic) 0.000 requisite conditions support the use of random effect model and its result. probability value of the model being less than 0.05 (0.0000) suggests that the inference drawn from the model is correct and the result is justified. it indicates also chances of type i and type ii errors. r-square value is 0.80 prescribing that variation in the dependent variable is demonstrated by the independent variable with a percentage value of 80 % and the rest 20% may be due to presence of other factors having uncertain behavior and movement. d-w. statistics deal with the problem of auto correlation and adaptability alike. d-w. statistics value varies between 2 and 3 (considered acceptable under the lenient approach) signifying no problem of auto correction and adaptability in the model (table-6). table-6. random effect model variable coefficient std. error t-statistic prob. c 21.730 6.442 3.371 0.002 dpr 2.161 4.935 0.435 0.664 per 0.065 0.271 0.245 0.805 eps 0.095 0.055 1.740 0.089 table-6.1. effects specification s.d. rho. cross-section random 10.495 0.733 idiosyncratic random 6.345 0.268 table-6.2. weighted statistics r-squared 0.065 mean dependent variable 7.425 adjusted r-squared 0.004 s.d. dependent variable 6.322 s.e. of regression 6.304 sum-squared resid. 1828.720 f-statistic 1.084 durbin-watson statistic 1.915 prob.(f-statistic) 0.000 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 43 table-6.3. unweighted statistics r-squared 0.144 mean dependent variable 28.453 sum-squared resid. 6386.842 durbin-watson statistic 0.614 9. conclusion different dividend ratios selected for the study depicts that sample companies do not have any consistent pattern of dividend payment and trend is skewed in character. correlation matrix also exhibits a very low positive association between per and dpr at 5% level of significance. similarly, association between roa-eps and roe-eps is low positive and significant at 1%. however, there is strong positive association between roe-roa at 1% level of significance. results of both the two regression models exercised in this study are expressive thereby demonstrating suitability of the random effect regression model. it can be deduced that performance of the selected companies has considerable impact on dividend policy. 10. implication of the study dividend policy and its benchmark of disbursement is a key concern in finance. the study is rejuvenating for managers fascinated in profit planning and investment and will also accommodate the researchers to build more perception on dividend policy which is still an intricate subject in corporate finance. however, this study is a venture to build germane dividend policy model in future. 11. research comment despite pros and cons to dividend policy, the analysis appears to designate that income through dividend is a seductive determinant to investors both for the confirmation of return as well as the management claims. dividend policy is under management deliberation. a trade-off exists between management’s decision as to the implementation and extent of the payout in dividend policy vs. reinvestment. although there is compact information about dividend policy making process, decisions do not appear to be made delicately. factors like tax, external financing costs, transaction costs, earnings stability, liquidity position, investment decision, etc. also play decisive role in management’s dividend policy. 12. future research further research can be persuaded to establish the cognition of dividend policy and its execution on market-based strategy. data for several periods can also be exercised for distinguishing payout variation over time and the level of materiality for each determinant. insertion of more variables like float, pe ratio projections, operating margins, de ratio, and others may also yield expressive result. the present analysis may be lengthened to study the impact of ownership distinctiveness in case of other developing resources for future research. impact of board structure on dividend policy is a beguiling effort to research. this is waiting for future research. acknowledgement the paper is devoted to almighty god who always shows his blessings in all walks of my life. references abdul, a. & muhibudeen, l.(2015).relationship between dividend payout and firms’ performance: evaluation of dividend policy of oando plc. international journal of contemporary applied sciences,2(6),56-71. abdul, a., & muhibudeen, l.(2015).relationship between dividend payout and firms’ performance: evaluation of dividend policy of oando plc. international journal of contemporary applied sciences,2(6),56-71. abiola, j.o. (2014).measuring and analyzing the effects of dividend policy in banking profits and growth. journal of policy and development studies,9(1),167-178. afza, t., & mirza, h.h.(2011).do mature companies pay more dividends? evidence from pakistani stock market. mediterranean journal of social sciences, 2(2),152-161. ajanthan, a.(2013).the relationship between dividend payout and firm profitability: a study of listed hotels and restaurant companies in sri lanka, international journal of scientific and research publications.3(6),1-6. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 44 chawla, p. k. & chadha, n.(2014).a comparative analysis of dividend payout trend of indian telecom and steel industries. shiv shakti international journal of interdisciplinary and academic research,3(1),58-73. kanwal, m. & hameed, s.(2017).the relationship between dividend payout and firm financial performance, research in business and management,4(1). khan, m.n., nadeem, b., islam, f., salman, m. and gill, h.m.i.s.(2016).impact of dividend policy on firm performance: an empirical evidence from pakistan stock exchange, american journal of economics, finance and management,2(4), 28-34. kolawole, e., sadiq, m.s., & lucky, o.(2018).effect of dividend policy on the performance of listed oil and gas firms in nigeria, international journal of scientific and research publications,8(6). kouser, r., luqman, r., yaseen, a., & azeem, m.(2015).dividend payout policy and financial crisis: evidence from the life cycle theory. pakistan journal of commerce and social sciences,9(2),583-597. kouser, r., luqman, r., yaseen, a., & azeem, m.(2015).dividend payout policy and financial crisis: evidence from the life cycle theory. pakistan journal of commerce and social sciences,9(2),583-597. kurawa, j.m., & ishaku, a.(2014).the effect of corporate governance on dividend policy of listed banks in nigeria: a panel data analysis, research journal of finance,2(8),1-12. labhane, n.b. & mahakud, j.(2016).determinants of dividend policy of indian companies: a panel data analysis, paradigm,20(1),36-55. maladjian, c.& el khoury, r.(2014).determinants of the dividend policy: an empirical study on the lebanese listed banks. international journal of economics and finance,6(4),240-256. masum, a.(2014).dividend policy and its impact on stock price-a study on commercial banks listed in dhaka stock exchange, global disclosure of economics and business,3(1). mbuvi, j. n.(2015).effect of dividend policy on value creation for shareholders of companies listed in the nairobi securities exchange. journal of economics and finance,(6)2,35-41. okafor, c.a., & mgbame c.o.(2011).‘dividend policy and share price volatility in nigeria, journal of industrial, financial & business management,9(1),234-241. pandey, n.s., & ashvini, n.(2016).a study on determinants of dividend policy: empirical evidence from fmcg sector in india. pacific business review international journal,1(1),135-141. sakinc, i. and gungor, s.(2015).the relationship between ownership structure and dividend: an application in istanbul stock exchange. journal of economics and development studies,3(4),19-30. thirumagal, p.g. and vasantha, s.(2018).a research paper on impact of dividend payout on shareholders wealth in indian industries, international journal of pure and applied mathematics,118(5). yegon, c., cheruiyot, j. & sang, j.(2014).effects of dividend policy on firm’s financial performance: econometric analysis of listed manufacturing firms in kenya. yusof y., ismail s.(2016).determinants of dividend policy of public listed companies in malaysia. review of international business and strategy,26(1),88–99. http://dx.doi.org/10.1108/ribs-02-2014-0030 abbreviations ▪ earnings per share: eps; ▪ price earnings ratio: per; ▪ return on assets: roa; ▪ return on equity: roe. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). copyright © cc-by-nc 2019, cribfb | afbr australian finance & banking review; vol. 3, no. 1; 2019 issn 2576-1196 e-issn 2576-120x review article published by centre for research on islamic banking & finance and business, usa 11 capital structure theories in finance research: a historical review lutfa t ferdous la trobe university bundoora vic-3083 australia email: l.ferdous@latrobe.edu.au abstract capital structure in one of the most converse and vital issues in the finance literature. this theoretical review of capital structure provides a synthesis of the theory utilised in capital structure literature. this theoretical review explains two categories of theories that examine the optimum capital structure of a firm. functional market theories, which propose firms conduct share transaction without being used transaction costs and ii) costly transaction theories. the first group consists of the original capital structure theories of modigliani and miller (1958, 1963), miller (1977), and de angelo and masulis (1980). the second range of theories captures the various effects of costly capital market transactions: pecking order theory" accredited to donaldson (1961); the debt capacity theories that depend on bankruptcy to limit a firm's use of debt financing (robicheck and myers, 1966) the agency models developed by jensen and meckling (1976), myers (1977), smith and warner (1979); and signalling model by ross (1977). recent capital structure literature explored into an analytical structure building up the major contributions starting with the development of agency and bankruptcy theory. these theories are connected with the outcome from financing choices to real debt-equity decisions. finally, we finish our review with established studies that explore the significances of leverageequity relationship, as well as its determinants. keywords: capital structure, theories in finance, agency theory. 1. introduction capital structure is a mix of debt and equity capital maintained by a firm. capital structure is also referred to as the financial structure of a firm. the capital structure of a firm is very important since it related to the ability of the firm to meet the needs of its stakeholders. capital structure is a topic that continues to keep researchers pondering. researchers continue to analyse capital structures and intend to determine whether optimal capital structures exist. an optimal capital structure is usually defined as one that will minimize a firm's cost of capital while maximizing firm value. hence, capital structure decisions have a great impact on the success of the firm. exactly how firms choose the amount of debt and equity in their capital structures remains an enigma. are firms mostly influenced by the traditional capital structures of their industries or are there other reasons behind their actions? the answers to these questions are very important because the actions managers take will affect the performance of the firm, as well as influence how investors will perceive the firm. modigliani and miller (1958) are the first ones to landmark the topic structure and the capital structure is irrelevant in determining the firm's value and its future performance. much emphasis has been placed on releasing the assumptions made by mm, in particular by taking into account corporate taxes (modigliani and miller, 1963), personal taxes (miller, 1977), bankruptcy costs (stiglitz, 1972; titman, 1984), agency costs (jensen and meckling, 1976; myers, 1977), and informational asymmetries (myers,1984). the development of agency theory in the 1980s is coupled with detailed research into the extent and effect of bankruptcy costs during the 1980s, lead to a detailed view of the usefulness of the basic modigliani and miller's capital structure theory. various new managerial theories of the firm (e.g. jensen and meckling, 1976; myers, 1977 and amihud and lev, 1981) have been evolved in the context of agency theory and two related problems: agency problem and information asymmetry have received increasing attention in finance. two other main theories dominate the capital structure debate: the trade-off theory (tot) and the pecking order theory (pot). on the other hand, lubatkin and chatterjee (1994) prove that there exists a relationship between capital structure and firm value. in more recent literature, authors have shown that they are less interested in how capital structure affects the firm value. instead, they place more emphasis on how capital structure impacts on the ownership/governance structure thereby influencing top management of the firms to make strategic decisions (hitt, hoskissonand harrison, 1991). these decisions will in turn impact on the overall performance of the firm (jensen, 1986). nowadays, the main issue for copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 12 the capital structure is how to resolve the conflict on the firms' resources between managers and owners (jensen, 1976). many of these theories have also been empirically tested. to my knowledge, no review has been conducted on the ground of capital structure theories used in determining the optimum capital structure. 2. theoretical review on capital structure developments of theory in capital structure can be categorized broadly into two groups: i) functional market theories, which assume that individuals and firms can buy and sell securities without incurring transaction costs and ii) costly transaction theories. the first group consists of the original capital structure theories of modigliani and miller (1958, 1963), miller (1977), and deangelo and masulis (1980). the second group includes a range of theories that discuss the various effects of costly capital market transactions. it includes the pure transaction costs or "pecking order theory" accredited to donaldson (1961); the debt capacity theories that depend on bankruptcy to limit a firm's use of debt financing (robicheck and myers, 1966), the agency models developed by jensen and meckling (1976), myers (1977), smith and warner (1979); and signalling model by ross (1977). recent work in capital structure has expanded into a lucid analytical structure building up the major contributions starting with the development of agency and bankruptcy theory. many of these theories have also been empirically tested. yet there is little consensus on how firms choose their capital structure and much remains to understand the link between theory and practice of capital structure. "there is no universal theory of capital structure and no reason to expect one.” (myers, 2003) this review paper discuss about capital structure theories those provide overview of the optimal choices of financing of a firm: equity and debt. as it is stated that economic theory does not propose any guidelines about financing choices. the answer to the question "how do firms choose their capital structures?" is thus still "we don't know." (myers, 1984). though there are other significant conditional theories which propose distinct approach to the "capital structure puzzle" and endeavour to lessen the puzzle from economic status. discussed theories from the review paper open an arena where researcher can get a historical review of conditional theories which assist to apply the contributing factors of capital structure and effect on firm value. this historical review will be discuss the propositions of miler and modigliani, the trade-off, signalling, pecking order and agency theory (including the free cash flow type of research) 2.1 miller and modigliani propositions capital structure theory of modigliani and miller, 1958 the modigliani and miller theorem is a financial theory stating that the market value of a firm is determined by its earning power and the risk of its underlying assets, and is independent of the way it chooses to finance its investments or distribute dividends. in the modigliani -miller's (1958) article developed within the framework of perfect capital market which characterized by free of taxes, transaction costs, and other frictions; the choice of a firm's capital structure could not affect its market value because investors could make or unmake any level of homemade leverage they desired by borrowing or lending on personal account. the "m and m capital structure irrelevance proposition" states the circumstances under which capital structure does not influence firm value. the assumptions of the theory are mm employed the concept of arbitrage to develop their theory. here are the initial mm assumptions  there are no personal or corporate taxes.  business risk can be measured by ebit and firms with the same degree of business risk are said to be in a homogeneous risk class.  all present and prospective investors have identical estimates of each firm's future ebit, that is, investors have homogenous expectations about expected future corporate earnings and the silkiness of those earnings,  stocks and bonds are traded in perfect capital markets. this assumption implies, among other things, (a) that there are no brokerage costs and (b) that investors (both individuals and institutions) can borrow at the same rate as corporations.  the debt of firms and investors is riskless, so the interest rate on all debt is the risk-free rate. further, this situation holds regardless of how much debt a firm uses. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 13  all cash flows are perpetuities; that is, all firms except zero growth, hence have an "exceptionally constant" ebit, and all bonds are perpetuities. mm without taxesmm first analysed leverage under the assumption that there are no corporate or personal income taxes. on the basis of their assumptions, they stated and algebraically proved two propositions. proposition i the value of is established by capitalizing its expected net operating income (ebit) at a constant rate, which is based on the firm's risk class. under the mm model when there are no taxes, the value of the firm is independent of its leverage. the model implies that,  the weighted average cost of capital to the firm is completely independent of its capital structure.  the wacc for the firm, regardless of the amount of debt it uses, is equal to the cost of equity it would have if it used no debt. proposition ii -the cost of equity to a levered firm is equal to i) the cost of equity to an unlevelled firm in the same risk class plus ii) a risk premium whose size depends on both the differential between a non-levered firm 's costs of debt and equity and the amount of debt used. this proposition shows that the firm's use of debt increases, its cost of equity also raises, and in a mathematically precise manner. the two propositions imply that the inclusion of more debt in the capital structure will not increase the value of the firm because the benefits of the cheaper debt will be exactly offset by an increase in the riskiness, hence in the cost, of its equity. thus mm argue that a world without taxes, both value of a firm and its wacc would be unaffected by its capital structure. capital structure theory of modigliani and miller 1963 in 1963, modigliani and miller published a second article that incorporated corporate taxes. with corporate income taxes, they concluded that leverage will increase a firm's value. this occurs because interest is a tax-deductible expense: hence more of a leveraged firm's operating income flows through to investors. here are the mm propositions when corporations are subject to income taxes but there no personal taxes: proposition i the value of a levered firm is equal to the value of an unlevered firm in the same risk class plus the gain from leverage, the gain from leverage is the value of tax savings, found as the product of corporate tax rate times the amount of debt the firm uses. the important point here is that when corporate taxes are introduced, the value of the levered firm exceeds that of the non-levered firm by the amount td. since the gain from leverage increases as debt increases, in theory, a firm's value is maximized at 100 per cent debt financing. proposition ii the cost of equity to levered firm is equal to i) the cost of equity to an unlevered firm in the same risk class plus ii) a risk premium whose size depends on the differential between the costs of equity and debt to an unlevered firm, the amount of financial leverage used, and the corporate tax rate. this proposition ii, coupled with the fact that taxes reduce the effective cost of debt, is what produces the proposition i result, namely, that the firm's value increases as its leverage increases. capital structure theory of miller 1977 although mm included corporate taxes in the second version of their model but didn't extend the model to include personal taxes. however, merton miller introduced a model designed to show how leverage affects firms' values when both personal and corporate taxes are taken into account. miller's model begins with the corporate tax rate, the personal tax rate on income from stocks and the personal tax rate on income from debt. it is to note that stocks' returns come partly as the dividends and partly as capital gains, so weighted average of the effective tax rates on dividends and capital gains, while essentially all debt income comes from interest, which is effectively taxed at investors' top rates. the miller model the model provides an estimate of the value of a levered firm in a world with both corporate and personal taxes. miller argued that firms in the aggregate would issue a mix debt and equity securities such that the before-tax yields on corporate securities and the personal tax rates of the investors who bought these securities would adjust until an equilibrium was reached. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 14 2.2 agency theory before agency theory, previously theorist proposed model assume that the interests of managers and shareholders are effortlessly associated. though, adam smith (1776) prescribe that management and ownership are differed in their own interest conflict. "the directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private co-partner frequently watch over their own. like the stewards of a rich man. they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. negligence and profusion, therefore, must always prevail. more or less, in the management of the affairs of such a company." adam smith (1776) as quoted in jensen and meckling (1976). jensen and meckling in 1976 suggest the conflicting interest of principals (shareholders) and their agents (managers)into their seminar agency theory based paper. agency cost such as bonding expenditure, monitoring cost and residual loss have arisen from this inconsistent relationship between shareholder and manager and this relationship assist to suggest how the mix of equity and debt can be determined optimum capital structure. nevertheless, this theory had been comprehended by other authors. later, myers (1977) contributed to agency costs of debtand jensen (1986) explained with the free cash flow. from the concept agency cost defines two categories of conflict: agency costs of equity and agency costs of debt. agency cost defines conflicts between managers and shareholders and debt holders and equity holder’s conflicts suggest agency costs of debt. i will explain more details about agency cost of equity what impact of debt on the agency costs that ascend from these relationships. 2.2 (a) agency costs of equitybenefits of debt financing agency costs of outside equity can be demonstrated by comparing the behaviour of a manager when he owns i00 per cent of the residual claims on a company with his behaviour when he sells off a portion of those claims to outsiders. if a company is managed by the owner, he will make operating decisions that maximize his utility, i.e. also the value of the company. however, as the owner-manager's fraction of the equity falls. also, his fractional claim on the outcomes falls. generating a divergence between his interests and those of the outside shareholders. when a manager does not control the complete gain from possible value increasing activities, may accept significant cost from the activities. thus, manager are not attracted to employ more effort into managing resources rather than involve in transfer wealth to their own interest. in some instance, different interest issue managers may incur some loses from perquisites (such as corporate jets, luxurious offices, etc.) though attain a less amount of gain. as a consequences, manager’s attitude towards the decrease in value caused rather than value increase which is called agency cost of equity value maximising inefficiency can be lessen significant amount when ownership owned by managers. in this case, when manager absolute shareholding and investment increases, also increases perfectly leveraged firm, manager’s shareholding and eliminates the damage from the conflict between the manager and shareholder (harris and raviv, 1991). from agency theory proposition, explained by jensen and meckling declare (1976) state that owner will accept complete wealth properties of the previously discussed agency costs of equity. when minority shareholder realise the conflicted relationship between agency and owner, the share price what they may reimburse for security, it may reveal monitoring cost. thus, this is also expected that for minority shareholders to disburse more resources in monitoring conflicted attitude through agency conflict. the wealth costs to the owner of gaining more cash from the equity markets rise as his portion of ownership reduces. debt financing has contributed to the reducing of .free cash flow as demonstrated by jensen (1986). in this paper jensen (1986) explain free cash flow as the excess of that essential to account all projects which creates positive net present values. this hard to encourage managers to distribute this cash to shareholders than invest in below the cost of capital or deteriorating this onto inefficiencies of a firm. by issuing debt capital, managers are attached to pay out future cash flows, and they provide the rights to debtholder a file bankruptcy when they fail to pay interest and principle payments.hence, debt reduces the agency costs of free cash flow is reduced by debt and the cash allocated for expensing at the option of managers. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 15 it is important to discuss that monitoring function of leverage is highly significant in firms where produce enormous cash flows with low growth forecasts even more important those organisation may shrink. these firms can invest in unprofitable investment due to negative pressure for wasting cash flows. there are two major contribution what debt financing can have on pushing down agency costs of equity and thus enhance firm’s value. 2.2 (b) agency costs of debtbenefits of equity financing when a firm consider to be highly leveraged, and potential financial distress could be occur, there are conflicted association exist between shareholders and debt-holders. in this condition,shareholders are interested to follow opportunistic strategies that lead to suboptimal investment. negative attitude towardsfirm value is called the agency cost of debt-financing. jensen and meckling(1976) commented especially on highly levered firm and probability of bankruptcy. highly leveraged firm and close to bankruptcy firm could have incentive on investment onto highly risk related firm, when an investment profits large returns that are well above the face value of the debt, shareholders will awardmajor gain from the investment. on the contrary, when investment become loss, debt-holders will incur the limited liability of the shareholders. thus, shareholders may enter even for irrationally risky ventures that they wouldn't prefer to invest they are value lessening projects. from jensen and meckling(1976) summary, the agency costs associated with debt consist of 1) the opportunity wealth loss caused by the impact of debt on the investment decisions of the company; 2) the monitoring and bonding expenditures by the bondholders and the company; 3) the bankruptcy and reorganization costs. this kind of investment reduces value of a debt and this loss in value of the equity from the poor investment can be more than offset by the gain in equity value captured at the expense of debt-holdersharris and raviv (1991). when a debt-holders perfectly forecast shareholders future attitude during debt issue, shareholders may receive less what they anticipated. hence, the cost of the incentive to invest in value-decreasing projects created by a higher proportion of debt in the capital structure is borne by the shareholders who issue debt. this effect called the "asset substitution effect"', is one of the agency costs of debt financing. another significant agency cost of debt represents the underinvestment problem identified by myers (1977). there are three types of agency costs which can help explain the relevance of capital structure.  when debt-equity increases, management prone to invest risky projects (even consider negative npv project). as project is successful, shareholders achieve upside gain, otherwise when project downside they receive downside payments. when the projects are undertaken, there is a chance of firm value decreasing and a wealth transfer from debt holders to shareholders.  underinvestment problem: when debt is risky especially growth company, debtholders accumulate more gain than shareholders. thus, management has an incentive to reject positive npv projects, even though they have the potential to increase firm value. myers (1977) state that probability of bankruptcy company frequently invest new capital oriented project as they think it could assist bondholders at their expense, even capital may invest may bring value-increasing projects. the reason behind that shareholders may consume full cost of investment, though investment returns would be gain majority by the debt holders.  free cash flow: unless free cash flow is given back to investors, management has perks etc. increasing leverage imposes financial discipline on management. 2.3 trade off theory the trade-off theory of capital structure is a theory in the kingdom of financial economics about the corporate finance choices of corporations. its purpose is to explain the fact that firms or corporations usually are financed partly with debt and partly with equity use by balancing the costs and benefits. financing with debt has some tax benefit, there are some financing cost also coming with debt. there are financial distress cost such as bankruptcy costs of debt and non-bankruptcy costs. the marginal benefit of debt enhance as well as marginal cost increases in this case a firm enhancing its overall value will focus on this trade-off when choosing how much debt and equity to use for financing. although other substitute theories empirical evidence are copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 16 not clear, the significance of this theory has often been questioned. other theorist have recommended it is the mechanical change in asset prices that make up for most of the variation in capital structure. the conventional sort of the research of kraus and litzenberger (1973) who measured a balance between the deadweight costs of bankruptcy and the tax saving benefits of debt, agency costs are also included in the balance. this theory is considered as a competitor theory to the pecking order theory of capital structure. as the debt equity ratio (i.e. leverage) increases, there is a trade-off between the interest tax shield and bankruptcy, causing an optimum capital structure, d/e* figure 1: trade-off theory graphical representation the assumptions of the theory are i) taxes do exist ii) capital markets are not perfect and iii) costs of bankruptcy and costs of financial distress exist. the tax considerations for this theory are  interest is tax deductible and, therefore, creates an interest tax subsidy. the greater the firm's marginal tax rate the greater the value of the interest tax shield.  the value of the interest tax subsidy depends on the firm's ability to generate taxable income.  the more a firm borrows the less the expected realized value of the interest tax shield.  given that there are other ways to shield income from taxes, the greater these alternative tax reducing opportunities the lower the value of the interest tax shield.  equity investors have a tax advantage relative to debt investors, which offset the tax advantage of debt at the corporate level. myers (1977) concludes that there is a moderate tax advantage to debt if you can use the tax shields. it is to note that taxes cannot be the only factor because we do not see firms with 100% debt. costs of bankruptcy are the loss of value of the assets when sold under the pressures of bankruptcy (not the loss in value prior to filing but the loss caused by liquidating). costs of bankruptcy = f (intangible assets to total assets) intangible assets are not easily transferable and, therefore, their value will decrease dramatically if bankruptcy occurs. costs of financial distress are the losses associated with decisions that are caused by a firm being in financial distress (lucent technology). costs of financial distress = f (intangible assets to total assets)  the defection of key employees, customers, and suppliers  the underinvestment problem or a decrease in new positive npv investments (internal sources and external sources dry up)  the opportunity costs associated with managing the crisis all of these costs are higher for firms with intangible assets (tech/high growth stocks) and, therefore, these firms should avoid the possibility of financial distress. again, think not just of the probability of financial distress but the value lost if distress occurs. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 17 the trade-off theory predicts that an optimal capital structure does exist and is found as the optimal trade-off between the tax benefits of debt and the increase in the costs of financial distress associated with debt. v(firm) = pv(operating cash flows) + pv(interest-tax shield) pv(costs of financial distress) there are some empirical evidence that consistent with trade-off theory, it focuses that varying debt levels across industries but similar debt levels within industries and characteristics of lbo candidates. again, inconsistent with trade-off theory shows that d/a = f(profitability), foreign countries with no tax shield have debt, stock market reaction to capital structure changes i) equity offerings cause a decrease in value, ii) debt offerings cause no change in value, iii) debt for equity swaps cause an increase in value, iv) equity for debt swaps cause a decrease in value and v) equity repurchases cause an increase in value implications of the trade-off models the trade-off models cannot be used to specify a precise optimal capital structure. according to the models, each firm should set its target capital structure such that the costs and benefits of leverage are balanced at the margin because such a structure will maximize its value. the empirical support for the trade-off models is rather weak, which suggests that factors not incorporated into these models are also at work. 2.4 bankruptcy theory in principle a firm becomes bankrupt when the value of its assets equals the value of its debt. so the value of equity is zero and the stockholders turn over control of the firm to the bondholders. at this time, the bondholders hold assets whose value is exactly equal to what is owed on the debt. in a perfect world, there are no costs associated with the transfer of ownership, and the bondholders do not lose anything. the costs associated with bankruptcy may eventually offset the tax-related gains from leverage. direct bankruptcy costs when the value of a firm's assets equals the value of its debt, then the firm is economically bankrupt in the sense that the equity has no value. however, the formal turning over of the assets to the bondholders is a legal process, not an economic one. there are legal and administrative costs to bankruptcy. because of expenses associated with bankruptcy, bondholders won't get all that they are owned. the legal and administrative expenses associated with the bankruptcy proceeding are the direct bankruptcy costs. indirect bankruptcy costs because it is expensive to go bankrupt, a firm will spend resources to avoid doing so. a firm is having significant problems in meeting debt obligations, it is experiencing financial distress. the costs of avoiding a bankruptcy filing -incurred by a financially distressed firm are called indirect bankruptcy costs. bankruptcy process one of the consequences of using debt is the possibility of financial distress, which can be defined in several ways:  business failure the term is usually used to refer to a situation in which a business has terminated with a loss to creditors, but even an all-equity firm can fail.  legal bankruptcy firms or creditors bring petitions to an authorized court for bankruptcy. bankruptcy is a legal proceeding for liquidating or reorganizing a business.  technical insolvency it occurs when a firm is unable to meet its financial obligations.  accounting insolvency firms with negative net worth are insolvent on the books. this happens when the total book liabilities exceed the book value of the total assets. finance theorists have long realized that sufficiently large costs of bankruptcy and financing distress could dramatically reduce the incentive for firms to use debt financing, even in the world of otherwise perfect capital markets. moreover, in the real world of finance, it reveals the literature suggests that a bankrupt company's security holders and protected bondholders frequently lose their entire investment in a firm. if bankruptcy costs are material, the advantage may become offset at some level of debt. then a higher risk of bankruptcy should reduce the attractiveness of debt, and optimal capital structure with a high bankruptcy rank should contain low amounts of debt. agency literature suggests that potential bankruptcy costs are part of the agency-debt costs. 2.5 pecking order theory pecking order theory suggest the cost of asymmetric information. this theory suggest that firms highlighted the internal financing to equity as internal debt is used first, and when that is depleted debt is issued, and when it is not sensible to issue any more debt, equity is issued. this theory reserves that a firm follows financing sources and copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 18 provide importance internal financing and prefers debt over equity when external financing is available. pecking order theory is promoted by myers (1984) and argued that equity capital is less preferred which mean it is important to raise capital when manager who informed better about the firm capital condition issues new equity capital, investors believe that managers suggest that the firm is overvalued and managers are taking opportunities of this over-valuation. according to the theory of myers and majluf, 1984 external debt financing is better than equity financing and it is good than to invest state securities than risky one. firms which investment opportunities exceed operating cash flows and the ability to issue less risky debt, it may decline good investments rather than issue risky securities to finance them. in some instances, shareholders may earn more when the firm transfers sufficient financial slack to commence good investment opportunities that may arise. firms may figure more financial slack by limiting dividends when investment requirements are modest or by issuing stock in periods when managers' information benefit could be small. when a managers could have larger information, and the share is issued to finance investment, the stock price may down, other things equal. this relation of issuance of default-free debt. 2.6 arbitrage theory arbitrageur of a capital structure strive for opportunities created by distinction pricing of various instruments issued by corporation. as an example traditional bonds and convertible bonds. convertible bonds are conditional and contracted which covert shares to equity. the stock-option constituent of a convertible bond has a calculable value in itself. the value of the whole instrument should be the value of the traditional bonds plus the extra value of the option feature. when the spread, the difference between the convertible and the non-convertible bond s grows excessively, then the capital-structure arbitrageur will be converge. 3. conclusion the papers in this literature explore factors that suggest organisation target capital structures as well as the degree to which future leverage-equity selections transfer firms back toward their optimal targets to capital structure. since the influential work of modigliani and miller (1958) on the insignificance of capital structure in investment decision, a wealthy theoretical literature has materialized that models firm’s capital structure choice under different assumptions. for example, theories such as trade-off theory rely on traditional factors such as tax advantage and potential bankruptcy cost of debt while others use the asymmetric information or game theoretical framework in which debt or equity is used as a signalling mechanism or strategy tool. many of these theories have also been empirically tested. yet there is little consensus on how firms choose their capital structure and how the firm-specific factors influence the shape of the capital structure. this research develops a link between theory and practice of capital structure. references amihud, y., & lev, b. 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(1984). the effect of capital structure on a firm's liquidation decision. journal of financial economics, 13(1), 137-151. warner, j. b. (1977). bankruptcy, absolute priority, and the pricing of risky debt claims. journal of financial economics, 4(3), 239-276. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) copyright © cc-by-nc 2019, cribfb | afbr australian finance & banking review; vol. 3, no. 1; 2019 issn 2576-1196 e-issn 2576-120x published by centre for research on islamic banking & finance and business, usa 20 triangular causality and controlling parallel exchange market bijan bidabad 1 abstract in this paper, the triangular relationship of money, price, and foreign exchange in a causality context are studied. it is concluded that regulating the exchange rate by volume of liquidity in a period of less than a year is not possible, but in annual and biannual analyses we can regulate the exchange rate through controlling the liquidity. in other words, in the long run, the exchange rate is affected by liquidity and price level, but in the short run, the price level has only temporary effects on the exchange rate. the results of the study show that: liquidity affects the exchange rate in the long run; price affects the liquidity in the long run; in the long run, liquidity and exchange rate affect prices. our results show that injection of foreign exchange into the parallel exchange market with different lags has little effects with different directions on the exchange rate. the same result is true for the relationship between liquidity and dollar rate. in other words, in spite of the long run relationship between exchange rate and liquidity, we cannot justify this relationship in the short run. the same is true with the balance of payments position and exchange rate in the short run. by simulating the relationship between injecting (selling) foreign exchange in the parallel exchange market, liquidity and the cumulative balance of payments all with exchange rate, we can conclude that in the short run, regulating exchange rate by instruments such as selling exchange in the parallel market or controlling the liquidity is not possible, but in the long run, conducting foreign exchange sale policy and controlling the liquidity and the balance of payments position can control the exchange market. keywords: foreign exchange, money supply targeting, monetary policy, market control, exchange rate policy 1. introduction all policies that are to somehow related to exchange rate control can be related to exchange rate targeting, and most of the economic policies are to somehow related to foreign exchange. but at this moment, we are focused on the supply of foreign exchange for controlling the exchange rate. the generality of this discussion is prevailing in exchange rate management policies, but here we only study the open market policy conducted on foreign exchange by monetary authorities in the parallel market. this policy is called “sale of foreign exchange in the parallel (free) market” and was adopted for the period of 1989 to 2001. in general, it is clear that whenever governments try to control prices through non-economic measures which are in confliction with supply and demand mechanism, automatically a parallel market is developed. the emergence of the parallel exchange market in the previous two decades is not exempted from this general rule. governments consider parallel markets as an obstacle for implementing their policies, but we should accept that parallel markets are the results of the government policies. in other words, whenever we do not follow the inherent rules of economics, we should be waiting for the emergence parallel market in the same field of policymaking. before the revolution, the foreign exchange parallel market was negligible. very few amounts of foreign exchange were transacted in exchange offices at a price which followed the exchange rate of the banking system, so these exchange offices pegged their rates between of bid and offer rates of the banking rates. in other words, their 1 (b.a., m.sc., ph.d., post-doc.) research professor of economics, monetary and banking research academy, bidabad@yahoo.com bijan@bidabad.com http://www.bidabad.com. this paper is the summary of the project: bijan bidabad, parallel exchange market control by monetary targeting and complementary policies. monetary and banking research academy, central bank of iran, tehran, iran. http://www.bidabad.com/doc/exchange-control.pdf http://www.bidabad.com/ bijan@bidabad.com bidabad@yahoo.com mailto:bidabad@yahoo.com mailto:bijan@bidabad.com http://www.bidabad.com/ http://www.bidabad.com/doc/exchange-control.pdf http://www.bidabad.com/ mailto:bijan@bidabad.com mailto:bidabad@yahoo.com mailto:bidabad@yahoo.com copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 21 bid rate was a little more than the bid rate of the banking system, and their offer rate was a little lower than the banking offer rates. this method of pricing helped them to survive; in other words, their profit margin was between the profit margins of the banks. after the revolution, banks developed regulations on exchange sale, which was considered as a restriction for the supply of foreign exchange. the restricted supply practically pushed up the rates, but the government kept banking rates unchanged, which caused to develop a parallel market with higher rates. because of the unordinary conditions of post-revolution, the gap between the parallel market and banking rates widened. the government tried several times to control this market with new regulations. the extent of these regulations went so far to consider the dealers of the parallel market as trouble-makers, or economic terrorists and heavy penalties were developed for them, and police and security forces were used against this market, but the government had little success in eliminating this market. one of the policies applied against this market was government interference in the market by direct sale of foreign exchange in order to increase the supply and decrease the parallel rates. this policy was conducted in several ways so that the banking system also sold foreign exchange with special rates and conditions. sometimes the central bank gave official permissions to private foreign exchange offices and sold foreign exchange through these offices. in some exceptional cases, the brokers of the central bank sold foreign exchange on the nearby main streets. these decisions were made on the bases of the analysis of the decision makers of those days, but the main principle behind these decisions was injecting foreign exchange into the market in order to decrease the parallel rates and achieve income in rial terms. the main precondition for applying this policy is the acceptance of an unofficial foreign exchange market. in some years, the policymakers were so radical that they considered the dealers of the parallel market as smugglers and punished them very severely, which suggests that this policy was not developed very well. we should accept that during the scarcity of foreign exchange supply with fixed rate regime, this is a natural phenomenon, and the market mechanism creates it automatically. the best method of dealing with this market is accepting it for the first time. this means that we should legally accept the transactions through this market and even consider it as an economic activity and prevent any noise from it and in the next phase automatically try to marginalize it by applying policies and adopting reforms in foreign exchange management. if the foreign exchange system tends to unify, the management of the system becomes transparent. in other words, all transactions of goods and services should be done in single rates, and the rate of the parallel market will, at last, be within the margins of official rate fluctuations. since the prices of many items of goods and services are affected by the foreign exchange rate in the parallel market and its fluctuations will cause the fluctuation of the prices of goods and services, the stabilization of the foreign exchange rate in the parallel market will cause partial stabilization in goods and services market. the injections of foreign exchange into the parallel market for stabilization will spillover into other markets. after the revolution in iran, the volume of money in circulation has had an increasing trend. economic theories demonstrate that this increase will lead to depreciation of money, in other words, when the volume of rial is increased, we should expect that the value of rial is to be reduced against foreign currencies, or its parity rate decreases. we have practically seen this event in the past few decades. the increase of the volume of rial from 2613 billion in 1996 to 320957 billion rials at the end of 2001 can be the main cause of the increase of parity rate of american dollar from 70 rials to 8000 rials. econometric researches also confirm this finding. the policy of selling foreign exchange in the parallel market not only increases the supply of foreign exchange, but also decreases the amount rial in the market, both of which will strengthen the national currency. most of the increases of the amount of liquidity after the revolution have been the result of the expansion of monetary base through the increases of government sector debts to the banking system. the details of this phenomenon have been described in several pieces of research, but here we consider that the mentioned results are sufficient to be used and not to be retested. the increase of the government sector’s debt to the banking system has been created through financing budget deficit by borrowing from the banking system, which is similar to seignorage of extra money by expanding the monetary base. the policy of selling foreign exchange in the parallel market can be regarded as a method for partially financing the budget deficit. in this way, the government can finance the budget deficit by selling foreign exchange in the parallel market at unofficial prices without obligation of borrowing from the banking system. in other words, without increasing the liquidity (in spite of borrowing from the banking system), this policy can finance the budget deficit. price increase and inflation in iran has a monetary source. many studies confirm this hypothesis. the increase in money supply causes an increase in general price level instead of increasing the supply of goods and services in the http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 22 economy. regarding this concept, it could be said that the policy of selling foreign exchange in the parallel market will decrease the price level through the decreasing foreign exchange rate which causes to decrease the price of imported commodities which use foreign exchange from the parallel market sources, and also through decrease of liquidity which has a deflationary effect. after the approval of the usury-free banking law, since bond has usury nature, it cannot be applied as a policy tool for changing the amount of money in circulation. in the western economies, central banks conduct open market operations by buying and selling bonds, and decrease or increase the amount of money in circulation and thereby, affect the interest rates and investment thereafter. but as it was mentioned earlier, since it is not possible to use bonds, it is not possible to conduct open market operations. the government interference in the parallel exchange market affects liquidity, and if the government buys, as well as selling foreign exchange in this market, these activities will be more similar with open market operations, and therefore, it is possible to affect interest rate in the parallel market by applying this policy. of course, this kind of operation is not completely in accordance with open market operation, but when other monetary instruments are not efficient enough, or applicable, this policy is of great help to monetary authorities. after this explanation, we return to the policy of selling foreign exchange in the parallel market. this policy confirms the followings:  the parallel market is implicitly accepted  it is a step towards exchange rate unification  it helps to stabilize the rates of foreign exchange  it decreases the amount of available rials, and thereof strengthens the national currency  it can partially finance the budget deficit  this policy has deflationary effects  it can be regarded as a monetary tool for open market operations in the macro-econometric model of iran2, the effect of selling foreign exchange in the parallel market has been studied. the calculations show that by selling foreign exchange equal to one thousand billion rials, the exchange rate of the parallel market decline will be 65 rials. 2. time series analysis in this section, we test the time series for stationarity, to be used in the next sections. the following variables have been tested for unit root. all data are monthly series. several tests such as df3 and adf4 have been used, and by using correlogram, auto-correlation, and partial correlation, the necessary differences were extracted to make the series stationary. tests have been carried out on the followings variables: 1. foreign exchange rate 2. consumer price index 3. liquidity (the broad definition of money m2) according to the studies, the following table has been prepared which shows the changes for making the stationery of the variables variable changes made to make the series stationary exchange rate [d(dollar)] first order difference consumer price index [d(cpi)] first order difference liquidity dlogm2112=d(log(m2),1,12) first order difference and 12 months difference on logarithm after doing changes to make the series stationary, we concluded that: 1. the logarithm of most of the series increases stationarity 2 bidabad, 1996. http://www.bidabad.com/ 3 dickey-fuller. 4 augmented dickey-fuller. http://www.cribfb.com/journal/index.php/afbr http://www.bidabad.com/ copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 23 2. some monetary series and prices needed 12 months difference 3. therefore, the following variables can be regarded as i(1) variables  d(log(dollar), ,12)  d(log(cpi), ,12)  d(log(m2), ,12) 3. causality between the main variables the previous studies and the assumptions of the present study are based on the tight relationship between monetary variables, foreign exchange rate, and prices. in this section, we use causality tests on these variables. in other words, we want to test the direction of the effect on the foreign exchange rate by the monetary variable and general price level. by the previous section, we found out the different orders to make the necessary time series stationary. now we use these results. before evaluating the causality between the variables, in order to find the correct form of granger relationship, we have to check for their co-integration. if the residual of long term regression of the two variables are stationary, or in other words, they have not a unit root, the two variables are co-integrated. if so, their simple difference will not be enough for regression, and therefore, the model should be used as ecm5. although this correction can explain the short variations of the model around the long term trend by inserting an error item which has been obtained from the long run equation, it adds its own problems to the model. for example, if the specification of the model is not strictly supported by economic theory, the results of the error correction model will have conceptual problems. 4. theoretical dynamic causality among variables when we define a regression, we implicitly presuppose that what variable or variables explain another variable which is defined as a dependent variable. it means that we define the causality relationship in which, by changing a variable, the dependent variable will change. this causality relationship can be a one-way relationship or two ways. if x causes y, but y has no effect on x, it is a one-way relationship. but if x affects y, and y affects x, then we have a two-ways or polar relationship. one of the methods for the causality test is the granger test. this test is based on this concept that the future cannot affect the past or the present time. the test is a kind of var(k) test: tjt k j jjt x j jt tjt k j jjt k i ijt eyxax eyxay 2 1 2 1 220 1 1 1 1 10               upon the above equations, we can evaluate the following different cases: 1. if  11 12 1, , ... , 0k    and 21 22 2{ , ,..., } 0k    , there is a one-way causality relationship from x to y. 2. if  11 12 1, , ... , 0k    and 21 22 2{ , ,..., } 0k    , there is a one-way causality relationship from y to x. 3. if   0,...,, 11211 k and 21 22 2{ , ,..., } 0k    , there is a two ways causality relationship between y and x. to test the above hypothesis, we use f statistics. this test will be carried out after testing for stationarity and making variables stationary before further use. 5 error correction model. http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 24 in order to find the causality relationship between the main variables, the triangle below is important. that is to say, we want to know which of the three variables of the foreign exchange rate, price, and liquidity is the cause of changes in other variables and how deep this effect is and then, find out which variable works as a catalyst. liquidity foreign exchange rate price level 5.triangular causality to solve the model, we explain the triangular causality relationship. we want to know how the three variables, x, y, and z, affect each other. on the basis of previous definitions, we define: 1. one way chain relationship if: ax affects y by does not affect x cy affects z dz does not affect t ex affects z (through y) fz does not affect z we say that there is a one-way relationship from x to y and to z: x y z for example, rain (x) increases water (y), and water grows the plants (z). 2. two to one, one-way relationship if: ax does not affect y by affects x cx affects z dz does not affect x ey affects z fz does not affect y we say both x and y affect z: x z y for example, rain (x) and sunshine (y) cause plants (z) grow. 3causality relationship with, or without catalyst, if: http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 25 ax affects y by does not affect x cy affects z dz does not affect y ex affects z (with, or without catalyst) fz does not affect z we say that there is a one-way relationship from x to y and z. that is to say: x z y for example, rain (x) causes the growth of plants (z) and increase of humidity (y), and humidity (y) also helps the growth of plants. 4annular causality relationship, if: ax affects y by does not affect x cy affects z dz does not affect y ex does not affect z fz affects x x z y for example, income (x), causes investment (y) and investment (y) creates employment (z), and employment again creates more income (x). 5annular one-way causality relationship with partial feedback, if: ax affects y by does not affect x cy affects z dz affects y http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 26 ex affects z (indirectly) fz does not affect x x z y 6annular causality relationship with complete feedback, if: ax affects y by affects x cy affects z dz affects y ex affects z (indirectly) fz does not affect x (indirectly) x y z for example, humidity (x) causes plants (y) to grow, and the growth of plants causes the increase of humidity (x). but the growth of plants (y) creates natural fertilizer (z), and fertilizer causes more growth of plants (y), and the creation of natural fertilizer also directly increases the humidity (z). 7the causality effect of one to two with one feedback, if: a x affects y by does not affect x c y affects z dz affects y e x affects z f z does not affect x (directly) x z y 8causality effect of one on two (with two feedbacks), if: ax affects y by affects x cy affects z dz affects y http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 27 ex affects z (directly) fz does not affect x (directly) x z y 9annular causality effect with one feedback, if: ax does not affect y (directly) by affects x ct does not affect z (directly) dz affects y ex affects z (directly) f z affects x (directly) x z y 10annular causality with complete feedback, if: ax affects y (direct and indirectly) by affects x (direct and indirectly) cy affects z (direct and indirectly) dz affects y (direct and indirectly) ex affects z (direct and indirectly) fz affects x (direct and indirectly) x z y http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 28 6. the dynamic causality among variables (practical) regarding the mentioned cases in the previous section, by using the granger causality test, we test the variables two by two and with different lags. the first group of tests includes testing causality among three variables in a range of 1 to 24 lags:  the first order difference of dollar rate series with 12 months seasonal adjustment (dollar)  the first order difference of liquidity with 12 months of seasonal adjustment (dm2112)  the first order difference of consumer price index with 12 months seasonal adjustment (dcpi112) the second group of tests is similar to the first group with one difference that the logarithms of variables are used instead of the original ones. the summary of the results of these tests is presented in the next tables and diagrams. the table of f statistics defines the probability of accepting the null hypothesis. this hypothesis is defined as follows: h0: the variable one is not the cause of the second variable. h1: the variable one is the cause of the second variable. if the calculated f is greater than f in the table, we reject the null hypothesis, and if the calculated f is smaller than f in the table, we accept the null hypothesis. the following table gives f statistics for a large number of observations (more than 120 in this case) and the degree of freedom of the denominator equal to 5 percent and 1 percent level of significance: f statistics for a number of observations over 120 and degree of freedom of numerator (lag) 24 20 15 12 10 9 8 7 6 5 4 3 2 1 lags 1.52 1.57 1.67 1.75 1.83 1.88 1.94 2.01 2.10 2.21 2.37 2.60 3.00 3.84 5% level of significance f 1.79 1.88 2.04 2.18 2.32 2.41 2.51 2.64 2.80 3.02 3.32 3.78 4.61 6.63 1% level of significance f by considering the next tables and the graphs for a simple non-logarithmic model, we conclude: 1the change in dollar rate, after at least 1 month, will lead to a change in liquidity. 2the change in liquidity will affect dollar rate after 1 month, and its further effects appear after 9 to 11 months and again after 2 years changes the dollar rate. 3changes in prices affect liquidity after a lag of 8 months to 2 years. 4liquidity changes will affect prices after 1 year. 5price changes affect the dollar rate after 1 month. 6changes in dollar rate affect cpi in every lag. in short, with the analysis of the above conclusions, at 95% of significance level, we can draw the following diagram: http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 29 with 12 to 24 months lag after 9 to 24 months lag with 2 to 24 months lag always with 3 to 5 months lag with 23 to 24 months lag the same study regarding the logarithms of the variables gives the following conclusions: 1change of dollar rate affects liquidity after 3 to 5 months. 2change of liquidity does not affect the dollar rate. 3price changes after 3 months affect liquidity. 4liquidity change does not affect prices. 5price changes after 6 to 11 months and also after 13 to 15 months causes changes in the dollar rate. 6changes in dollar rate causes changes in prices after 11 months. in short, the above conclusions can be shown at a 95% level of significance in the diagram below with 3 to 5 months lag liquidity dollar rate prices liquidity dollar rate prices after 3 months lag after 6 to 15 months lag with 11 to 24 months lag http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 30 adding up the above results, we can draw the following diagram for short term analysis: the following diagram is for more than a year analysis: the above diagrams show that foreign exchange rate cannot be regulated by changing liquidity in less than a month, and the results show that only the general price level can affect this variable. but in one to two years of analysis, the foreign exchange rate can be regulated by liquidity control. in other words, the long run trend of the foreign exchange rate is affected by liquidity and price level changes, but since price changes have also short term effects on the foreign exchange rate, therefore, we can change this hypothesis in error correction model as follows: foreign exchange rate = long term function (price level, liquidity) + error if in the first order stationary condition of the three variables of the foreign exchange rate, liquidity, and price level, the co-integrated regression creates stationary error, we follow the error correction model. after the study of the foreign exchange rate, liquidity, and price index variables and making them stationary, we follow the model with stationary variables. with the estimation of long-run function, we realized that the existing co-linearity between liquidity and cpi, practically the obtained weights are not as they were expected and therefore, it is not possible to follow error correction model. on the basis of obtained graphs and results for long-run effects, we consider the three following relationships: eq1: dollar=c(1)*m2+ c(2)*dummy8000 + c(3)*dummy8000*m2 + c(4) + reseq1 eq2: m2= c(11)*cpi+c(12) +c(13)*dummy8000+c(14)*dummy8000*cpi+ reseq2 eq3: cpi= (c(21)+c(22)*dummy8000)*dollar+(c(23)+c(24)*dummy8000)*m2 +c(25)+ c(26) *dummy8000 + reseq3 these equations show the mathematical causality relationship between our variables. regarding the existence http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 31 of high co-linearity between liquidity and price level, the price variable has been omitted from the first equation. in order to consider the policies for fixing dollar rate at 8000 rials, the dummy variable “dummy8000” has been introduced into the model which affects the intercept, as well as the slope. the amount of this dummy from the 11th month of 1998 and afterward is one, and for other times is zero. in order to study the co-integration and concluding whether the mentioned relationships are long term relationships or not, we regress the first order difference of the residuals of each regression to its own lag. in this way, we conduct the unit root test. the results of these tests with the study of mackinnon show that all three equations have long term nature. in other words:  liquidity affects the foreign exchange rate in the long run.  prices affect liquidity in the long run.  in the long run, both liquidity and dollar rate affect prices. 7. selling foreign exchange one of the variables which have not been used here is the selling of foreign exchange in the parallel market. as it was mentioned, the application of this policy can affect the monetary and exchange sectors of the economy. unfortunately, the monthly data for this variable is not available; the annual data as budget information is available in the central bank reports. these figures have been presented in the previous sections of this paper. studies show the relationship between this variable and the foreign exchange rate in the parallel market. the macro-econometric model of iran6 shows that there is a significant relationship between selling foreign exchange in the parallel market and dollar rate in that market. the following relationship has been defined in that model: dollar rate=f(selling exchange in parallel market, liquidity, cumulative balance of payments) the above study showed that it is not possible to find a significant relationship for the above function in the short run, even though this function is statistically satisfactory. the reason for that is perhaps the lack of monthly data series of selling foreign exchange for a long period. as it was mentioned, there is a long term relationship between these variables; a concrete short-run relationship has not been found. the cross-correlogram below shows: selling foreign exchange with different lags has little effects with different directions on the parity rate of rial. the next graph shows the same conclusion for the relationship between liquidity and dollar rate. in other words, in spite of the existence of the relationship in the long run, it is not possible to define such a relationship in the short run. the same is understood for the position of balance of payments and the foreign exchange rate in the short run. 8. conclusion in this paper, our goal was to find out the effects of changes in money on the foreign exchange rate in the short run and long run. in other words, we were looking to find out if we can change foreign exchange rate by changing the liquidity? on the other hand, what is the effect of the price, which has an important catalyst role in this interaction? therefore, we looked for the triangular relationship between money, prices, and foreign exchange rate, through which we can reach foreign exchange rate control policies. calculations show that regulating foreign exchange rate by changing the amount of liquidity for a period of less than one year is not possible, and only the general level of prices can affect this variable. but in annual and biannual analysis, we can say that the control of the foreign exchange rate can be achieved through changes in liquidity. in other words, the long run trend of the foreign exchange rate is defined by liquidity and price level, but prices have also short term effect on the dollar rate. in the co-integration analysis, we checked whether the above relationships are credible for the long run or not. we concluded that:  liquidity affects dollar rate in the long run  prices affect liquidity in the long run  in the long run, liquidity and dollar rate affect the price level the long-run analysis with annual data shows that there is a significant relationship between selling foreign exchange in the parallel market. in other words, the dollar rate is a function of the cumulative balance of payments, liquidity, and the amount of dollar sold in the parallel market. the short-run analysis of the relationships shows that 6 bidabad, 1996. http://www.bidabad.com/ http://www.cribfb.com/journal/index.php/afbr http://www.bidabad.com/ copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 32 we cannot find a statistically significant relationship in this regard. in other words, there is only a long-run relationship between the variables, and there is not a clear short term relationship for them. the studies show that selling dollars in the market with different lags have small effects on the dollar rate in volatile directions. the same is true with the relationship of dollar rate and liquidity. that is to say, in spite of the existence of a long-run relationship between dollar rate and liquidity, we cannot find this relationship for the short run. the same is true for the relationship between the balance of payments and liquidity in the short run. by simulation of the amount of foreign exchange sold in the parallel market, liquidity, and cumulative balance of payments with dollar rate, we can conclude that controlling foreign exchange rate in the short run by using tools such as selling foreign exchange in the parallel market or controlling the liquidity is not possible, but in the long run, by the policy of selling foreign exchange and controlling the liquidity and the balance of payments, we can control the foreign exchange market. references bidabad, bijan, general monetary equilibrium. lap lambert academic publishing, omniscriptum gmbh & co. kg, isbn: 978-3-659-54045-5, spring 2014. bidabad, bijan, parallel exchange market control by monetary targeting and complementary policies. monetary and banking research academy, central bank of iran, tehran, iran, 2007. http://www.bidabad.com/doc/exchange-control.pdf bidabad, bijan, and n. kalbasi anaraki, inflation targeting: case study of iran, paper prepared for the second hallescher workshop. http://www.bidabad.com/ rmacdonald (1988), floating exchange rates, theories and evidence, unwin hyman ltd. bernanke, b.s., laubach, t., mishkin, f.s. and posen a.s. (1999), “inflation targeting” princeton: princeton university press. kumhof, m. li, s. and yan, i. (2001), “balance of payments crises under inflation targeting” mimeo, stanford university. mishkin, f.s. and schmidt-hebbel, k. (2001) “one decade of inflation targeting in the world: what do we know and what do we need to know?”, nber 8397. ryan, c. and thompson, c. (2000), “inflation targeting and exchange rate fluctuations in australia” reserve bank of australia, research discussion paper 2000-06. jonas, j.; f.s.mishkin (2003)"inflation targeting in transition countries: experience and prospects. national bureau of economic research, working paper 9667. april. http://www.nber.org/papers/w9667/. bernanke, b.s. and f.s. mishkin," inflation targeting: a new framework for monetary policy, journal of economic perspectives, 1997. bernanke ben s., laubach, thomas, mishkin fredric s. and posen adam s. " inflation targeting: lessons from the international experience. princeton, nj: princeton university press. christiano, lawrence j., martin eichenbaum; charles l. evans, "identification of the effects of monetary policy shocks," in m.i. blejer et al. eds, financial factors in economic stabilization and growth. new york, cambridge university press, 1996. mishkin frederic s., "issues in inflation targeting "in price stability and the long-run target for monetary policy, bank of canada, ottawa, canada, 2001. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) http://www.cribfb.com/journal/index.php/afbr http://www.bidabad.com/doc/exchange-control.pdf http://www.bidabad.com/ http://www.nber.org/papers/w9667/ copyright © cc-by-nc 2019, cribfb | afbr australian finance & banking review; vol. 3, no. 1; 2019 issn 2576-1196 e-issn 2576-120x published by centre for research on islamic banking & finance and business, usa 33 money-transaction-income process: quantification of quantity theory of money bijan bidabad 1 abstract in this paper, we try to establish the relationship between money and income via transaction. in this regard, we use different processes of value-added production in the economy to find this lost chain in literature. according to our findings, we reformulate and generalize the quantity theory of money. our empirical investigations confirm our model formulations. keywords: money, quantity theory, fisher, transaction, income 1. introduction fisher’s quantity theory of money establishes an exact relationship between money and transactions. but, other economists tried to link money to income via quantity theory of money by assuming that real income is a suitable scale variable for the total volume of transactions. this assumption simply relates money to income without reliable economic evidence. consider the following two equations. equation (1) is the original fisher’s quantity theory, and equation (2) is the other's interpretation of quantity theory. mv = pt = t (1) mv = py = y (2) where, m: stock of money. v: velocity or circulation of money. p: price level. y: real income. y: nominal income. t: volume of transaction. t: value of transaction. in the equation (1), fisher discusses around the quantity and value of goods and services sold, but by equation (2), other economists interpret that income is a suitable scale variable for transaction, and they link mv to income (produced value added) in the economy by simply replacing “y” by “t”. in this section, now, we are going to determine the exact relationship between these two fundamental variables. on the other hand, it is tried to bridge between fisher’s original quantity theory (mv=pt) and revisionists’ interpretation of quantity theory (mv = py) in a logical frame. 2. value of transactions in the production process to find out the relationship of value added (income) to the amount of nominal payment required to perform corresponding transactions; we try to follow the procedure that value added is produced in the economy. before going through discussions, it should be cited that in all of the procedures of national income accounting, we accumulate value added produced by any economic agent of the economy. but, necessarily, production in national 1 (b.a., m.sc., ph.d., post-doc.) research professor of economics, monetary and banking research academy, bijan@bidabad.com http://www.bidabad.com. presented at the 3rd international conference on economics, political, law and fiscal sciences (epls '14), world scientific and engineering academy and society (wseas). transilvania university of brasov, brasov, romania. mailto:bijan@bidabad.com http://www.bidabad.com/ copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 34 income accounting does not mean creating a physical product. in general term, any transaction produces positive or negative value added, and the amount of value added is calculated when the transaction occurs. another point to remember is: in the macroeconomic frame of analysis, we have only one type of commodity under the title “value added”. so, in this regard, we just deal with value added as the only macro-commodity produced by the economy. assume that trade is in balance, and the quantity and value of imports are equal to those of exports. this assumption is due to the transactional nature of foreign trade. that is, the imports and exports of goods and services are equal to their transaction values. however, we will release this assumption later. we examine two extreme processes of value-added production and then mix them together to reach an operational form of the real production process. by integrated production process, we mean that the process of “value added macro commodity” production is sequential and value added is produced by using previously produced value added as input. suppose that there exist many firms and they only produce one commodity, namely, “value added”. each firm receives input (in terms of value added) from his previous firm and gives output (in terms of value added) to the next firm. in this case, the cost of production of the latest firm is equal to the accumulation of costs of all previous firms. this means that the latest produced value added includes all of the previously produced values added as input or cost. in contrast to this process, we will refer to the disintegrated production process. the latter process considers again many firms, but with this characteristic that the production of one firm necessarily is not used as input for the next firm. however, these two processes will be more explained through the text. here, let us go through the first process of the integrated value-added production process. 2.1 integrated production process suppose that an agent (or firm) (say agent 0) in the economy possesses a commodity (or service) (call it c0) having the price of p0 in the market. this agent sales his commodity to another agent (say agent 1) with a new price of p1 that this new price is equal to the previous price (p0) plus some earned profits (y1) by agent 0. that is, p1 = p0 + y1 (3) the amount of y1 is the value added of this transaction. to perform this transaction, agent 1 should pay p1 units of money to agent 0. thus the amount of money payment required to create y1 units of value added is equal to p1 units. if we denote t1 as the value of the transaction in the first round, then we have the following equation; t = t1 = p1 (4) where, “t” is the total value of transactions. in national income accounting words, we say that commodity c1 has been produced and at this moment belongs to the agent 1. total value added at this round is equal to y1. denote “y” as total nominal value added, at this round, we have; y = y1 (5) this point should be emphasized that why “y” (or “y1”) does not include “p0”. according to national income accounting rules, we should not include the value of produced goods in the past periods (i.e., last years) in the current period (i.e., current year) total value added. because this value had been calculated in the previous years and included in the previous years' income accounts. in the second round, agent 1 uses commodity c1 to produce c2 commodity. he then sales it to agent 2 with the price of p2, which is equal to p1 (the price of c1) plus some amount of value added (y2) that agent 1 receives. thus, p2 = p1 + y2 (6) the required amount of nominal payment for this transaction is equal to p2. thus, we denote; t2 = p2 (7) where, t2 stands for the value of transaction of the second round. the total value of transactions (t) at this stage will be equal to the sum of transactions values of the rounds 1 and 2. that is; t = t1 + t2 (8) http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 35 total value added at this stage is equal to, y = y1 + y2 (9) in the third round, agent 2 uses c2 commodity to produce c3 commodity. then, he sales c3 to agent 3 with the price of p3. the new price (p3) is equal to the p2 price plus his earned profit y3. amount of y3 is equal to value added produced in this round. thus; p3 = p2 + y3 (10) the nominal payment for this transaction (t3) is equal to p3. that is; t3 = p3 (11) the total value of transactions of rounds 1, 2, and 3 is equal to the sum of transaction values at different rounds. that is; t = t1 + t2 + t3 (12) total produced value added will be equal to; y = y1 + y2 + y3 (13) now, let us go the jth round. similarly, we may state that agent j-1 uses commodity cj-1 to produce commodity cj. then he sales cj to agent "j" with the price of pj. that is pj is equal to the price of the commodity cj-1 (equal to pj-1) plus the earned profit of agent j-1 (equal to the amount of yj). thus, we have; pj = pj-1 + yj (14) the nominal payment for this transaction is equal to pj. therefore; tj = pj (15) the total value of transactions of all “j” rounds is equal to the sum of transaction values at different rounds. that is; t = t1 + t2 + … + tj (16) total production value added in the economy will be equal to; y = y1 + y2 + … + yj (17) now, let us derive the relation between the value of transactions (t) and total value added in the economy by solving (3) to (17). it is clear that total value added in the economy at any round “j” is simply derived by (17). this relation calculates national income in national income accounting framework. so, total income at any round “j” is equal to; y =   j j yj 1 (18) price of the commodity cj at round “j” is simply derived by solving difference equation (14) with initial condition (3). that is; p1 = p0 + y1 p2 = p1 + y2 = p0 + y1 + y2 p3 = p2 + y3 = p0 + y1 + y2 + y3 (19) . . . . . . . . . . . . . . . . . . . . . http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 36 pj = pj–1 + yj = p0 + y1 + y2 + y3 + … + yj on the other hand we may write; pj = p0 +   j 1j yj (20) total value of transactions at round “j” will be simply derived from (16), (15) and (14) as follows; t = t1 + t2 + … tj = p1 + p2 + … + pj = p0 + y1 + p0 + y1 + y2 + p0 + y1 + y2 + y3 + (21) . . . . . . . . . . . . + p0 + y1 + y2 + y3 + … + yj therefore, t =    j 1j tj   j 1j pj = jp0 +   j 1j   j k y 1 k (22) different production stages and corresponding variables regarding our analysis are depicted in table 1. at this point, we should emphasize on some necessary points. first, we are talking about nominal income and nominal value of transactions and not real income and not the volume of transactions. second, we are also talking about the price of a commodity as the market value of that commodity. table 1. j cj yj y pj tj t 0 1 2 3 . . . j c0 c1 c2 c3 . . . cj 0 y1 y2 y3 . . . yj 0 y1 y1+ y2 y1+ y2 + y3 . . . . . . . . . . . . . . . y1 + … + yj p0 p0 + y1 p0 +y1+ y2 p0 +y1+ y2 + y3 . . . . . . . . . . . . . . . . . . p0 +y1 + … + yj 0 p0 + y1 p0 +y1+ y2 p0 +y1+ y2 + y3 . . . . . . . . . . . . . . . . . . p0 +y1 + … + yj 0 t1 t1 + t2 t1 + t2 + t3 . . . . . . . . . . . . . . . t1 + … + tj j: production round. cj: produced commodity at round j. yj: produced value added at round j. y: cumulative value added. pj: price of commodity at round j. tj: transaction value at round j. t: cumulative transaction value. when we have only one initial commodity as initial input (c0) and process of value-added production is of integrated type (like our simple explanation), the relation of transaction value and income can be simply shown by (22). this integrated production process has a structure similar to figure 1. integrated production process 0 1 2 3 j figure 1. since we are focusing on macro-frame of analysis, we can use a continuous form of (18) through (22) relations. because we have many commodities and many production processes and finally only one “commodity” under the title of income or value added is produced, we may accept that in total income formation, the amount of y j in (18) is http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 37 very very small during the period of production, but their number (j) is very large relatively. however, this is actually highly realistic, since, on the average, if we divide annual income of the economy to a total number of seconds in a year we will see that the amount of economy’s value-added produced in a second is very small (though a total number of seconds in a year is very large). this leads us to use a continuous form of relation (18). that is instead of discrete sum we can use integral sign. let; dy = lim yj (23) yj 0 where, d stands for differential. note that yj is: produced value added at round “j”. this means that it is the difference of the total value added at round “j” minus total value added at round j-1. so, in the discrete case, it is the differences between the total value-added variables of two sequential rounds. thus, we can easily adopt it as a differential of the total value added in the continuous case as (23). in this regard, dy means very small changes in total value added. now, we can rewrite (18) by using (23) as; y =  j 0 dy = j – 0 = j ====> y = j (24) now, consider the relation (20). the variable pj expresses the amount of money payment that one should pay to buy the final produced commodity cj (at round j). from this payment, p0 is the amount one pays and buys the commodity, and no value added is produced by this purchase (transaction). the remaining amount of pj is that amount of payment to buy commodity cj that is equal to the total value added produced by the production of cj. this decomposition of the transaction is very important in our “exchange theory of money” bidabad (1994). however, the continuous form of (20) can be written as the sum of these two components. that is; py = p0 + y = pj = p0 + j (25) the third and fourth parts of (25) come from the result of (24). in relation (22), the amount of jp0 is the amount of transaction value which does not produce value added. let us denote this amount by t0. in this regard, in a continuous frame, we can use the following procedure to get an equation similar to (22). by (22) and (24) we have; t =  y 0 pydpy =  j 0 pydpy (26) replace (25) in (26) (and since dp0 = 0), gives; t =  y 0 (p0 + y) d (p0 + y) =  y 0 p0 dy +  y 0 ydy (27) thus we will have; t = p0y + 2 1 y2 = p0 j + 2 1 j2 (28) as the continuous form of (22). note that in deriving (28), we can also use the following relation instead of the double sums on the right-hand side of (22);  y 0  x 0 dz dx = 2 1 y2 (29) where, “y”, “x” and “z” replaced for “j”, “j” and “k” as continuous form variables respectively. in (28), it should be noted that all variables are in values. explicitly, http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 38 t: total value of transactions. y: total nominal value added (income). p0: total price (or value) of produced commodities in previous periods and are used as input in the current period. in (28), the total value of transactions has been divided into two segments. one is that portion of transactions that do not produce value added. these transactions are equal to t0 as; t0 = p0y = p0j (30) the other segment is that portion of transactions that produce value added. amount of these transactions is equal to half of the square of total value added in the economy. that is 2 1 y2. 2.2 disintegrated production process as we noted before in this process in contrast to the integrated process, produced value added of a firm is not used as input for the other firm. this means that intermediate demands for commodities do not exist and all productions are used for final demand; in contrast to integrated process which says final demand exists whenever we stop the production; and demands for commodities are of the intermediate type. to understand the details of this opposite extreme process, we again go through the steps that value added is produced. the schematic shape of this type of process is shown in figure 2 below. disintegrated production process 0 1 0 2 0 3 . . . . . . . . 0 j figure 2 suppose that agent 0 has “j” units of c0 commodity, having a unique price of p0. he sales these commodities to agents 1,….,j with new prices of p1,…,pj. so, in national income accounting, we say commodities c1,…,cj have been produced. agent 0’s profit from each of these transactions is equal to y1,…,yj. the market prices and transaction values of these commodities are equal to; t1 = p1 = p0 + y1 . . . . . . . . . . . . . . . . tj = pj = p0 + yj (31) where, tj is the transaction value of the jth transaction. at this point, the production of value-added ceases. in compare to table 1, table 2 can be considered for the disintegrated production process. total value added to the economy will be equal to; j y = ∑ yj (32) j = 1 http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 39 table 2. j cj yj y pj tj t 0 1 2 3 . . . j c0 c1 c2 c3 . . . cj 0 y1 y2 y3 . . . yj 0 y1 y1+ y2 y1+ y2 + y3 . . . . . . . . . y1 + … + yj p0 p0 + y1 p0 +y2 p0 + y3 . . . . . . p0 + yj 0 p0 + y1 p0 + y2 p0 + y3 . . . . . . p0 + yj 0 t1 t1 + t2 t1 + t2 + t3 . . . . . . . . . t1 + … + tj j: production round. cj: produced commodity at round j. yj: produced value added at round j. y: cumulative value added. pj: price of the commodity at round j. tj: transaction value at round j. t: cumulative transaction value. total required nominal payments for all transactions will be equal to “t” as; t =        j 1j j 1j j 1j pjtj p0 +    j 1j yj jp0 + y (33) now let us assume again that the amount of value added produced in each round is very small. therefore, again, the definition of (23) prevails. by this assumption we may apply (24) again to (32) and we total value of transactions for this production process as; t = jp0 + y = yp0 + y (34) this equation has again, similar to (30), a part of transactions (equal to yp0) that does not produce value added. the amount of t0 should be exchanged (or transacted) until we can produce “y” units of value added. 2.3 mixed production process operationally, the two cited before extreme cases of integrated and disintegrated production processes both occur in the economy. to combine these two processes, we use a convex combination of both. let us use single prime (') and double prime (") symbols for integrated and disintegrated processes respectively; and symbols without prime for their convex combination. total transactions value as a convex combination of both (28) and (34) will be equal to; t = α (p0' y + ½ y2) + (1–α) (p0"y+y) = [α p0' + (1-α) p0" + 1α ] y + ½ αy2 (35) where αє[0,1] is a combination factor. without loss of generality, we may use p0 as a convex combination of p0' and p0". that is; p0 = α p0' + (1 – α) p0" (36) thus, (35) can be written as; t = (p0 + 1 – α) y + ½ α y2 0≤α≤1, p0≥0 (37) when α=1, equation (36) is the extreme case of integrated production process (p0 = p0') and when α=0, it explains the extreme case of disintegrated production process (p0 = p0"). in (37), value of those transactions that do not produce value-added is again equal to (30). http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 40 3.total transaction and foreign trade in the previous section, we had assumed that trade is in balance, and imports are equal to exports in the economy. on the other hand, our equation (37) implies for absorption as the following equation explains, where “an” stands for nominal absorption and “bn” for the nominal balance of trades; ta = (p0 + 1 – α) an + ½ αan 2 bn=0, 0≤α≤1, p0≥0 (38) the left-hand side variable ta denotes transactions value due to absorption. now assume that balance of trade is not equal to zero, and let’s find the amount of total transactions due to foreign trade. in the case of exports, the amount of produced value added equals to the value of exports is purchased by foreign countries from home country. there is a reverse case for imports, that is, the foreigner’s produced value added is purchased by home country. thus, the total exports are equal to the total value of transactions due to exports. a similar case occurs for imports. in transactions inside the border of a country, one is the purchaser, and one is a seller. in a transaction with a foreign country, one purchase (imports) and one sells (exports) commodity. total value added outflow is equal to exports, and total value added inflow is equal to imports. total transacted value with foreigners will be equal to net exports (exports minus imports). in this regard, we can write down the following equation, tb = exn imn (39) where, tb, exn and imn denote transactions value due to the foreign sector, nominal values of exports and imports respectively. total transaction in the economy will be the sum of internal and external transactions as; t = ta + tb (40) or, on the other hand, we will have; t = (p0 + 1 – α) an + ½ α an 2 + bn 0≤α≤1, p0≥0 (41) this equation shows the relation of the total transaction with absorption and balance of trade. 4. quantity theory of money, reformulated now, we are going to reformulate the quantity theory of money and constructing the link between money and income via transaction by applying our important conclusion from the previous section given by equation (41). other economists propose that (2) is a good (but not complete) substitute for (1), but, in “the purchasing power of money”, fisher explicitly derives (1) that money required to handle all transactions multiplied by its velocity should be equal to the value of transactions. other revisionists tried to link the total value of transactions to total nominal income in a loosed base and introduced (2). in (2), the main problem or pitfall is the assumption that they used real income as exactly the same (scale) variable as the volume of transactions. this was the mistake they undertook. a scale variable with coefficient one (y=1*t, or y=1*t) is really a great specification error. in equation (37), we showed that the total value of transactions actually has a parabolic relation with nominal income. therefore, we can reformulate fisher’s quantity theory of (1) by using (41) as; mv = (p0 + 1 – α) an + ½ an 2 + bn = t = pt 0≤α≤1, p0≥0 (42) simply, we may include the notion of the general price level and real output (or output at constant price) by using the following simple identity (given constant foreign price); y = py = p (a + b) = an + bn an = pa, bn = pb (43) using this definitional identity in (42) we will have the following fundamental relation as a reformulation of the quantity theory of money; mv = (p0 + 1α) pa + ½ α (pa)2 + pb = t = pt 0≤α≤1, p0≥0 (44) this relation once relates money in circulation to total transactions and then relates total transactions to income components in the economy. it is interesting to note that in (44) if we use α = p0 = 0, we again will reach the http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 41 equation of mv=py as a special case of our formulation. in this case, by α = 0, we mean the production process is disintegrated, and by p0=0, we mean no initial valued input is used in the process of value-added production. 5. empirical analysis let us now test our important proposition of (37) empirically for the data of the united states. thus, we are going to test the relation between the total value of transactions and nominal income as specified by the following regression equation. tt = ß1yt + ß2y 2 t + ut (45) where; tt: total value of transactions at time t. yt: nominal income at time t. ut: disturbance term. ß1, ß2: regression coefficients. for the sake of simplicity, in this model, we assumed that pb is a component of random error term obeying classical assumptions of least square regression. this assumption is not strong and does not affect our results so much. according to this specification, the estimated values of ß1 and ß2 should have the following restrictions. ß1 = p0 + 1 – α ≥ 0 (46) 0 ≤ ß2 = α/2 ≤ ½ (47) another test is to be performed is equation (45) accompanying with intercept term ß0. that is; tt = ß0 + ß1yt + ß2y 2 t + ut (48) if our proposition is true, we should reach significant ß1 and ß2 in (45) and (48) within the interval given by (46) and (47) and insignificant ß0 in (48). since transaction data is not available, similar to previous researches, we employ total debits and its modifications as proxies for a total value of transactions. the debit data captures the values of initial, intermediate, and final transactions. therefore, according to our previous discussions, debits data will be more consistent with what we mean by the transaction. to calculate total debits, we combined debits on demand deposits as a proxy for total deposit transactions and three different types of debits on currency as proxies of total currency transactions. to account for the level of currency transactions, we follow the assumptions and data applied by komijani (1983). in this regard, three alternative scenarios adopted to approximate total debits, namely, t(1), t(2) and t(3) with the following definitions; t(1) = debits on demand deposits in all commercial banks. t(2) = debits on demand deposits in all commercial banks +15 x (stock of currency). t(3) = debits on demand deposits in all commercial banks + the dollar value of the amount of currency “received and counted” by federal reserve system. to test the equations (45) and (48) with above three proxies for the total value of transactions, we used the data provided by komijani (1983) for the period of 1952 – 1980 for the united states of america (there is no updated transactions value data). the cochrane-orcutt procedure of estimation applied to the models (45) and (48). the results of the calculations are depicted in table 3. table 3. no. dep. var. ß0 (sß0ˆ) ß1 (sß1ˆ) ß2 (sß2ˆ) rho (srho) r2 duration watson 1 tt (1) ---------- ---------- 2.3236 (0.6327) 0.0080 (0.0003) 0.3572 (0.2228) 0.9971 1.3708 2 tt (2) ---------- ---------- 3.1624 (0.6357) 0.0079 (0.0003) 0.3514 (0.2258) 0.9972 1.3769 3 tt (3) ---------- ---------- 2.3793 (0.6328) 0.0080 (0.0003) 0.3562 (0.2233) 0.9971 1.3710 4 tt (1) *-80.416* 2.4620 0.0080 0.3509 0.9971 1.3747 http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 42 (1069.66) (1.9902) (0.0007) (0.2505) 5 tt (2) *+85.912* (1080.53) 3.0158 (2.0054) 0.0080 (0.0007) 0.3568 (0.2467) 0.9972 1.3736 4 tt (3) *-61.996* (1071.71) 2.4855 (1.9939) 0.0080 (0.0007) 0.3515 (0.2504) 0.9971 1.3739 * insignificant the first three rows are corresponded to equations (45) and completely confirm our hypothesis and model specification with special attention to the conditions of (46) and (47). the rows of four through six of the table correspond to the model (48). these rows also confirm our hypothesis that the estimated intercept should be insignificant. all other calculated statistics confirm our hypothesis strongly. references bidabad, bijan [2014] general monetary equilibrium. lap lambert academic publishing, omniscriptum gmbh & co. kg, isbn: 978-3-659-54045-5, spring 2014. crystal, k.a. 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[1965]. money, interest and prices, an integration of monetary and value theory, 2nd ed., harper & row, new york. pesek, b.p. [1979], modern bank deposits, and the theory of optimum money, in economic perspective, an annual survey of economics. m.s. ballabon (ed.), baruch college of the city university of new york, vol. i, harwood academic publishers, chur, new york. pierce, d.g., d.m. shaw [1974], monetary economics, theories, evidence, policy; london, butterworth. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr australian finance & banking review; vol. 3, no. 1; 2019 issn 2576-1196 e-issn 2576-120x research article published by centre for research on islamic banking & finance and business, usa 1 sustainable reporting and profitability of quoted firms in nigeria: a multi-dimensional panel data study ngozi g. iheduru associate professor department of accountancy faculty of business administration imo state university owerri, nigeria charles u. okoro m. sc student department of accountancy school of management sciences ken saro wiwa polytechnic bori, rivers state, nigeria abstract this paper used cross sectional data to examine the effect of sustainable reporting on the profitability indicators of nigeria quoted firms between 2008-2017. data was sourced from financial statement of the firms. twenty firms were selected from the population of quoted firms in nigeria. return on equity, earnings per share and return on investment were proxy for profitability while sustainable reporting was proxied by economic, social, environmental and corporate governance disclosure. the panel data model was tested using the hausman test. model one and two validated the fixed effect while model three validated the random effect. the results found that economic disclosure and social disclosure have positive but insignificant effect on return on equity of the selected firms while environmental and corporate governance disclosure have negative and insignificant effect on return on equity, all the predictor variables have positive and insignificant effect on earnings per share of the firms and that economic, social and environmental disclosure have positive effect on return on investment while corporate governance disclosure have negative effect on return on investment of the selected firms in nigeria. we recommend that operating environment of the firms should be well examined and policies should be advanced to manage factors such as economic, social, environmental and corporate governance disclosures to leverage the environmental challenges and enhance profitability, companies should ensure strict compliance to all forms of sustainability reporting. keywords: sustainable reporting, profitability, quoted firms, panel data study 1. introduction the objective of shareholders wealth maximization is an appropriate and operationally feasible criterion to choose among the alternative financial actions. organizations are generally established with an objective to maximize shareholders welfare while remaining profitable (aggarwal, 2013). more often than not, activities carried on by these organizations tell on their immediate environment as well as the environment at large. it provides an unambiguous measure of what financial management should seek to maximize in making decisions such as investment, dividend policy and financing decisions on behalf of shareholders (burhan and rahmanti, 2012). financial goals are quantitative expression of corporate missions and strategies and are set by its long-term planning system as a tradeoff among conflicting and competing interest (duke ii, & kankpang, 2013). these financial goals guides the maximization of book value of net worth, market value per share, cash flow, operating profit before interest and tax, maximizing the ratio of price earning, market rate of return, return on investment, net profit to net worth, net profit margin, market share and maximization of the growth in earnings per share, total assets, sales and ensuring availability of funds(pandey, 2015). every corporate organization operate in an environment where it takes input from processed to finished or semi finish product to the environment (akani and briggs, 2018). this process results in externalities which is the cost and benefit of the corporate organization to the environment. environmental accounting involves the identification, measurement and allocation of environmental costs and the integration of these costs into the business and copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 2 encompasses the way of communicating such information to the stakeholders (horvathora, 2010). the concept of sustainability reporting maintains that while a firm strives to achieve its traditional objectives of profit maximization, it is important that this profit is maximized through activities that seek to integrate social and environmental considerations into the decision-making process. historically advocacy for corporate sustainability reporting by leading governments has been on the increase with the coming together of brazil, denmark, france and south africa, in support of the united nations conference on sustainable development (rio+20). the aforementioned countries attracted the support of the global reporting initiative and united nations environment programme (unep). organizations engage in sustainability reporting to enhance their competitiveness, in comparison with other companies producing similar product (jones, 2010). competitiveness or standing out among other organizations can be traced to the goodwill or intangible asset value of the firm because it cannot be physically measured in monetary terms. a company’s social and environmental issues can materially affect its overall performance in terms of corporate image and reputation (makori and jagongo, 2013: aondoakaa, 2015; babalola and abiodun, 2012; munasinghe and kumara, 2013; khaveh, nikhashemi, yousefi and haque, 2012). the reporting of these issues among other corporate sustainability indicators can be traced to demands from various stakeholder groups such as investors, customers, employees, non-governmental organizations, media and community, for increased levels of transparency and disclosure, ethical reasons and community concerns. while there are many studies on financial disclosure and corporate profitability, there is limited study citabledealing with the problem of sustainable reporting and profitability of quoted firms in nigeria, therefore this study examined the effect of sustainable reporting on profitability indicators of nigeria quoted firms. 2. literature review concept of sustainable reporting sustainability reporting is a subset of accounting and reporting that deals with activities, methods and systems to record, analyze and report, firstly, environmentally and socially induced financial impacts and secondly, ecological and social impacts of a defined economic system (jasch and stasiskiene, 2005). sustainability reporting deals with the measurement, analysis and communication of interactions and links between social, environmental and economic issues constituting the three dimensions of sustainability. sustainability reporting is becoming more prevalent, driven by a growing recognition that sustainability related issues can materially affect a company’s performance, demands from various stakeholder groups for increased levels of transparency and disclosure and the need for companies (and the business community more generally) to appropriately respond to issues of sustainable development (ivan, 2009). it is the practice of measuring, disclosing and being accountable to internal and external stakeholders for organizational performance towards the goals of sustainable development. theoretical framework stakeholder theory the traditional definition of a stakeholder is any group or individual who can affect or is affected by the achievement of the organization’s objectives (fontaine, harman and schmid, 2006). the general idea of the stakeholder concept is a redefinition of the organization. in general, the concept is about what the organization should be and how it should be conceptualized. popa, blidisel and bogdan (2009) maintains that stakeholder theory is based on the premise that the stronger the companies relationships are with other interest parties, the easier it will be to meet its business objectives. stakeholder theory contributes to the corporate sustainability concept by bringing supplementary business arguments as to why companies should work toward sustainable development. perrini and tencati (2006) stated that the sustainability of a firm depends on the sustainability of its stakeholder relationships; a company must consider and engage not only shareholders, employees and clients, but also suppliers, public authorities, local community and civil society in general, financial partners. legitimacy theory legitimacy theory is derived from political economy theory and relies on the idea that the legitimacy of a company to operate in society depends on an implicit social contract between the company and society. as described by deegan (2000) legitimacy theory asserts that organizations continually seek to ensure that they operate within the bounds and norms of their respective societies, that is, they attempt to ensure that their activities are perceived by outside parties as being legitimate. managers continually attempt to ensure that their company complies with its social contract by operating within society’s expectations. this suggests that managers have incentives to disclose information that indicates that the company is not in breach of the norms and expectations of society, therefore, the company attempts to maintain its survival and continuity by voluntarily disclosing detailed information to society to prove it is a good citizen. political economy theory copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 3 the political economy has been defined by gray et al. (1996) in deegan (2007)as the social, political and economic framework within which human life takes place. political economy theory explicitly recognizes the power conflict that exist within society and the various struggles that occur between various groups within the society. the perspective embraced in political economy theory is that society, politics and economics are inseparable and economic issues cannot meaningfully be investigated in the absence of considerations about the political, social and institutional framework in which the economic activity takes place. it is argued that by considering the political economy a researcher is better able to consider broader (society) issues which impact on how an organization operates, and what information it elects to disclose. following from the above point, guthrie and parker (1990) in deegan (2007:130) explain the relevance of accounting within a political economy perspective. they state that the political economy perspective perceives accounting report as social, political and economic documents. they serve as a tool for constructing, sustaining, and legitimizing economic and political arrangements, institutions and ideological themes which contribute to the corporation’s private interests. political economy theory relies on the concept that society, politics and economics are indivisible and economic events cannot be studied in comprehensive manner without reference to political, social and institutional framework in which the event occurs. a study of political economy allows researchers to contemplate broader issues about the information companies elect to disclose in their annual reports (guthrie and parker, 1990 in kenth and stewart, 2008). accountability theory accountability theory is concerned with the relationship between groups, individuals, organizations and the rights to information that such relationships bring about. accountability is an act of being responsible or answerable for one’s own decisions or actions with the expectation of explaining and justifying them when asked to do so. simply stated, accountability is the duty to provide an account of the actions for which one is held responsible (gray et al., 1991). the natures of the relationships and the attendant rights to information are contextually determined by the society in which the relationship occurs. it is absolutely true that some sort of relationship will exist between an organization and each of its stakeholders. part of this relationship may be economic in nature and the terms determined by the parties as reflecting their relative powers in the relationship. the information flowing through the relationship will be determined by the power of the parties to demand it and the willingness of the organization to provide it (gray et al., 1997). empirical review asuquo, dada and onyeogaziri (2018)examined the effect of sustainability reporting on corporate performance of selected quoted brewery firms in nigeria. to determine the association between sustainability reporting and corporate performance, data was obtained from the audited financial statements of the three brewery firms under study for a period of five years (2012-2016). the result of the study shows that economic performance disclosure (ecn), environmental performance disclosure (env) and social performance disclosure (soc) have no significant effect on return on asset (roa) of selected quoted firms in nigeria. olayinka and temitope (2011) empirically examined the relationship between corporate social responsibility and financial performance in nigeria and found out that corporate social responsibility has a positive and significant relationship with the financial performance measures, yahya and ghodratollah (2014) employed multiple-linear regression analysis to investigate the impact of corporate social responsibility disclosure (csrd) on the financial performance of companies listed on the tehran stock exchange. the independent variable (csrd) was measured by economic, social and environmental indices while return on assets, return on equity and price earnings ratio were used in measuring financial performance. the analysis produced inconsistent results. onyekwelu and ekwe (2014) used ordinary least square regression to examine whether corporate social responsibility predicates good financial performance using the banking sector in nigeria. the findings of their study show that the amount committed to social responsibility vary from one bank to the other. it further revealed that the sample banks invested less than ten percent of their annual profit to social responsibility. onyekwelu and ugwuanyi (2014) carried out a research on corporate social accounting and enhancement of information disclosure among firms in nigeria and found out that the inclusion and separate presentation of social costs incurred by organizations in the financial statements will enhance information disclosure in the statement. nze, okoh and ojeogwu (2016) examined using the ordinary regression analysis the effect of corporate social responsibility on earnings of quoted firms in nigeria in the oil and gas sector over a ten-year period and found out that corporate social responsibility has a positive and significant effect on earnings of firms studied. babalola and abiodun (2012) concluded that variations in selected firms performance were caused by changes in csr reporting after analyzing ten firms in nigeria for over 1999-2008. aupperle, carroll and hatfield (1985) analyzed the relationship between corporate social responsibility and profitability of the companies listed in forbes 1981 annual directory and concluded that there was no relationship between social responsibility and profitability. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 4 murray, sinclair, power and gray (2006) studied the relationship between social and environmental performance disclosure and financial market performance of companies in uk and found no significant relationship between environmental reporting and market performance. aggarwal (2013) ascertained whether sustainable companies are more profitable. using regression analysis, he established that sustainability has significant but varying impact on financial performance. munasinghe and kumara (2013) ascertained the relationship between corporate social responsibility (csr) and financial performance to see what motivates firms to voluntary initiate csr activities. using spearman’s rank-order correlation they found out that return on equity and return on assets were positively correlated and significant. makori and jagongo (2013) investigated into whether there is any significant relationship between environmental accounting and profitability of selected firms listed in india. using multiple regression analysis, they found that there is significant negative relationship between environmental accounting and return on capital employed (roce) and earnings per share (eps) and a significant positive relationship between environmental accounting and net profit margin and dividend per share. robbins (2011) found that most executives believe that corporate social responsibility reporting can improve profits. they understand that corporate social responsibility can promote respect for their company in the market place which can result in higher sales, enhance employee loyalty and attract better personnel to the firm. also, corporate social responsibility reporting activities focusing on sustainability issues may lower costs and improve efficiencies as well. robbins (2011) observed that reviewing individual empirical studies can be confusing. but by using the technique of meta-analysis many studies can be statistically analyzed to determine collective results. duke and kankpang (2013) ascertained the effect of corporate social responsibility activities on the financial performance of firms operating in some of the industries that have the greatest impact on the environment in nigeria. using multiple regression analysis they revealed that waste management, pollution abatement are both significantly and positively associated with firm performance. makori and jagongo (2013) investigated into whether there is any significant relationship between environmental accounting and profitability of selected firms listed in india. using multiple regression analysis they found that there is significant negative relationship between environmental accounting and return on capital employed (roce) and earnings per share (eps) and a significant positive relationship between environmental accounting and net profit margin and dividend per share. researching on the impact of sustainability performance of company on it financial performance, a study of indian companies aggarwal (2013) ascertained whether sustainable companies are more profitable. using regression analysis he established that sustainability have significant but varying impact on financial performance. munasinghe and kumara (2013) ascertained the relationship between corporate social responsibility (csr) and financial performance to see what motivates firms to voluntary initiate csr activities. using spearman’s rank-order correlation they found out that return on equity and return on assets were positively correlated and significant. the empirical studies examined above are mainly foreign studies with few studies of citable significant on the nigeria business environment. 3. methodology this study used quasi experimental research design.. this approach combines theoretical consideration (a prior criterion) with the empirical observation and extract maximum information from the available data. it enables us therefore to observe the effects of explanatory variables on the dependent variables. firms that were studied are those that are quoted on the floor of nigerian stock exchange (nse). the target size of 20 quoted firms was drawn from various sub-sections/industries, based on the nse classification. the annual financial statements of the respective firms for ten years running were our major focus. the necessary data for our analysis were obtained from various years of nse fact-book. the study adopted the longitudinal time dimension, specifically the panel study type. the panel regression equation is different from a regular time-series or cross section regression by the double subscript attached to each variable. the general form of the panel data model is specified as: titii xy ,,,   1 the subscript i denotes the cross-sectional dimension and t represents the time-series dimension. the left-hand variable y represents the dependent variable in the model which represents the value relevance of firms listed on the nigeria stock exchange, x contains the set of explanatory variables in the estimation model,  and is taken to be constant overtime t and specific to the individual cross-sectional unit model specification copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 5 the objective of this section is to develop models to employ to find the validity of the hypothesis: that sustainability reporting enhances profitability of quoted firms.. multiple linear regression technique (applying time series), and analysis of variance technique was used to generate the models in this study. the study used positive quantitative research paradigm which is appropriate because it enables the capturing of knowledge through measurements of phenomena in which mathematical and statistical procedures are used to describe, predict and explain behavioral phenomena (krasuses, 2005). the study is basically a quantitative research that aimed at examining the effect of sustainable reporting on profitability indicators of nigeria quoted firms.  cgdenvdsodecdfroe ,,, 2  cgdenvdsodecdfeps ,,, 3  cgdenvdsodecdfro ,,,1 4 the regression models are thus formulated as   iiii cgdenvdsodecdroe 43210 5   iiii cgdenvdsodecdeps 43210 6   iiii cgdenvdsodecdroi 43210 7 where roe = return on equity eps = earnings per share roi = return on investment ecd = economic disclosure son = social disclosure envd = environmental disclosure cgd = corporate governance disclosure 1 = stochastic or disturbance/error term. t = time dimension of the variables α 0 = constant or intercept. method of estimation and testing i. panel data regression model specifications panel data can be estimated and analyzed in three different specification models. these are the correlation matrices the fixed effect model (fem) and the random effect model (rem). in this study the fixed effect model is chosen over pooled ols regression because of the advantages the former has over the latter. ii. pooled regression model to obtain a reliable and unbiased estimated the analysis, this estimation method uses the classical linear regression assumptions which according to albrigim zappe and winston, (2011) stipulate that the error term should be independently and normally distributed with zero mean and constant variance and more importantly must not correlated with the independent variables pooled ols linear regression is given as follows: itititititit uxxxxy  544322110  8 where yitis the dependent variable; 0 is a constant term: x1, to x5, are the independent variables; 41  to are slope parameters: i...n refers to the cross-sectional units and t is the time period. using this regression specification, the model or this study is thus written as gujarat; (2009) opined that pooled ols regression model has the advantage of being the simplest, easy to understand and interpret as compared to the other models but the model is associated with some weaknesses. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 6 iii. the fixed effect model the fixed effect mode is highly comparable to the pooled ols regression model in the sense that the slope coefficient is the same for all cross sectional and that the intercept remains unchanged across time. employing the fixed effect least-squares dummy variable (lsdv)approach the issue of heterogeneity is taken different intercepts for every cross sectional and (brooks, 2008). the fixed model can be specified as itititititiit uxxxxy  43211  9 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: itroe    0 1  n j ecdf 1( sod2 ..........543 ucgdenvd   10 iteps    0 1  n j ecdf 1( sod2 ..........543 ucgdenvd   11 itroi    0 1  n j ecdf 1( sod2 ..........543 ucgdenvd   12 if this is represented with random variables, then ,0 joj   which indicates that the difference occurs randomly, and the expectation value of . 5 0 isoi 13 4. results and discussion this section presents analysis and findings of the study as set out in the research objective and research methodology. the study sought to establish the effect of sustainable reporting on the profitability indicators of quoted firms in nigeria. results in the tables below contain details on the effect of sustainable reporting on the profitability indicators of the 20 selected quoted firms in nigeria. table i: the effect of sustainable reporting on the return on equity of quoted firms in nigeria. panel a: correlated random effects hausman test test summary chi-sq. statistic chi-sq. d.f. prob. cross-section random 11.112130 5 0.0000 cross-section random effects test comparisons: variable fixed random var(diff.) prob. ecd 0.476024 0.453448 0.090455 0.9402 sod 0.183524 0.192809 0.002145 0.8411 envd -0.147233 -0.143443 0.007228 0.9644 cgd -0.667807 -0.663585 0.000262 0.7943 panel b: regression results variable coefficient std. error t-statistic prob. ecd 0.476024 1.380493 0.344822 0.7313 sod 0.183524 0.145949 1.257456 0.2128 envd -0.147233 0.154718 -0.951618 0.3446 cgd -0.667807 0.234754 -2.844709 0.0058 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 7 c 10.18255 1.378952 7.384264 0.0000 effects specification cross-section fixed (dummy variables) r-squared 0.650012 mean dependent var 10.19322 adjusted r-squared 0.480730 s.d. dependent var 1.292761 s.e. of regression 1.081038 akaike info criterion 3.186850 sum squared resid 81.80496 schwarz criterion 3.742363 log likelihood -123.4082 hannan-quinn criter. 3.410865 f-statistic 3.014502 durbin-watson stat 1.265173 prob(f-statistic) 0.000412 source: extract from e-view 9.0 panel a of the results test the validity of fixed and random effect, from the results the probability of the hausman test is less than the critical value of 0.05, therefore fixed effect result is accepted. panel b presents the regression effect of sustainable accounting on the profitability indices of nigeria quoted firms. the results proved that 65 percent variation on the return on equity of the quoted firms can be explained by variation on the four predictor variables on sustainable reporting. probability of f-statistics found that the model is statistically significant while the durbin watson statistics proved the absence of serial autocorrelation. the probability coefficient of the variables found that there are no statistical differences between the fixed and the random effect. regression coefficient of the variables justifies that economic disclosure and social disclosure have positive but insignificant effect on return on equity of the selected firms while environmental and corporate governance disclosure have negative and insignificant effect on return on equity. table ii: the effect of sustainable reporting on earnings per share of quoted firms in nigeria. panel c: correlated random effects hausman test test summary chi-sq. statistic chi-sq. d.f. prob. cross-section random 36.581216 5 0.0000 cross-section random effects test comparisons: variable fixed random var(diff.) prob. ecd 0.136702 -0.144138 0.000499 0.7393 sod 0.117696 -0.176701 0.002281 0.2167 envd 0.104710 -0.123441 0.003877 0.7636 cgd 0.091056 0.008413 0.001509 0.0334 panel d: regression effect of sustainable reporting on earnings per share variable coefficien t std. error t-statistic prob. ecd 0.136702 0.107798 1.268128 0.2131 sod 0.117696 0.152467 0.771945 0.4453 envd 0.104710 0.177639 0.589451 0.5593 cgd 0.091056 0.088776 1.025678 0.3121 c 15.40232 5.477468 2.811942 0.0080 effects specification cross-section fixed (dummy variables) r-squared 0.600437 mean dependent var 11.45720 adjusted r-squared 0.440612 s.d. dependent var 7.116944 s.e. of regression 5.322920 akaike info criterion 6.425246 sum squared resid 991.6718 schwarz criterion 6.998853 log likelihood -145.6312 hannan-quinn criter. 6.643679 f-statistic 3.756843 durbin-watson stat 1.517175 prob(f-statistic) 0.000734 source: extract from e-view 9.0 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 8 again panel c of the results justifies the validity of fixed effect, from the results the probability of the hausman test is less than the critical value of 0.05, therefore fixed effect result is accepted. the differences between the fixed and random effect is statistically not significant. from panel d, the results found that 60 percent variation on the earnings per share of the firms can be predicted by variation on the four predictor measures of sustainable reporting, this justifies by the significant of the f-statistics and probability while durbin watson statistics proved the absence of serial autocorrelation. the beta coefficient of the variables proved that all the predictor variables have positive and insignificant effect on earnings per share of the firms. table iii: the effect of sustainable reporting on earnings per share of quoted firms in nigeria. panel e: correlated random effects hausman test test summary chi-sq. statistic chi-sq. d.f. prob. cross-section random 6.809936 4 0.1463 cross-section random effects test comparisons: variable fixed random var(diff.) prob. ecd -0.071848 0.507468 0.278045 0.2719 sod 0.191573 0.255089 0.001098 0.0452 envd 0.204147 0.242534 0.000344 0.0385 cgd -0.199820 -0.096867 0.009577 0.2928 panel f: regression effect of sustainable reporting on return on investment variable coefficien t std. error t-statistic prob. ecd 0.507468 0.133505 3.801108 0.0006 sod 0.255089 0.082570 3.089357 0.0041 envd 0.242534 0.089788 2.701187 0.0108 cgd -0.096867 0.166405 -0.582116 0.5644 c 0.678448 0.355450 1.908701 0.0650 effects specification s.d. rho cross-section random 0.820470 0.8612 idiosyncratic random 0.329343 0.1388 weighted statistics r-squared 0.843470 mean dependent var 0.485215 adjusted r-squared 0.824497 s.d. dependent var 0.908805 s.e. of regression 0.351364 sum squared resid 4.074075 f-statistic 44.45550 durbin-watson stat 1.274413 prob(f-statistic) 0.000000 unweighted statistics r-squared 0.825726 mean dependent var 2.191316 sum squared resid 36.37256 durbin-watson stat 0.252859 source: extract from e-view 9.0 further panel e of the results justifies the validity of random effect, from the results the probability of the hausman test is less than the critical value of 0.05, therefore fixed effect result is accepted. the differences between the fixed and random effect is statistically not significant. from panel f, the results found that 60 percent variation on the earnings per share of the firms can be predicted by variation on the four predictor measures of sustainable reporting, this justifies by the significant of the f-statistics and probability while durbin watson statistics proved the absence of serial autocorrelation. beta coefficient of the variables proved that economic, social and environmental disclosure have positive effect on return on investment while corporate governance disclosure have negative effect on return on investment of the selected firms in nigeria. the positive effect of the variables confirm the findings of asuquo, dada and onyeogaziri (2018)that economic performance disclosure, environmental performance disclosure and social performance disclosure have no significant effect on return on asset of selected quoted firms in nigeria. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 9 findings of the study show that economic disclosures do not significantly affect return on equity of selected quoted firms in nigeria. this result is plausible in real business situations. the performance of firms depend heavily on firms pricing and volume of sale rather than disclosures of figures from previous financial periods. this result contradicts the findings of makori and jagongo (2013), who posited that environmental accounting has a significant influence on profitability in india. the authors argued that disclosing firm’ activities carried out for the community it is domiciled influences the customers’ patronage of firms’ products. the findings also showed that environment disclosure have effect on earnings per share. this finding contradicts the position of murray, sinclair, power and gray (2006), who posited social and environmental performance disclosures do not significantly affect financial market performance in uk companies the result shows that social disclosures significantly affect return on investment of firms. the social expenditure carried out by the company is usually a small part of the firms’ total expense that is used to obtain profits of the firm. this result confirms olayinka and temitope (2011) results that corporate social responsibility disclosures significantly affect financial performance of firms. the social expenditure carried out by the company is usually a small part of the firms’ total expense that this used to obtain profits of the firm. 5. conclusion and recommendations generally, disclosures about issues away from mandatory requirements of the regulatory standards do not significantly affect profits as seen by the results of this research. stakeholders look out for information about the trading activities and valuation measures of items in the financial statement, though sustainability reporting highlights areas of new interest in financial accounting which may eventually become significant variables that influence performance measures of companies. sustainability reporting provides a framework to create value for stakeholders which translates to satisfying the interest of diverse group of stakeholders. this work is anchored on stakeholder theory since it is propagated by stakeholder theory that managers should manage a firm for the benefit of all stakeholders. this is in agreement with legitimacy theory which emphasize that organizations continually seek to ensure that they operate within the bounds, norms and expectations of their societies and therefore, a company should maintain its survival and continuity by voluntarily disclosing detailed information to stakeholders to prove it is a good citizen. from the findings, the study concludes that there is significant relationship between sustainable reporting and profitability of quoted firms in nigeria. it therefore recommends that:  operating environment of the firms should be well examined and policies should be advanced to manage factors such as economic, social, environmental and corporate governance to leverage the environmental challenges and enhance profitability.  companies should ensure strict compliance to all form of sustainability reporting, all cost incurred in the process of business transaction should be properly reported in the financial statement and accounted for to enhance profitability of the firm . references aggarwal, p. 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(2009). transparency and disclosure between theory and practice, a case study of romania, proceedings of fikusz ‟09 symposium for young researchers. retrieved from http://www.kgk.bmf.hu/fikusz on 14th september, 2011. an empirical examination of the relationship between corporate social responsibility and profitability. academy of management journal, 28 (2) 446-463. robbins, r. (2011). does corporate responsibility increase profit? retrieved from http//www.businessethics.com on 14th september,2011. yahya, h.y., & ghodratollah, b. (2014). the effect of disclosure level of csr on corporate financial performance in tehran stock exchange. international journal of accounting research, 1(11), 43-51. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) copyright © cc-by-nc 2020, cribfb | afbr australian finance & banking review; vol. 4, no. 1; 2020 issn 2576-1196 e-issn 2576-120x published by centre for research on islamic banking & finance and business, usa 9 test of monetary approach to balance of payments in west africa monetary zone foluso ololade oluwole department of banking and finance adekunle ajasin university, akungba akoko; ondo state, nigeria e-mail: foluso.oluwole@aaua.edu.ng john adebayo oloyede department of banking and finance ekiti state university; ado ekiti, ekiti state, nigeria e-mail: ololadefo81@gmail.com abstract this research tested the monetary approach to balance of payment in developing countries of west africa in order to affirm whether the specified relationship in the approach depicts correctly the actual behaviour of the economies. time series and crosssectional data that ranges from 1970 – 2016 were used. the empirical results of the fixed effect model established a significant positive relationship between net domestic credit, interest rate and exports; an insignificant positive relationship between capital movements, imports, income and the dependent variable. exchange rate, however, had a significant negative relationship with the net foreign assets, while inflation had an insignificant but negative relationship with net foreign assets. the pairwise causality tests indicated a unidirectional relationship between exchange rate, net domestic credit and net foreign assets while the other variables move independently and cannot granger cause net foreign assets. hence, the study concludes that the polak model is valid in the west africa monetary zone despite the fact that they are no more operating a fixed exchange rate system. the study suggests that the attention of the monetary authorities and the governments should not only be on decreasing the money supply in the economy, since an increase in net domestic credits has a positive impact on the net foreign assets provided it is channeled towards domestic production. keywords: balance of payment, foreign exchange, monetary approach, current account deficit, money supply. jel codes: e42, f31, e12, f32, e51. 1. introduction it has been observed over time among developing countries that there is a prevalence of persistence current account deficit which is a major cause of concern because, maintaining a healthy and stable balance of payment and promoting trade drives rapid economic growth. therefore, the management and sustenance of balance of payment (bop) equilibrium is of great importance for developing countries to pursue (boateng and ayentimi, 2013; umer, 2010; ogiogio, 1996 and obionna,1998). an examination on the problem of bop imbalances by martin (2014) revealed that out of the 66 poorer developing counties (low income and lower middle-income countries), 52 had a current account deficit. the current account deficits in these states are common than in other groups of nations due to the great effect of external factors that cannot be influenced and it is also a sign of the endeavours of countries with less capital to accelerate economic development by means of net capital imports. also, despite the relatively extensive body of theoretical and empirical literature on this subject matter, there are only a few comprehensive studies that empirically analyse the effect of macroeconomic variables of the polak model on the bop position of west african countries. for example, stephen and njuyuna (2000) applied the old polak model to kenya, pointing out that the behavioural equation of the polak model ignores the other determinants of money balances like interest rate, inflation and wealth. it assumed that changes in domestic credit have no effect on the determinants of money demand. the study is also in conformity with the work of (nwakama, 2013; duasa, 2005; ajayi, 2014; tijani, 2004; johnson, 1976; aghevli and khan, 1977; connolly and taylor, 1976; humphrey, 1976, 1977; musa 1976). the monetary approach also assumed a fixed exchange rate regime. the definitional equation also treated export as being determined exogenously, which is only realistic if the exchange rate is fixed. once an exchange rate is flexible, it becomes endogenous (khan, 2008). adamu and itsede (2010), however, in their study of monetary approach to bop in west africa monetary zone, filled the above gap by including other determinants of money demand like inflation and interest rate but ignored the effect of exchange rate volatility on bop as a control variable that the monetary authority should also focus on, in addition to the net domestic credit (polak 1997). mailto:foluso.oluwole@aaua.edu.ng mailto:ololadefo81@gmail.com copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 10 this sparked off the emergence of an empirical research and better evidence to validate the monetary approach in resolving the bop crisis in the selected west african countries through the modified polak model. in view of this, the study tends to investigate the relationship between bop, proxy as net foreign assets and some macroeconomic variables in the selected countries. the investigation is an attempt to examine the extent to which the monetary theory approach explains the observed behaviour of bop problem of west african countries that operates the floating exchange rates. 2. literature review the application of polak model to namibia was also carried out by fleermuys (2005). the monetary approach to namibia’s bop was tested on the basis of quarterly data covering the period 1993 to 2003, in which net foreign assets is a function of economic growth, inflation, interest rate and net domestic credit using the engel-granger approach to long run estimation to test whether bop is a monetary phenomenon on the long run. it was found out that the bop in namibia is not a purely monetary phenomenon because only inflation and domestic credit have a significant relationship with net foreign assets. the study thus concluded that the monetary authorities should pay special attention to domestic credit and to also achieve sufficient economic growth through money demand to correct the balance of payments deficit. this conforms with the works of menzie and eswar,2002; dausa, 2005; makin, 2005; khan, 2008; boateng and ayentimi (2013); iyoboyi and mufutau (2014); shuaib, augustine and frank ,2015 the study conducted by braima and korsu (2013) tested whether the balance of payments of sierra leone is a monetary phenomenon, using aggregate annual data for sierra leone from 1970 to 2010. a reserve flow model was estimated. due to the inherent tendency of non-stationary of macroeconomic variables and their attendant spurious effects on time series regression estimates, tests for stationary of the variables were carried out. given the existence of non-stationary in the variables, which were however found to be stationary under linear combination (were co-integrated); an error correction model was estimated. the result showed that the balance of payments of sierra leone is a monetary phenomenon, driven by changes in domestic credit, the price level, exchange rate and interest rate. domestic credit, interest rate and the price level have negative effects on the balance of payments of sierra leone while the exchange rate has a positive effect. however, the importance of the price level is felt with a delayed impact. according to them, the policy implication is that monetary policy operations that are consistent with low and stable inflation, domestic credit restraint and exchange rate depreciation are important for improvement of the bop of sierra leone, with low and stable inflation being more useful for medium term objective. supporting these views are the works of aghevli and khan, 1977; dhliwayo, 1996; tijani, 2004; imoisi,2012; umoru and odjegba (2013); ajayi, 2014. for a cross country study in africa, taiwo (1992), using bayesian posterior odds ratio, sampled ten (10) african countries from 1960-1990, to assess their bop crisis. he concluded that about 50 percent of the countries sampled were experiencing a fundamental disequilibrium in their current and capital accounts. he noted that the economic crisis facing most african countries is multi-dimensional, and must not in any way be compared with the bop predicament that they are facing. the view of nyong and obafemi (1995) and that of arewa and nwakama(2013) are that government needs to look beyond the issue of money supply in solving the bop issues. most of the studies reviewed above view balance of payment problem as a monetary phenomenon and not a real phenomenon while some have mixed results. it is also noted that a lot of work has been done on the developed countries and developing countries. despite the application of the monetary approach, even by the imf to various countries, they are still experiencing deficits in their balance of payment position. using various models by different authors, and the conventional theories, there is need to carry out this study on the african countries, most especially the west african countries whose external sector has undergone profound changes over the years viewed from the trend of their bop position. most of these countries run current account deficits alongside low levels of investment and economic growth, which may not be beneficial to them on the long run. the study, however intends to investigate the validity of the assumption that bop deficits or surplus in the west african countries, is a monetary phenomenon, using the modified polak model (polak, 1997). 3. methods the research design for this study is the correlation research design as the model focuses on the relationship between credit expansion and change in foreign assets and its effect on the bop. the key variable according to the model which the authorities could control is the domestic credit creation. 3.1 model specification to test the efficacy of the monetary approach on balance of payment proxy as net foreign assets, the equation in a functional form is given as: nfa = f (ndc, cm, exp, inc, mcip, inf, int). copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 11 the modified version of the polak model as in yotzov (2001), adamu and itsede (2010), wioletta (2013) with the inclusion of exchange rate as an additional policy variable to the net domestic credit was tested in the usual equation as: nfait =a0 + a1nfait -1 + a2 expit + a3cmit + a4incit + a5ndcit + a6mcpiit + a7exchit + a8inf + a9 int + nit + µi where, nfa = net foreign assets exp = value of exports ndc = net domestic credits inc = real income cm = capital movements int = interest rate inf = inflation rate mcip = share of imported goods and services relative to price level exch = exchange rate a0 = intercept a1 – a8 = are the coefficient of the parameter estimates nit = country specific factor ui = is the error term 3.2 a priori expectation it is expected that the coefficients of domestic credit, price index, interest rate, and inflation will be negative while exchange rate, income, exports and imports will be positive. theoretically, it is expected that low exchange rate will encourage importation and this will worsen the balance of payment position. also, the growth of gdp will increase when exports exceed import which basically improves bop. when there is inflation in an economy, people tend to rely on imported goods whose price does not change, therefore bringing about unfavourably bop. mathematically: a1, a3 a5, a6 ˃ 0 while a2, a4, a7 and a8 ˂ 03.4 3.3 estimation techniques the choice of estimation depends on the specification of model, the nature of the available data and the purpose of the model. the fixed effects model takes into account the panel structure of the data and assumes that the individual heterogeneity among the countries is captured by the intercept. the intercept of the model does not vary over time i.e. it is time invariant. therefore the model was estimated using the panel fixed effect model. different diagnostic tests were also conducted to check the validity of the model. the panel unit root to test the level of stationary, the panel co-integration to guide against spurious regression and the hausman tests to determine whether the fixed or the random effect would be suitable for the model under study. 3.4 sources of data annual time series data covering the period of 1970 – 2018 were sourced to test the polak model of the monetary approach to bop in the west african monetary zones (ghana, gambia, guinea, liberia, nigeria and sierra leone). these data were sourced from secondary sources which include: the imf’s international financial statistics, west africa monetary institute (wami) database, world development indicators, organisation for economic community development (oecd) data base. however, the data for guinea was not all available and so; the analysis was based on the other five countries, excluding guinea 3.5 statistical definition of variables for the purpose of the study under review, the following definitions are adopted: ▪ net domestic credit (ndc): is defined as the sum of the net claims on the central bank and claims on other sectors of the economy measured in local currency unit. ▪ income (y): is identified as the gross domestic product (gdp) rate annual percentage, that is the annual percentage growth rate of gdp at market prices based on constant local currency. ▪ net foreign assets (nfa): represents the nets foreign assets held by monetary authorities and deposit money banks, less their foreign liabilities measured in current local currency. ▪ exports (x): the export value index was used; that is, the current value of exports converted to us dollars and expressed as a % of the coverage for the base period (2000). ▪ capital movements (cm) covers the net capital inflows of the non-banking sector. ▪ import (mcpi): this is measured as the annual growth rate of imports of goods and services based on constant local currency, aggregate based on constant 2010 us dollars. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 12 ▪ exchange rate (exch): the official exchange rate was used, calculated as an annual average based on monthly averages (local currency units relative to dollars). ▪ interest rate (int): this represents the deposit interest rate measured by the rate paid by commercial banks for demand, time and savings deposit. ▪ inflation rate (inf): inflation was measured by the annual growth rate of the gdp implicit deflator, that is, the ratio of gdp in constant local currency. 4. results 4.1 descriptive statistics table 1. descriptive statistics nfa ndc mcip int inf inc expt exch cm mean 3.83e+11 5.93e+11 15.95938 13.01391 19.35887 3.336903 1.86e+11 268.7881 1.73e+11 median 21389119 1.05e+09 11.76600 12.47208 11.59316 4.168448 13316120 2.084538 46642816 maximum 8.72e+12 1.96e+13 96.26080 35.75917 178.7003 106.2798 5.70e+12 4524.158 6.55e+12 minimum -4.22e+11 -3.14e+08 -54.34199 1.833333 -35.83668 51.03086 -115138.3 0.000102 -9.24e+08 std. dev. 1.50e+12 2.46e+12 27.13448 6.112069 24.21256 11.27003 6.01e+11 841.9288 8.27e+11 skewness 4.274297 5.802849 0.128018 0.988401 3.012703 2.545981 6.428859 3.634825 6.006569 kurtosis 20.66077 38.08141 2.654650 4.457101 15.02110 36.48484 53.48722 15.59943 40.05378 jarque-bera 3593.160 12743.71 1.724998 56.28831 1687.581 10706.85 25333.28 1974.872 14161.45 probability 0.000000 0.000000 0.422106 0.000000 0.000000 0.000000 0.000000 0.000000 0.000000 sum 8.58e+13 1.33e+14 3574.901 2915.115 4336.386 747.4663 4.16e+13 60208.53 3.88e+13 sum sq. dev. 5.04e+26 1.35e+27 164190.4 8330.696 130733.3 28324.05 8.06e+25 1.58e+0 8 1.52e+26 observations 224 224 224 224 224 224 224 224 224 source: researcher’s computation 2019 from table 1, the mean results of all the variables showed a significant value, the median and maximum equally revealed a significant value while the minimum descriptive statistics of net foreign asset (nfa), net domestic credit (ndc), mcip, inflation (inf), real income (inc), export (expt), and capital movements (cm) revealed negative minimum contributions meanwhile interest rate (int) and exchange rate (exch) reported positive contributions. from skewness statistic, it indicated that all the variables were positively skewed, while kurtosis statistic displayed that all variables were leptokurtic (fat tailed) in nature. the jarque-bera statistic value showed significant contributions. however, the descriptive analysis revealed that the variables were normally distributed with 224 observations. 4.2 panel unit root result the unit root test was carried out using the im, perasan and shin methos. the results are presented in table 2 to table 4 table 2. im, pesaran & shin unit root test at level variable statistic prob. nfa 3.76907 0.9999 non-stationary ndc 3.63730 0.9999 non-stationary mcip -2.39857 0.0082 stationary int -0.05629 0.4776 non-stationary inf -3.64146 0.0001 stationary inc -6.37563 0.0000 stationary expt -1.04578 0.1478 non-stationary exch 1.84191 0.9673 non-stationary cm -4.10924 0.0000 stationary source: researcher’s computation (2019) copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 13 table 3. im, pesaran & shin unit root test at first difference variable statistic prob nfa -8.35293 0.0000 non-stationary ndc -10.3402 0.0000 non-stationary int -10.0086 0.0000 non-stationary expt -5.80371 0.0000 non-stationary exch -7.00957 0.0000 non-stationary source: researcher’s computation (2019). table 4. order of integration variable order of integration nfa i(1) ndc i(1) mcip i(0) int i(1) inf i(0) inc i(0) expt i(1) exch i(1) cm i(0) source: researchers’ computation (2019) table 2, 3 and 4 revealed im, pesaran and shin (ips) panel unit root test, which was employed to test for the stationarity of the variables. the results were presented in level and first difference at 5% significance level. the result showed that mcip, inf, inc and cm were stationary at level while other variables such as nfa, ndc, int, expt and (exch) became stationary only after first differencing at 5% alpha level of significance. this implies that the variables retained shock for short period, after which they let go and this necessitated the use of panel auto-regressive distributed lag (p-ardl). 4.3 lag selection criteria the likelihood ratio test (lr), final prediction error criteria (fpe), akaike information criterion (aic), schwarz information criterion (sc) and hannan-quinn information criteria (hqic) were applied for the selection of lag length. the criteria suggestion is then presented below for the estimation of the panel ardl. table 5. lag length selection criteria lag logl lr fpe aic sc hq 0 -28868.59 na 4.7e+110 280.3649 280.5103 280.4237 1 -27101.08 3363.405 3.6e+103 263.9911 265.4450* 264.5791 2 -26953.74 267.5031 1.9e+103 263.3470 266.1095 264.4642 3 -26698.42 441.2406* 3.5e+102* 261.6545* 265.7255 263.3010* source: researchers’ computation (2019) the results indicated that likelihood ratio (lr), final prediction error (fpe), akaike information criterion (aic), schwarz criterion (sc) and hannan-quinn criterion (hq) predicted 3, 3, 3, 1, and 3, lag respectively. the study then selected the lag length of schwarz criterion being the minimum lag length and for the nature of the data. 4.4 results of the ardl table 6. autoregressive distributed lag (ardl) model variable coefficient std. error t-statistic prob. c 1.330945 3.437045 0.387235 0.6990 nfa(-1) 0.638765 0.067898 9.407745 0.0000 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 14 expt -0.275808 0.111102 -2.482475 0.0325 ndc -0.513939 0.165061 -3.113628 0.0096 inc 0.021686 0.063919 0.339270 0.7347 cm -0.256245 0.070942 -3.612036 0.0184 intr 0.145507 0.141922 1.025257 0.3064 inf -0.039398 0.030838 -1.277555 0.2028 exch 0.086458 0.023829 3.622582 0.0162 mcip 0.061339 0.028177 2.057866 0.0213 r-squared = 0.75 adj. r-squared = 0.74 f-stat. = 64.888 prob.(f-stat.) = 0.000 source: researcher’s computation 2019 the result of the autoregressive distributed lag (ardl) was presented in table 6. from this result, it was discovered that a direct linear relationship exist between net foreign asset and net foreign asset at lag one [nfa (-1)], income (inc), interest rate (intr), exchange rate (exch) and mcip while, an inverse relationship was observed between the net foreign asset (nfa) and export (expt), net domestic credit (ndc), (cm), inflation rate (inf) of the countries during the period under study. the statistical significance of the estimated parameters of this model was examined using the standard error test and the probability value. this result shows that one percent increase in net foreign asset at lag one, net foreign asset at lag two income, interest rate, exchange rate and mcip will lead to 64, 17, 2, 15, 9 and 6 percent increases in net foreign asset while, one percent increase in value of export, net domestic credit, capital movement and inflation rate will cause the net foreign asset to reduce by 28, 51, 26 and 4 percent respectively in west africa. using standard error test, it was revealed that 0.319, 0.086, 0.138, 0.257, 0.128, 0.043, 0.031 which are greater than 0.068, 0.067, 0.111, 0.165, 0.071, 0.024 and 0.028 respectively for nfa(-1), nfa(-2), expt, ndc, cm, exch and mcip. the same result is obtained using probability value as the prob. values of the estimated parameters 0.000, 0.011, 0.033, 0.009, 0.018, 0.016 and 0.021 ˂ 0.05 the probability of the error margin. thus, it implies the statistical significant of the estimated parameters in determining the net foreign asset of the west african countries. the rsquare value 0.75 revealed that 75 percent variation in the net foreign asset of the west africa countries under consideration can be explained by the lags value of the net foreign asset, export, net domestic credit, income, capital movement, interest rate, inflation rate, exchange rate and mcip. the probability of f-statistic 0.000 ˂ 0.05 shows the statistical significant of the autoregressive distributed lag model in balance of payments in the west african monetary zone countries using monetary approach. 4.5 hausman result to determine the appropriate estimator between fixed effect and random effect the hausman test was employed. hausman test compares fixed effect with random effect. if the hausman test is insignificant (prob > chi2 greater than .05), then the fixed effects model will be used and vice versa. the result is therefore presented in table 4 table 8. hausman result test summary chi-sq. statistic chi-sq. d.f. prob. period random 29.989784 8 0.0002 source: researchers’ computation (2019) table 8 presents the result of hausman test which revealed that the chi-square value is 29.9898 and its p-values were 0.0002. the result showed that there is enough evidence to reject the null hypothesis of no substantial difference between fixed effect estimates and random effect estimates. the test revealed that fixed effect estimator is the most efficient and consistent during the study period. 4.6 panel fixed effect result table 9. panel fixed effect variable coefficient std. error t-statistic prob. c -2.62e+11 1.66e+11 -1.580263 0.1159 ndc 0.522071 0.024154 21.61458 0.0000 mcip 5.44e+08 2.07e+09 0.262241 0.7935 int 2.70e+10 1.23e+10 2.195278 0.0295 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 15 inf -1.61e+09 2.95e+09 -0.544249 0.5870 inc 2.62e+09 5.12e+09 0.512333 0.6091 exp01 0.377186 0.135740 2.778729 0.0061 exch -2.75e+08 95571584 -2.882570 0.0045 cm 0.009342 0.084638 0.110371 0.9122 effects specification period fixed (dummy variables) r-squared 0.807372 adjusted r-squared 0.748795 f-statistic 13.78308 prob(f-statistic) 0.000000 source: researcher’s computation (2019) table 9 revealed the panel fixed effect which showed that the difference in beta coefficient of the variables have different contributions to net foreign asset in developing countries. in this result, using the beta coefficient, nfa is negative at constant of -2.62 and its p-values were 0.1159. this means that when all variables are held constant, there will be a negative variation up to the tune of 2.62 units in nfa which implies that there is insignificant and negative effect of the independent variables to nfa at constant. the result further showed that the regression coefficient of ndc was 0.522 and its p-value was 0.0000. this implies that ndc has positive and significant effect on nfa in developing countries. the coefficient of mcip was 5.44 and its pvalues were 0.7935 and this implies that mcip has a positive and insignificant effect on nfa. the regression coefficient of int in nfa was 2.70 and its p-values were 0.02095. the panel fixed effect equation showed that int has a positive and significant effect on nfa. the regression coefficient of inf in nfa was -1.61 and its p-values were 0.5870. the result showed that inf has a negative and insignificant impact on nfa. the coefficient of inc was 2.62 and its p-values were 0.6091 and this implies that inc has a positive and insignificant effect on nfa. the regression coefficient of expt in nfa was 0.377 and its p-values were 0.0061. this showed that expt has a positive and significant effect on nfa. the regression coefficient of exch in nfa was -2.75 and its pvalues were 0.0045. the result showed that exch has a negative and significant impact on nfa and the regression coefficient of cm in nfa was 0.009 and its p-values were 0.9122. the result showed that cm has a positive and insignificant effect on nfa in the developing countries during the study period. the result equally revealed that the coefficient of the regression which is the coefficient that depicts the estimated coefficient appears to be good while standard error and the values of t-statistic were equally presented in table 4.8. the results of other important statistical tools revealed that the coefficient of determination (r2) representing 80.7%, the adjusted r-square 75.9%, and the entire regression test is statistically significant including the f-test with p-values 0.0000 at 5% significance level. 4.7 summary and implication of findings the empirical proof gathered in this study has been to establish the fact that increased domestic credit, exports, and imports improves the bop position contrary to the postulates of the monetary approach to balance of payment theory that increased money supply causes a distortion in the balance of payment position of a country. the reason could be the fact that the increased domestic credit expansion was able to boost the production, increased domestic output and more demand for inputs including imports. so, the economy was able to grow at a rate faster enough to absorb the rate of expansion in the net domestic credit which could have led to increased money supply and excess demand for goods and services. furthermore, the increase in exchange rate and inflation worsened the bop position of these wamz countries. normally, exchange rate ought to improve the bop as it will reflect in currency appreciation, discouragement of imported goods and increased demand for domesticated goods. 5. conclusion and recommendations this study assessed and investigated the impact of the monetary variables on the balance of payments of the west africa monetary zone countries. the focus was to investigate the validity of the theoretical proposition of the monetary approach, rooted in polak model, to the theory of bop in a floating exchange rate system. from the study, it has been confirmed to a large extent that the monetary approach is valid in explaining the bop position of the wamz countries despite the fact that they are no more operating under a fixed exchange rate system as propounded by the theory. the objectives of the wami have not been achieved by the member countries, in terms of single digit inflation rate, positive real interest rate, real exchange rate stability and efficient level of foreign reserves. the study thus recommended that: copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 16 ▪ the attention of the monetary authorities and the government should not only be on decreasing the money supply in the economy since an increase in net domestic credits has a positive impact on the net foreign assets provided it is channelled towards domestic production. this will eventually have a positive increase on exports and if supported by a policy of ban on importation, the bop position will improve. ▪ the inclusion of exchange rate in the polak model is also relevant since it has a direct effect on both imports and exports. out of all the variables examined, exchange rate and net domestic credits have major impacts on the net foreign assets, therefore there is need for the monetary authorities and the governments to critically pay attention to the movements in exchange rate. exchange rate adjustment could also be used as a policy tool because of its impact on imports, exports and even settlement of external debts ▪ there is also a need for stability in the economies and for investors not to be scared of investment, the economy need to be politically and socially stable. a suitable and positive environment gives birth to thriving investment which in turn improves the balance of payment. references adamu, p. a. & itsede, o. c. 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(2001). macroeconomic models of the international monetary fund and the world bank.(analysis of theoretical approaches and evaluation of their effective implementation in bulgaria). national bank of bulgaria discussion paper, 14(2),6 –34. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). contents australian finance & banking review vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business 14 comparative study on credit monitoring practices in slected banks of nepal fatta bahadur k.c 1 indra kumar kattel 2 1 tribhuvan university, nepal 2 mewar university, rajasthan, india correspondence: indra kumar kattel, rastriya banijya bank limited, central office singhdurbar plaza, kathmandu, 44600, nepal, email: indra.kattel2024@gmail.com received: october 01, 2017 accepted: october 05, 2017 online published: october 14, 2017 abstract credit monitoring is performed by the banks as post approval activities for existing credit clients to indentify the early warning single of credit risk. so that, the study was accomplish to observe the credit monitoring practice in nepalese commercial banks. the study was based on a sample of 10 commercial banks, comprising 5 private sector banks and 5 joint venture banks. this paper attempts to determine the awareness of nepalese bankers about the significance of credit monitoring as risk identification tools. the result of the study indicates that the periodically review of the security documents, credit processing procedure, compliance of covenants setup during credit approval, technique to control default, risk reporting, review of loan account and regular follow-up were differently used as credit monitoring practice in private sector and joint venture banks in nepal. these factors also found significant predictor for credit monitoring. moreover, there was a positive relationship between credit monitoring practice and its factors instead of technique to control default. keywords: monitoring, compliance, default, approval, procedure. 1. introduction credit monitoring management is a fundamental process of the every banks and financial institutions, which replicates in the quality of the credit portfolio. the banks need to constantly do an assessment and make updates where there is a need so as to be sure to handle any unexpected risks at the right time before it is happen. this is because any neglected or minimized risk can have very long term big and negative consequences since the banking activities are so interrelated with monitoring. credit risk cannot be avoided or eliminated. so, the only alternative is to control it. for this rationale, banks, establish the credit. banks have challenges to mintined the the cfedit in pass categories. diwan & rodick (1992), suggested that high npls increase the uncertainty regarding the capital position of the banks and therefore tend to limit their access to additional financing in regular banking business. the shortfall of the lending fund contributes to lower credit growth. in certain banks, governments have large amounts of non-performing loans and some commercial banks tend to finance government fiscal deficits and sustain some unprofitable government projects with large borrowings from banks. these actions increase the prospects of generating npls in the banks. so, non-performing loans are one of the main reasons that cause insolvency of the financial institutions and ultimately destroy the whole economy (hou, comparative study on credit monitoring practices in slected banks of nepal fatta bahadur k.c and indra kumar kattel 15 2007). by considering these facts, it is necessary to control non-performing loans for the financial soundness of banks; otherwise the capital can be jammed in unprofitable projects and sectors which not only damage the financial health of banks but also the economic stability of the country. in order to control the non-performing loans, it is necessary to know their root causes in the particular financial sector (rajaraman & vasistha, 2002). kassim (2002) suggests that some causes of non-performing loans (npls) include: poor management, lack of sound credit policy, inadequate credit analysis, errors in documentations, undue emphasis on profitability at the expense of loan quality, fraudulent practices (diwan & rodick, 1992; diwan & rodick, 1992), political instability, economic depression, abnormal competition, policy and regulatory inconsistencies, weak real sector, political and social influence on bank operators etc. non-performing loans (npls) have gained world’s attention in the last three to four decades as these increasing non-performing loans are causing banking crisis which are turning into banking failures (siems & barr, 1994). according to k.k & pillai (2012, p. 3), some of the important reasons for non performing asset, that should be closely monitored by the banks. these mentioned reasons are summarized below:  willful defaults, exhaust off of funds, fraud, disputes, management disputes, mismanagement, misappropriation of funds etc.,  lack of proper pre-appraisal of credit proposal and follow up.  improper selection of borrowers/activities.  inadequate working capital leading to operational issues. under financing/untimely financing.  delay in completing the project.  non-compliance of sanction terms and conditions.  poor debt management by the borrower, leading to financial crisis.  excess capacities created on non-economic costs.  in-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets.  business failures.  failures to make out problems in advance.  diversion of funds for expansion\modernization\setting up new projects\ serving or endorsing sister concerns.  lack on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delay in settlement of payments / subsidiaries by government bodies etc.,  time involved in the legal process and realization of securities.  the management of non-performing loans is often associated with high operational costs leading to declining capital growths in the affected banks. non-performing loans reduces the liquidity of banks, deform credit expansion, and slows down the growth of the real sector with direct consequences for the performance of banks. so, that credit monitoring is a useful tool to identify the earning warning signal of the borrowers. the regular monthly helps to diagnosis of the real cause of npl and assist to improve the credit quality.  the risk is being assessed in terms of the sternness of the impact, likelihood of occurring and controllability (gray & larson, 2008, p. 215). so that credit monitoring and review renewal of the existing credit limit for the client are the post sanction activities of the banks. credit monitoring is performed by prioritizing the risk either by using off site or onsite for risk evaluation. (williams, et al., 2006, p. 70). this monitoring is based on the likelihood and consequences. likelihood depends on the probability that the risk will occur comparative study on credit monitoring practices in slected banks of nepal fatta bahadur k.c and indra kumar kattel 16 and how frequently it will take place. while, consequences on the other hand can be calculated by looking at the effects on results or on the enablers of results (williams, et al., 2006, p. 70). for this purpose, banks adopt the various monitoring and follow up tools to know the actual position of the credit clients. hence, credit monitoring is then carried out when an appropriate risk appraisal tools has been assumed. an assessment is done against an appropriate risk-acceptance criterion to give a risk level of the credit (williams, et al., 2006, p. 70). therefore, monitoring and control is equally important for credit risk management practice in banking sectors. during the post credit appraisal, banks try to find out risk level from the basic sources of credit risk. 1.1 objective of the research the major objective of the study is to compare the credit monitoring practices between private sector banks and joint venture banks in nepal. the key objective of this research is to establish relationship credit monitoring practices ant its explanatory variables. 1.2 hypothesis of the research to fulfill the above define objectives of this study, the following hypotheses were developed and tested by using statistical tools. h1: there are significant differences among private sector and joint venture banks in credit monitoring practice. h2: there is positive relationship between credit monitoring practice and its explanatory variables. 1.3 model specification to test the above hypothesis, following model has been developed by the researcher. ------------------------------(i) dependent variable, y= credit monitoring practice (cmp) independent variables are explained as given. x1 = periodically review the security document x2= periodically review credit processing procedures x3= review the compliance of covenants to find out the early warning signal of the loan account in time x4=review is a technique to control the default of loan. x5 = risk reporting system may support to revise the existing policy and procedures x6= review of loan account find the utilization of limit. x7= regular fallow up the loan account to know the business activities. 2. literature review das & das (2007) evaluated the credit risk management practices in bangladesh. the study identified the importance of credit risk management of commercial banks and then tried to find out the existing procedures for credit risk management that were followed by the different commercial banks in bangladesh. the researchers suggested that some prudential guidelines to be required for commercial banks to sustain in the volatile banking market. bodla & verma (2009) examined the credit risk management framework of indian commercial banks. the results show that there is the right for approval of credit risk with ‘board of directors’ in case of 94.4% and 62.5% of the public sector and private sector banks, respectively. the study has brought out that credit risk management framework in india is on the right track and it is fully based on the rbi’s guidelines issued in this regard. comparative study on credit monitoring practices in slected banks of nepal fatta bahadur k.c and indra kumar kattel 17 jordon (2009) conducted the study on risk management lessons from the credit crisis. the paper shows that the perfect carrying out of risk management does not assure the huge losses. probability of loss always exists even if all the precautionary measures are taken. there are certain factors involved in huge losses usually, business decisions and weak monitoring mechanism. the credit crisis emphasized the importance of risk management. pu & zhao (2010) examined the correlation in credit risk using credit default swap (cds) data. secondary data for the period of january 2001 to december 2006 was taken for analysis. the finding of the research suggested that infectivity is not only statistically but also economically significant in causing correlation in credit risk. norden & weber (2010) investigated the link between account activity and information production on borrower risk. for this purpose, they examined whether credit line usage and cash flows in a borrower’s checking account were helpful for monitoring, and how banks used this information. measures of account activity substantially improved default predictions and were especially helpful for monitoring small businesses and individuals. furthermore, early warning indications resulted in higher loan spreads, and in a higher likelihood of limit reductions and complete write-offs. the result of the study shows that account activity provides a real-time window into the borrower’s cash flows. it may be helpful to take a credit decision for certain types of debt financing. the finding of the research suggests that lenders can benefit most from regular monitoring and source of information. alam & masukujjaman (2011) examined the risk management practices of commercial banks in bangladesh based on five commercial banks operating in bangladesh. the research reveals that credit, market and operational risk are the major risks in commercial banks which are managed through three layers of management structure. the board of directors performs the responsibility of the main risk oversight; the executive committee observes risk and the audit committee supervises all the activities of banking operations. in the circumstance of views regarding the use of risk management techniques, it is found that internal rating system and risk adjusted rate of return on capital are comparatively significant techniques used by commercial banks in bangladesh. aman & zaman (2011) examined credit risk performances of the state-owned, private and foreign banks over the period from 1990 -2005 by using the simple error correction model (ecm). credit feature is statistically significant for pbs with expected sign. in the light of empirical analysis of data, the research finds that private sector banks concentrate more on credit to attract credit customers' findings because it is imperative for private sector banks to concentrate more on credit to attract customers. in the same manners private sector banks maintain credit risk efficiently and effectively during the analysis period. ariffin & kassim (2011), analyzed the relationship between risk management practices and financial performance in the islamic banks in malaysia. overall, the findings on risk management practices shows that the importance of board of directors to endorse the overall policies and to guarantee that the management requires actions to manage the risks. hassan (2011) examined the degree to which islamic and conventional banks used risk management practices and techniques in dealing with different types of risks in the middle east region. there was no significant difference between islamic banks and conventional banks concerning risk identification. however, there were significant differences between islamic banks and conventional banks regarding the understanding risk, risk assessment and analysis, risk monitoring, and credit risk analysis of the entire sample banks. thiagarajan, ayyappan, & ramachandran (2011) empirically carried out a study to predict the determinants of the credit risk of the commercial banking sector in india by using an econometric model. the results showed that the insulated non-performing assets had a strong and statistically significant positive influence on the comparative study on credit monitoring practices in slected banks of nepal fatta bahadur k.c and indra kumar kattel 18 current non-performing assets. it is a significant inverse relationship between the gdp and the credit risk for both public and private sector banks. the study reveals that both macroeconomic and bank specific factors play crucial role in determining the credit risk of the banking sector. nazir, daniel, & nawaz (2012) examined and compared the risk management practices of conventional and islamic banks in pakistan. the result found that those pakistani banks were efficient in credit risk analysis, risk monitoring and understanding the risk in the most significant factors of risk management. furthermore, there was a significant difference in risk management practices of the islamic and conventional banks of pakistan. abdullah, khan, & nazir ( 2012) evaluated the credit risk management of domestic and foreign banks in pakistan. based on the result of the research, researchers recommended that credit risk might be reduced if (i) the size of the banks keeps with specifies limits and (ii) liquidity of the banks is increased. rani (2012) evaluated the risk management practices in scheduled commercial banks of india. the finding reveals that the difference between the various levels of staff positions have been statistically significant, but no significant difference in the awareness level of officers of public sector, private sector and foreign sector banks regarding credit, market and operational risk. the result indicated that awareness about risk management was the optimum level of the officials of the private sector and foreign sector banks as compared to public sector banks. wood & kellman (2013) examined the risk management practices by barbadian banks with the primary objective to evaluate the various types of risk faced by banks operating in barbados. the main findings of the study are: risk managers perceive risk management as critical factors to banks’ performance; the types of risks causing the extreme exposures are credit risk, operational risk, country or sovereign risk, interest rate risk and market risk; there is a high level of success with current risk management practices and these practices have evolved over time in line with the changing economic environment and regulatory updates. bilal, talib, & khan (2013) examined the risk management in the banking sector with the evidence from the sub continent and gulf country. based on statistical analysis and personal surveys, research findings concluded that banking sector of the study countries had deep concerns with potential risk challenges and they were in a continuous process to improve the risk measurement framework in accordance with the latest regulatory obligations. all three types of banks had a clear understanding of rm practices and strong relationship was observed between predictors and endogenous variables. arora & kumar (2014), evaluated the credit risk management framework of public and private sector banks in india. the findings revealed that the strength of the overall crm framework did not vary significantly between public and private sector banks as on the whole there was very little difference in the scores of the public and private sector banks. imbierowicz & rauch (2014) investigated the relationship between the two major sources of bank default risk: liquidity risk and credit risk. the result of the research showed that both risk categories did not have an economically meaningful reciprocal contemporary or time-lagged relationship. these results provided new insights into the understanding of bank risk, as developed by the body of literature on bank stability risk in general and credit and liquidity risk in particular. luqman (2014) studied the effect of credit risk on commercial bank performance in nigeria. secondary data were explored in presenting the facts of the situation. the result showed that the ratio of loan and advances to total deposit negatively related to profitability, though insignificant, and that the ratio of non-performing loan to loan & advances negatively related to profitability. this study showed a significant relationship between bank performance and credit risk management. overall credit and npls were major variables in determining asset quality of commercial bank. comparative study on credit monitoring practices in slected banks of nepal fatta bahadur k.c and indra kumar kattel 19 3. research method and materials in order to fulfill the research objective, questionnaires were design to collect the primary data. the researcher has chosen the survey as the appropriate research design for the study, and as such, questionnaires were used as research instruments. the study was based on a sample of 10 commercial banks, comprising 5 private sector banks and 5 joint venture banks, which were randomly chosen. descriptive statistics, anova and regression used to analyze the data. to ensure accuracy, internal consistency and completeness, reliability of the instrument was established using cronbach’s alpha coefficient test (cronbach, 1946). the choice of this indicator was influenced by the simplicity and its prominence in banking risk literature. the higher generated score is more reliable. nunnaly (1978) has indicated 0.7 to be an acceptable reliability coefficient to measure the reliability but lower thresholds are sometimes used in the literature. in this case, the alpha (α) coefficients were 0.84, which is acceptable level. 4. result and discussion this section presents the findings obtained from the data analysis. this result is presented in two sub sections: descriptive statistical analysis and regression analysis. 4.1 descriptive statistical analysis as shown in the given table, there was found difference of mean value of the credit monitoring practice such as periodically review of the security documents, credit processing procedure, compliance of covenants setup during credit approval, technique to control default, risk reporting, review of loan account and regular follow-up in private sector and joint venture banks in nepal. the result indicates that credit monitoring practices were different in the nepalese commercial banks. table 1 descriptive statistics of factors of monitoring practice source: survey data 2015, psb = public sector banks, jvb= joint venture banks comparative study on credit monitoring practices in slected banks of nepal fatta bahadur k.c and indra kumar kattel 20 the one way anova has been used to see the any differences between private sector and joint venture banks in the analysis of the periodically review of the security documents taken by the bank. it demonstrated the model was significant (p<0.05) with f value 26.127 at one degree of freedom. similarly, there was significant differences (p<0.05) in the analysis of the review of credit processing procedure between private sector and joint venture banks with f value 112.464 at one degree of freedom. the analysis of variance (anova) of review the compliance of covenants for borrower shows that f value is 150.113 at significant level (p<0.05) suggesting that there was a significant differences between two group of banks. similarly, anova of review the technique to control the default demonstrated that there was significant (p<0.05) differences with f value 147.179 at one degree of freedom. table 2 analysis of variance sum of squares df mean square f sig. x1 between groups 5.142 1 5.142 26.127 0 within groups 24.997 127 0.197 total 30.14 128 x2 between groups 14.483 1 14.483 112.464 0 within groups 16.355 127 0.129 total 30.837 128 x3 between groups 16.327 1 16.327 150.113 0 within groups 13.813 127 0.109 total 30.14 128 x4. between groups 16.662 1 16.662 147.179 0 within groups 14.377 127 0.113 total 31.039 128 x5 between groups 30.707 1 30.707 396.488 0 within groups 0.982 127 0.008 total 31.69 128 x6 between groups 15.407 1 15.407 122.383 0 within groups 15.988 127 0.126 total 31.395 128 x7 between groups 17.136 1 17.136 164.23 0 within groups 13.251 127 0.104 total 30.388 128 the analysis of variance (anova) of risk reporting of borrower shows that f value is 396.488 at significant level (p<0.05) symptomatic of significant differences between two group of banks. similarly, anova of review of loan account demonstrated that there was significant (p<0.05) differences with f value 122.383 at one degree of freedom. the analysis of variance (anova) of the regular follow-up of the client demonstrated that the model was significant (p<0.05) with f value 164.23 at one degree of freedom respectively. from the above statistical explanation, we conclude that there are significant differences between private sector and joint venture banks in the credit monitoring. hence h1 is accepted. comparative study on credit monitoring practices in slected banks of nepal fatta bahadur k.c and indra kumar kattel 21 4.2 regression analysis the dependent variable considered for this model is cumulative score of different indicators of the credit risk monitoring and control. there are more than 7 variables, all measured in likert scale converting them to a numeric score. it shows that dependent variable is explained by joint correlation coefficient of 0.913 that according to dancey and reidy (2004) categorization is a high correlation. similarly around 83.3% of the variability explained by the independent factors has been included in the model. table 3 model summary model r r square adjusted r square std. error of the estimate durbin-watson 1 .913 a 0.833 0.823 5.94 0.672 a. predictors: (constant), x1-x7 similarly from the anova table, it is shown that the model is highly significant (p<.05) reflecting that the improvement in the model is found than in the initial model. the f value is 86.079 at 7 degree of freedom. hence, h2 is accepted. table 4 anova model sum of squares df mean square f sig. 1 regression 21262.191 7 3037.456 86.079 .000 b residual 4269.685 121 35.287 total 25531.876 128 a. dependent variable: credit monitoring practice b. predictors: (constant), x1-x7 after finding the model significance, we have gone through each and every independent variable. the prime motive is to identify the insignificant ones and remove them from the analysis. then after, the significant contributions to the dependent variables have been explained in detail as given in table no. 5. periodically review of the security documents, credit processing procedure, and compliance of covenants setup during credit approval, risk reporting, review of loan account and regular follow-up were found significant variables during the analysis. risk reporting is variable that makes the significant contribution to explaining the monitoring practice when other remaining variables are controlled for with beta coefficient of 0.0.511. risk reporting plays the important roles to collect the information. similarly, significant contribution also found to make by regular follow-up with the beta coefficient of 0.461, and periodically review the security documents with the beta value of 0.298, while keeping all other variables constant. table 5 coefficients a model unstandardized coefficients standardized coefficients t sig. b std. error beta 1 (constant) -22.768 1.957 -11.634 0 comparative study on credit monitoring practices in slected banks of nepal fatta bahadur k.c and indra kumar kattel 22 x1 8.669 1.356 0.298 6.392 0 x2 8.284 4.008 0.288 2.067 0.041 x3 -21.762 7.546 -0.748 -2.884 0.005 x4 -0.431 2.137 -0.015 -0.202 0.84 x5 14.506 1.74 0.511 8.335 0 x6 8.113 2.94 0.284 2.759 0.007 x7 13.359 6.098 0.461 2.191 0.03 a. dependent variable: monitoring practice more important, compliance of covenants was the variable with beta coefficient (0.-0.748), and the review of loan account with beta coefficient (0.284) was found significant predictor for monitoring practice credit risk measurement. 5. conclusion lending is a key business activity in the bank. the loan portfolio is one of the largest assets and a chief source of revenue for bank, but is also a great source of risk to a bank’s safety and soundness. in the view of emerging concern from the deceleration in credit growth to different portfolio, there is need for strong and effective structured mechanism to put in the place in every level. since credit monitoring is a basic preventive tool to disclose the regulatory and functional weakness during the credit management. monitoring is an integral part of our credit risk management practices. it is the responsibility of each credit officer to undertake ongoing credit monitoring for their allocated portfolio of the clients. bank has specific procedures in place intended to identify at an early stage credit exposures for which there may be an increased risk of loss. the objective this early warning system is to address potential problems while adequate options for action. this early risk detection is an ideology of the credit culture and is intended to ensure that greater attention is paid to such exposures. so that monitoring parameters should be established to diagnosis the weakness. monitoring is an ongoing process in the banking business. 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(2013). risk management practices by barbadian banks. international journal of business and social research, 3 (5), 22-29. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. australian finance & banking review; vol. 2, no. 1; 2018 issn 2576-1196 e-issn 2576-120x published by centre for research on islamic banking & finance and business 1 msmes as engine of economic growth in nigeria: challenges and prospects of scalability emmanuel okokondem okon 1 1 department of economics, kogi state university, anyigba, kogi state, nigeria correspondence: department of economics, kogi state university, anyigba, kogi state, nigeria, e-mail: tonydom57@yahoo.com. tel: +2348023275716 received: january 13, 2018 accepted: january 15, 2018 online published: january 19, 2018 abstract growing or expanding the micro, small and medium enterprises (msmes) sector of the economy is one key strategy to achieve economic growth and development. micro, small and medium enterprises (msmes) scalability (growth or expansion) have become an area of concern for economic growth in developing economies. people use the term in reference to computer or other technological systems, but those in business also use the word to describe the adaptability of a company (thibodeaux, 2015) in today‘s fast-paced business environment where the focus on customer satisfaction is at an all-time high. this article discusses the concept of scalability as it relates to business and non-scalable components of business process as well as the importance of being scalable. it also looked at some of the challenges and practices that prevent effective scalability of msmes in nigeria and the way forward. keywords: msmes, challenges, scalability, economic growth, nigeria 1. introduction micro, small and medium enterprises (msmes) account for a large proportion of the total employment growth in many countries. in such countries, msmes produce a significant share of their increases in gross domestic product (gdp), while the contributions of larger enterprises tend to remain stable (adb, 2002). for instance, in the oecd economies, msmes and micro enterprises account for over 95% of firms, 60-70% of employment, 55% of gdp and generate the lion‘s share of new employment. in the case of developing economies, the situation is not very different. for instance, in morocco, 93% of firms are msmes and account for 38% of production, 33% investment, 30% export and 46% employment. similarly, in bangladesh, enterprises of less than 100 employees account for 99% of all firms and 58% employment. also, in ecuador, 99% of all private companies have less than 50 employees and account for 55% of employment (etuk et al., 2014). in the case of nigeria, well-managed and healthy msmes constitute significant sources of employment opportunities and wealth creation. while the citizens benefit in terms of employment and income, government also benefits by generating revenue in form of taxes. this can be a strong factor to social stability. it is noteworthy that not all msmes and microenterprises are in the formal sector; some of them occupy the unofficial labour market, which varies in size from an estimated 4-6% in developed countries to over 50% in developing nations. according to the international finance corporation (ifc, 2006), there is a positive relationship between a country‘s overall level of income and the number of msmes per 1,000 people. the world bank‘s doing business reports indicate that a healthy msme sector corresponds with a reduced level of informal or ―black market‖ activities. thus, managing msme sector to reduce the number of informal business is essential in the nigerian development project. msmes are regarded as the bedrock of industrialization. because a number of them possess extensive knowledge of resources, as well as demand and supply trends, they constitute the chief supplier of input to larger firms. they also serve as the main customers to the larger firms; provide all sorts of products ranging from food, clothing, recreation, www.cribfb.com/journal/index.php/afbr australian finance and banking vol. 2, no. 1; 2018 2 entertainment, healthcare, education, and so forth. they help in economic development through industrial disposal and production of primary and intermediate products. they can also supply the material needs of the larger enterprises. in addition, they provide specialized, and many times, personal services. in summary, msmes constitute important sources of local supply and service provision to larger corporations (etuk et al., 2014). developing countries represent a huge, largely untapped market for large corporations. by working closely with msmes, large corporations can develop new customer base that may not be accessible to the traditional distribution networks of these corporations. msmes also represent important sources of innovation. they tend to occupy specialized market ―niches‖ and follow competitive strategies that set them apart from other companies. this might include re-engineering products or services to meet market demands, exploring innovative distribution or sales techniques, or developing new and untapped markets. this often makes them good partners for large corporations. in the financial sector, emerging economies represent a huge potential market for credit, particularly in sub-saharan africa, where according to the united nations capital development fund (uncdf), only 4% of africans have a bank account. local financial institutions that have successfully served the msmes market in developed countries have found it highly profitable, according to united nations conference on trade and development (unctad, 2001). large international banking groups are beginning to tap into these markets. for instance, today barclays bank is present in 12 african countries, employs 41,000 people – one-third of its total workforce – and has 8 million customers. africa accounts for 13% of the group‘s profits. barclays has worked to integrate msmes into its operations. in their efforts to localize value creation, many large companies in the world increasingly rely on local companies as a crucial component of their value chain. furthermore, msmes help in the development of local technology and mobilization and utilization of domestic savings. thus, increases in msme efficiency can also improve the competitiveness of larger firms that depend on msme suppliers, and therefore improve the competitive position of a country‘s economy. msmes tend to be more labour intensive than larger firms, and capital requirements for establishing them are low. this widens the chances of many individual to participate in them and by so doing contribute to industrial development. moreover, the size and structure of msmes give them flexibility in management approaches which make them respond swiftly to changes and adapt to market needs much more quickly than their large enterprise counterparts in comparable industries. thus in these days of increased emphasis on private-sector-driven economy, msmes act as engines of the much desired private-sector-led economic growth and diversification (etuk et al., 2014). growing or expanding the micro, small and medium enterprises (msmes) sector of the economy is one key strategy to achieve economic growth and development. micro, small and medium enterprises (smes) scalability (growth or expansion) have become an area of concern for economic growth in developing economies(asare, 2017).people use the term in reference to computer or other technological systems, but those in business also use the word to describe the adaptability of a company (thibodeaux, 2015) in today‘s fast-paced business environment where the focus on customer satisfaction is at an all-time high (mariwala, 2017). scalability is essential in that it contributes to competitiveness, efficiency, reputation and quality. small businesses must be particularly mindful of scalability because they have the biggest growth potential and need to maximize the return with resources (thibodeaux, 2015). this article discusses the concept of scalability as it relates to business and non-scalable components of business process as well as the importance of being scalable. it also looked at some of the challenges and practices that prevent effective scalability of msmes in nigeria and the way forward. as earlier stated, msmes are perceived as the key to nigeria‘s economic growth, poverty alleviation and employment generation. but their unimpressive performance in employment generation and contribution to gdp in recent years has generated a lot of research interests. 2. concept of scalability all young businesses are defined by an insatiable desire for growth. but there's a right way and wrong way when it comes to scaling up (albanese, 2015). according to campbellb (2017), scalability is about capacity and capability. does a business have the capacity to grow? will a business systems, infrastructure and team be able to accommodate growth? scaling a business means setting the stage to enable and support growth in your company. it means having the ability to grow without being hampered. it requires planning, some funding and the right systems, staff, processes, technology and partners (campbell, 2017). scalability, in the context of buying and selling in a business, refers to a company's ability to add significant revenue and not be constrained by its own structure and resources. when a company can quickly "scale up," it usually means it has the management, documented processes, information systems, and standard operating procedures to manage its own growth (divestopedia, n.d.).scalability refers to the ability of a business to grow without losing customers, diminishing quality, or changing the core value proposition of the organization. in other words, it is developing products or services that people want and figuring out how to produce many of them for lower costs while selling more of them (dudnik 2010). https://www.score.org/author/anita-campbell https://www.score.org/author/anita-campbell www.cribfb.com/journal/index.php/afbr australian finance and banking vol. 2, no. 1; 2018 3 according to mariwala (2017), scalability means growth which extends to your stakeholders; whether customers, employees or vendors. in other words, it is a positive influence that propels you further. scalability describes how easy it is to expand a business model and grow its revenues significantly without equally increasing its cost base (liu, n.d.).for a business, scalability means that you are prepared to handle an increasing number of customers, clients, and/or users (contegix, n.d.). 2. 1. mathematical illustration of scalability a good way to approach the meaning of scalability is through a slightly mathematical definition. this doesn‘t mean digging into derivatives or complex numbers, which we‘ve all long since forgotten, but applying some basic mathematical ideas to the concept (shawn, 2016); the basic idea of scalability is this: a product or service x is considered scalable, if: delivering 20 of x is either…  no more costly or difficult than, or  only incrementally more costly or difficult than… delivering 10 of x. and the corollary: a product or service x is considered not scalable if: delivering 20 of x is double or even more costly or difficult than delivering 10 of x. or, it could be re-worded of this way: if y is the effort required to deliver 10 x, then:  if delivering 20 x requires ~2y or more, then x is not a scalable product or service.  if delivering 20 x requires y or only a bit more than y, then x is a scalable product or service. this is the heart of the idea of scalability. it‘s the difference between a linear and an exponential relationship between costs, revenue and product delivery. naturally, these numbers are not hard and fast, and in reality business is generally much more complex, however the basic concept remains the same. simple examples to illustrate maybe some simple examples will make the concept clearer. these will be intentionally over-simplified to fit into a binary model; example 1: manually washing cars: not scalable imagine that i wash cars for a living. delivering the washing of a car involves a few basic variables (let‘s assume i already have the tools for the job):  selling the car wash to a person (convincing them that they should get their car washed by me) == y1 == ~10 minutes  actually washing the car == y2 == 1 hour y1 and y2 are my ―costs‖, together they are the y from the definition above. together they take about an hour of my time. now, it‘s easy to see that if i am manually washing cars one by one, then my business model is not scalable. because, washing 20 cars is pretty much double the effort of washing 10 cars. simple. example 2: teaching students: scalable imagine i am a teacher of chinese history. delivering the education of chinese history involves one basic variable; my time in the classroom (again, assuming i have the knowedge and expertise to teach) :  it takes me 1 hour to deliver a lecture on chinese history == y however, let‘s imagine that in one class i have 10 students, and in the other class i have 20. by all accounts, in the classroom with 20 students, i am ―delivering‖ more education, in theory, exactly double. but teaching 20 students was no more difficult than teaching 10 students. i delivered exactly the same lecture, however in the second case, twice the number of students attended. in this simple model, teaching chinese history is a scalable exercise! oversimplification these two examples are, of course, oversimplifications. but the essence of the idea of scalability is accurate. in example 1, the business model was less scalable than example 2. naturally the real world involves many more variables. in the case of the car wash, i might have an advertisement sign outside that does my selling for me and so selling doesn‘t cost me any of my time. in the case of the teaching, the model breaks down as we keep adding students (we can only fit so many students into one of my lectures; the model scales only so much, then i have to break it out into two classes). but these variables can be plotted out and understood and ultimately fit into the model of scalability. https://inc42.com/author/harsh-mariwala/ http://shawnpowrie.com/author/shawn/ www.cribfb.com/journal/index.php/afbr australian finance and banking vol. 2, no. 1; 2018 4 real life scalability in the oversimplified examples above, scalability was treated like a binary property; either something is scalable or not. however, real life is, naturally, a lot more involved. let‘s play with the concept a bit more by defining some limits to it and talking about additional variables: upper limit: nothing is infinitely scalable something would be infinitely scalable if the costs y, of delivering product x, are not at all increased no matter how much of x we deliver. in the real world, this is simply not possible. there are some products in reality that are highly scalable. one such area is something like a website. imagine for instance this blog article. it‘s going to take me a certain amount of time to write it (our y) — and if 10 people read it (10x) or 20 people read it (20x) the time it took me to write it is completely unaffected. digital content is highly scalable. imagine if 1000 people read this article — still, it only took me y effort to produce it. what about 10 000? 100 000? still, it only took me y effort to produce it. however, eventually my server can‘t handle the load. so i have to pay for a better server to host my content, and my y has increased. digital content is highly scalable, but not infinitely — nothing really is. lower limit: increased efficiency as the genesis of scalability let‘s return to the car example from above. imagine i‘m the guy out there washing the cars every day. eventually i wake up and realize that i‘m never going to scale my business very well. so i start thinking; how can i scale this up? let‘s say i start to learn how to wash two cars in a little less than double the time it takes to wash one. for instance, i reclaim and re-use the water somehow, so i don‘t have to wait for the hosepipe for as much time. or maybe i rinse and dry both cars at the same time side by side. either way, i am finding ways to cut down the time usage. increased efficiency lies close to the genesis of scalability, but is not entirely the same thing. increasing efficiency means reducing y for the delivery of 10 x, which ultimately does mean delivering 20 x takes less effort, however it is still 2 y, even if y itself is less. scalable and non-scalable components of an overall business process in real life the process of delivering a product or service is not usually entirely scalable or non-scalable. often, there are components or parts of the overall business process that are scalable to varying degrees (shawn, 2016). this example illustrates this idea quite nicely: there are some guys in dominoes pizza making some pizzas for customers. the creation of a pizza involves several steps. the chefs have to prepare the dough, put on the proper ingredients, and cook the pizza in the oven. interestingly, preparing the pizza is a non-scalable activity. a chef, no matter how good, can‘t prepare two pizzas for exactly the same effort as it takes to prepare one. yes, perhaps he can work on ways to do it quicker, but he can‘t scale the preparation well. however, two pizzas can be cooked in the oven at the same time. in fact, ten or even twenty pizzas can (assuming the oven to be quite big). so, preparing the pizza is a non-scalable activity, but cooking the pizza is a more scalable activity. so the delivery of the pizza to the customer involves both scalable and non-scalable parts of the process. imagine further an even more nuanced scenario, also in our pizza story: the pizza delivery driver is going to deliver two pizzas. luckily, both customers are on the same street. so, delivering two pizzas took only a little more time than delivering one would have. in fact, delivering 10 pizzas to the same street, assuming the distance from the pizza store to the street is way larger than the distance from the one house to the next on the same street, is almost the same effort as delivering 5. but, what if, in another scenario: the pizza driver is going to deliver two pizzas. unfortunately, both customer‘s houses are equidistant from the pizza store, and each other. assuming the main cost of delivering a pizza is the time to drive to a location and the petrol associated with the driving, delivering two pizzas literally took double the effort than delivering one did. and so we see that in the case of delivering pizzas, the scalability or non-scalability of an activity can depend on entirely random variables. sure, we can look into optimising our pizza delivery routes, but ultimately that can only go so far. 2.2. the importance of being scalable as a business grows, its main objective is to continue to meet market demands. the trouble is, market demands are never static. they shift as people‘s interests and tastes change and as resources flow in and out of availability. if you want to stay competitive in these circumstances, you have to be able to change what you are doing to fill the needs and wants customers have in the moment. scalability also matters because growth in business means you are working with more customers, data and resources. if you do not have a way to handle these increases, you can lose efficiency, or the quality of your service or products can suffer. that can lead to poor customer relations and a lowered business reputation. http://shawnpowrie.com/author/shawn/ www.cribfb.com/journal/index.php/afbr australian finance and banking vol. 2, no. 1; 2018 5 from the financial perspective, scalability is critical because it lowers what you end up paying out. for example, if you have 100,000 clients and buy a technology system that can support a million customers, you don‘t have to replace that system (assuming it‘s still functioning well mechanically) when you reach 200,000 customers, 300,000 customers and so forth. in the same way, if you purchase state-of-the-art equipment, it won‘t become outdated as fast and you won‘t need to put money into new hardware for a while. if you‘re working in a scalable way, you end up getting more for your buck (touchsupport, n.d.). 3. literature review the scalability of businesses is affected by the industries in which they operate. some business models are easier to scale, while others can be much more challenging. as found by sutton and rao (2014), culture and structure are often more important than anything else. businesses that produce a tangible product, such as the clean bottle case and the greyston bakery case, or most types of consumer purchased goods, are inherently simpler to scale. small ventures of this type have many opportunities to achieve economies of scale, cost savings, and increased efficiencies. however, scaling up to achieve greater efficiencies and production levels exposes the entity to problems, such as decreased quality, lessened control over processes, and increased complexity. another important aspect of scaling up for small businesses is customer value perception (cvp), where perceptions of organizations can change when they grow. the case of the etsy store three bird nest illustrates cvp. kumar (2010) found that growing or scaling a business can be approached from two main perspectives regarding the timing of expansion. the question is a paradox: whether to grow in advance of demand with the hopes of capturing maximum market share and minimizing foregone revenue; or, more conservatively, does the business grow when demand already exists? increasing the scale of a business in advance of real demand relies on careful forecasting and represents a greater risk. however, waiting to grow could result in the business losing customers to competitors and potentially missing an entire swing in the market. while many factors go into the decision to grow a business, forecasts are ultimately only accurate to a certain extent, and as new ventures are formed they must decide how they will approach such an important part of the life of their business. consequently, the environment of forecasting and planning has changed because forecast-based planning methods and/or budget-oriented planning are alone not sufficient for any business to be sustainable. clean bottle (2015) offers a line of water bottles that come apart at both the top and bottom for thorough cleaning and ease of maintenance. clean bottle was born of the increasingly popular ―crowd funding.‖ crowd funding is a model of bringing new products to market with individuals pledging money, but their funds are only used if enough pledges are made to reach a specific threshold. clean bottle set the goal for their crowd funding campaign at $20,000, and nearly doubled it before their deadline. clean bottle is a successful example of scalability because it offers a product that requires little inputs beyond basic manufacturing. 4. micro, small and medium enterprises and scalability all businesses need to be scalable on one or more levels in order to hold onto and build market share. even so, msmes have the greatest need for scalability because they are the ones with the biggest potential for growth. they are the organizations that have to be more careful with the limited resources they have, the ones that go through metamorphoses as their leaders become more familiar with the business game. many msmes fold directly because they fail to foresee what they might need or where the market can take them, having too much of a here-and-now mindset. it is natural for msmes to want to make as many areas scalable as possible and business leaders should work toward this goal. still, you should recognize that not everything might be scalable. a lack of scalability in one or more areas doesn‘t necessarily stop you from moving forward. for this reason, it‘s just as important to recognize where you can‘t change as to see where you can (touchsupport, n.d.). 4.1. challenges and practices that prevent effective scalability of msmes in nigeria msmes in nigeria achieve a much more relative high value added operations because they are propelled by basic economic activities that depend mostly on locally sourced raw materials; they provide feeder industry services as they serve as major suppliers of intermediate goods and components to large-scale industries as well as major agents for the distribution of final products of such industries; they provide opportunities for the development of local skills and technology acquisition through adaptation, etc. despite the catalytic role of msmes in nigeria, the development of its viability has over the years been challenged by a number of harsh economic conditions which characterize the nigerian business environment. some of these challenges have been outlined by the institute of development administrator of nigeria (idan, 2007).here is a look at how these challenges affect the scalability of msmes in nigeria. financial problems it is natural for business owners to want to expand operations and put their business on a growth path; however, this move requires not only a winning strategy based on market realities, but also the appropriate source of finance. this www.cribfb.com/journal/index.php/afbr australian finance and banking vol. 2, no. 1; 2018 6 could scale up or breakdown a business. using the correct mix of financial options is very important for scalability of business. there is no question that expansion requires money, and rather than use up business‘s working capital, choose the right finance from the market. today micro, small and medium enterprises have access to numerous sources of finance, each with its own unique features and benefits. it is important for business owners to carefully identify the attributes of each option and choose the ones that work best. instead of going for funding from one source, mix it up. take a business loan, accept equity investors and see if the suppliers will give credit. doing this spreads the risk and is faster than just waiting for a venture capital investment, which will also dilute one‘s ownership (the hans india, 2017). ekpenyong (1997) and utomi (1997) identified inadequate capital, inaccessible credit facilities as some of the problems bedeviling the msmes in nigeria. long term development institutional credit is known not to be available to msmes because they are generally considered high credit risks by financial institutions. the study by evbuomwan, et al. (2012) indicated that 75.7% of their survey respondents relied mostly on own funds to finance their businesses. however, the msmes lack of access to relative cheap and effective sources of finance has been identified as the major factor hindering their contribution to economic growth. a widespread concern is that the banking system in the sub-sector (which supposed to be the major financier of msmes) is not providing enough support to new economic initiatives and in particular to the expansion of msmes. management problems growth and scalability of business requires an expanded skill set. as such, entrepreneurs are advised to build a team with broad and complementary skills. unfortunately, the lack of trained manpower and management skills also constitute a major challenge to the survival and scalability of msmes in nigeria. according to west and wood (1972), ―…90% of all these business failures result from lack of experience and competence.‖ poor documentation of business process msmes in nigeria are usually characterized by poor record keeping. as their business grows, so is the business processes, but they do not document the process let alone update the documentation. many owners of msmes in the country do not build their business so that when they die someone could come in, read their business process manual, and know exactly how the business operates. a documented process is good for scaling of msmes, it is also good for selling a business. marketing growing and scaling up a business always leads back to marketing and sales. even if a business firm has an inspirational vision, has a solid team behind that vision, and have an awesome process, it is nothing without revenue. if it has to scale, it will need to learn how to market it product or service and create sales. however, most nigerian msmes owners equate ‗marketing‘ to ‗selling‘ and this is reflected in their various dysfunctional business behavior against customer satisfaction and good business and marking orientation. they lack the knowledge and skills of basic marketing ingredients – marketing research, market segmentation, and marketing planning and control. the outcome of this is poor quality products, unawareness of competition, poor promotion, poor distribution, and poor pricing methods (ayozie, 2013). inadequate basic infrastructure government has not done enough to create the best conducive environment for the striving of smes, the problem of infrastructures ranges from shortage of water supply, inadequate transport systems, lack of electricity to improper solid waste management. nigeria‘s underdeveloped physical and social infrastructures create a binding constraint to smes growth, since; they heavily rely on the inefficiently provided state infrastructures and cannot afford the cost of developing alternatives. this increases cost and reduces efficiency as well as scalability. cash flow problems a cash flow problem arises when a business struggles to pay its debts as they become due. note that a cash flow problem is not necessarily the same as experiencing a cash outflow. a business often experiences a net cash outflow, for example when making a large payment for raw materials, new equipment or where there is a seasonal drop in demand. however, when cash flow is consistently negative and the business uses up its cash balances, then the problem becomes serious (tutor2u, n.d.).the main causes of cash flow problems are: low profits or (worse) losses, over-investment in capacity, too much stock, high overhead expenses, and allowing customers too much credit. also, fast growth can cause real cash flow problems when the large number of new customers takes time to pay while the growing business expenses need to be paid right away. just as good cash flow keeps a business afloat, poor cash flow can sink it (freshbooks, n.d.). in fact, poor cash flow is a big reason why one in every four businesses doesn‘t make it past the first year. and why more than half don‘t survive past the fifth. it is extremely difficult to scale a business if cash flow management processes are lacking. unfortunately, many msmes in nigeria do not know how to create a good cash flow stream. most of the msmes https://www.slcbookkeeping.com/blog/growth-planning-always-leads-back-to-sales-and-marketing www.cribfb.com/journal/index.php/afbr australian finance and banking vol. 2, no. 1; 2018 7 encounter a cash flow problem at one time or another. fortunately, most cash flow problems can be prevented with a bit of preparation and the right strategy. investment culture problems investment is the purchase of an asset with the hope that it will generate income or appreciate in the future. it involves committing money into an investment vehicle in the hope of making a financial gain with the possibility of losing it. most nigerian entrepreneurs do not have the investment culture of ploughing back profits. bala (2002) stressed that the attitude of a typical nigerian entrepreneur is to invest today and reap tomorrow. also, the sociopolitical ambitions of some entrepreneurs may lead to the diversion of valuable funds and energy from business to social waste. labor intensive it is emphasized that the small scale enterprises make the possibility of the equitable distribution of national income more realistic of providing employment opportunities on a large scale. by creating more employment it help mobilizing capital and human resources that would otherwise be left idle. the 2012 enterprise baseline survey revealed that there are 17 million small and medium scale enterprises in nigeria, employing 32.41 million persons and makes a contribution of about 46.54 per cent to the nation‘s gross domestic product in nominal terms (elebeke, 2012). however, msmes that is labor intensive and staff intensive is not scalable. msmes have start looking at production automation, proven process technologies, and minimum staff approaches, to begin scaling. ict issue currently across the globe, there has been a paradigm shift in the mode of operations of msmes, to move from a matter based economy to a knowledge based economy. in recent years, it‘s been seen that one of the major drivers of msmes growth in developed countries has been attributed to the increasing use of information and communication technology (ict). ict utilization is very important in the 21st century as they make ease business transactions, improve customer and consumer relationship and also panacea to combat a number of challenges facing msmes. ashrafi and murtaza (2008) state that organizations around the globe are utilizing ict to cut cost, improve efficiency and offer greater customer service, despite the high diffusion of digital technologies from developed economies to developing economies in recent years, the use of ict within msmes in nigeria remains low (apulu and latham, 2009). this probably is due to employee‘s ict illiteracy or employer‘s ict illiteracy, cost of ict equipment, entrepreneurs not seeing the competitive pressure in the market strong enough for them to adopting ict, etc. 4.2. towards making micro, small and medium scale enterprises scalable in nigeria growth without a large increase in cost is tricky. studying and crafting a scalable business model can help in both the short term and long term with the end result being both growth and profitability. the overall goal is to increase revenue without a cost growth. here are some factors for msmes in nigeria to consider in scaling up their businesses: a) evaluating and planning a firm has to take a hard look inside its business to see if it is ready for growth. this means taking stock of where a firm‘s business stands today. it has to strategize what needs to be done to increase sales. then assuming a firm‘s orders doubled or tripled overnight. does the organization have the people and systems to handle those new orders, without failing? this is where a good plan is essential. one of the best planning starts with a detailed sales growth forecast, broken down by number of new customers, orders and revenue that a firm intends to generated. a spreadsheet should be included that breaks the numbers down by month. the more specific a firm is, the more realistic it sales acquisition plan can be. then a similar expense forecast should be done based on adding technology, people, infrastructure and systems to handle all those new sales orders. some hard thinking and research needs to be done to come up with proper cost estimates, however, doing so will make the plan better (campbell, 2017). b) timing the timing of msmes‘ product or service must be right in the marketplace. msmes need to anticipate their market and customers‘ needs and constantly innovate to stay ahead. this requires leadership with agility, resilience, and a willingness to fail–and to recognize that failure quickly enough to adapt and move forward. c) branding today‘s economy requires business leaders to create positive memories for customers and partners, or customers will turn to a competitor in search of a better experience. for msmes to create a scalable business, they have to understand just how crucial it is to build brand equity. the emotional attachment that links customers to their product, as opposed to any other, translates into sustainable growth (fastcompany, 2013). to achieve this, it will require choosing a target audience; connecting with the public to make them feel an emotional attachment to a firm‘s brand; inspiring and influence the audience through brand message; and reinforceing the brand image within www.cribfb.com/journal/index.php/afbr australian finance and banking vol. 2, no. 1; 2018 8 the msmes (i.e., making sure employees at every level of the organization work and behave in a way that reinforces firm‘s brand image). d) sales scale up creating a unique product and a unique brand is not enough. msmes will need to develop repeatable sales processes to create a scalable business. it is one thing to sign up a few customers; it is another thing entirely to identify, design, and implement repeatable sales and customer delivery processes (fastcompany, 2013). to ensure that a repeatable and scalable sales model is created, msmes need to: increase the sources of their customer leads on a consistent basis; sales conversion rate and revenue must be consistently forecasted; the cost to acquire a new customer must be significantly less than the amount that can be earned from that customer over time; and customers should get the right product in the right place at the right time. e) finding and establishing key relationships and networks msmes can catalyze their businesses‘ growth by building and fostering critical relationships. even if they are good in their area of core competency and have deep domain expertise at what they do and the value they bring to their customers. but in the end, it comes down to connections (wagner, 2013). f) evaluate financing options for expansion there are very few big businesses that are self-funded, however, whether a firm wants to expand its employee base, buy a new facility or develop a new product, one of the key elements in taking a firm to the next level is knowing the kind of capital it needs to support that growth, hence, msmes must evaluate the financing options available for them to expand (wagner, 2013). g) technology embracement msmes need to take better advantage of technology innovations to help manage their business. if a small business can identify a genuine need, technology likely exists to fulfill that need both locally and globally. the last two decades have marked an enormous increase in technology use in business. through advancement in technology in computers and the internet, small businesses are contributing more to the economy than in the past. technology has made it easy in processing daily business activities and routine tasks. technology has tangible and intangible benefits in a small business that affect the culture, relationships and efficiency of an enterprise (advance funds network, n.d.). h) automate solutions msmes should appraise their business processes. there are always repeated steps and circular activities that can be automated. this frees time for focusing on business growth. staff work-hours should be minimized. for example, instead of depending on manual data entry and appointments setting, invest in a system that simplifies work process for employees. newcomers can then be trained quickly and easily and join the workflow without delay (mightycall team, 2016). in sum automation can help run a business at lower cost and more efficiently by minimizing manual work i) establish standardized processes if a start-up is going to scale, managers need to implement standardized and repeatable processes, with proper delegation. this may require investments in purchasing support systems including it and training personnel accordingly, as well as delegation from the founder and senior management (salter, 2016). j) reduction of risks risk is an inevitable part of starting and growing a business. it's impossible to control everything, but there are plenty of ways to limit internal and external threats to a firm and its growth. one important resource to help you accomplish this is a business insurance provider. small businesses should be prepared by seeking insurance products that help them recover from any loss, including those that cover the cost of remediation and lawsuits. according to gausepohl (2016), as small businesses grow, they may add space or equipment, create new products or services, or increase their operating and distribution footprint, it is wise for periodically reviewing of their insurance policy to ensure they have the right coverage. k) team building the biggest challenge in scaling any business is people. the faster the growth, the harder it is to add enough skilled people to keep from tipping over. if a firm accelerates its growth but does not have a team that supports its customers and maintains a high level of service, development and refinement, it will eventually collapse in on itself. there are two parts to this: first is hiring. it is important to spend time to put the right people in place. the second is creating a fertile work environment for growth (gerber, 2016). l) marketing firms should not delay an efficient marketing strategy if it wants small business to become a market leader. the startup needs to be noticed at once. it‘s not about local promos and advertising campaigns, which are useful to attract clients here and now. it is about joining a global market(mightycall team, 2016). it important to get access www.cribfb.com/journal/index.php/afbr australian finance and banking vol. 2, no. 1; 2018 9 to business conferences, participate in workshops. these are places to make business networking and make proper acquaintances in different fields. social media is a rich platform of information, communities and events agenda. marketing is a continual process. msmes need to keep updating their product line, so they can attract new clients. 5. conclusion all businesses need to be scalable on one or more levels in order to hold onto and build market share. even so, micro, small and medium enterprises have the greatest need for scalability because they are the ones with the biggest potential for growth. they are the organizations that have to be more careful with the limited resources they have, the ones that go through metamorphoses as their leaders become more familiar with the business game. many msmes fold directly because they fail to foresee what they might need or where the market can take them, having too much of a here-and-now mindset. although many areas in a business are scalable, some are not. it‘s just as important to recognize where cannot be changed as to see where can be changed. references albanese, j.(2015). how to scale a business: 4 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vol. 2, no. 2; 2018 issn 2576-1196 e-issn 2576-120x impact factor: 2.7 published by centre for research on islamic banking & finance and business, usa 1 price-swinging stock market fundamentals: nexus and contemporary features prince umor c. agundu 1 , james t. wula 2 & usman mamuda musa 2 1 department of banking & finance, federal university wukari, taraba state, nigeria 2 department of accounting, federal university wukari, taraba state, nigeria correspondence: prince umor c. agundu, department of banking & finance, federal university wukari, taraba state, nigeria. tel: 08037757642. email: princeagundu@fuwukari.edu.ng received: july 20, 2018 accepted: july 26, 2018 online published: august 4, 2018 abstract the factors which determine stock prices in capital markets are many and diverse; hence researchers in the academic fields of accounting and finance intermittently undertake to track them with contextual emphasis. from the philosophical basics to the more rigorous econometric dispositions, analysts in different schools of thought had ventured in this regard and came up with divergent outcomes. some factors did commonly appear for most stock markets, while various conditions surrounding the respective scenes accounted for environmental dynamics. this reinforces the truism that each market has acclimatized rules and regulations, country peculiarities, and investor typologies; all of which provide basis for uniqueness. in this conceptual analysis, the factors that feature as dominant determinants of stock prices are earnings per share (eps), dividend per share (dps), and price-earnings ratio (p/er); among which the last is the most and not the least. it further attests to the prevailing value relevance of financial statement information emanating from corporate accounting reports; hence the imperativeness of stock market regulators sustaining the rules that make for adherence to best practices. the alternative to informational reliability is institutional fragility; because when investors’ confidence erodes, liquidity squeezes, efficient markets crashes, and in turn, investors withhold investments. it, therefore, requires market regulatory/administrative mechanisms to be focally directed at enhancing reportorial compliance and compelling higher due diligence, accountability and responsibility in line with international standards. keywords: financial statements, market fundamentals, stock prices. 1. introduction financial performance of firms listed on the stock exchange reflects an assessment of financial activity/productivity, particularly of the entities as they participate in capital market activities. the process typically involves measuring a firm’s policies and operations in monetary terms. financial performance analysis identifies the financial strengths and weaknesses of the firm by properly establishing relationships between the items of the statement of financial position (balance sheet) and the statement of comprehensive income (trading, profit and loss account). the first stage is to select the information that anchor the relevant fundamentals to the decision under consideration from the entire information contained in the financial statements. the second stage is to arrange the information in a manner that highlights the significant relationships. the third stage is to www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 2 interpret and draw inferences and conclusions, thereby consummating the financial performance analysis cycle which characteristically features selection, relation, and evaluation facets. the critical perspectives of corporate financial evaluation include profitability analysis, working capital/liquidity analysis, financial structure analysis, activity analysis and market value/investment ratio analysis. nonetheless, recent studies expediently focus on market value/investor ratios, especially earnings per share (eps), dividend per share (dps), and price-earnings ratio (p/er), for the purpose of assessing longterm financial performance and reflecting the income and degree of satisfaction of shareholders connected with the firms. the period spanning 2009-2014 marked an era whereby the nigerian capital market recorded very low activity, particularly indicated by sharp drop in share prices following the 2008 global stock crash. also, it was from 2009 that the nigerian stock exchange (nse) began publishing the nse 30 index; analytically adopting five-sector indices to provide investable benchmarks to capture the performance of specific sectors. the indices comprise the top 15 most capitalized and liquid companies in the insurance and consumer goods sectors, top 10 most capitalized and liquid companies in the banking and industrial goods sectors and top seven most capitalized and liquid companies in the oil and gas sector (nse, 2011/2012; 2014). recent studies had beamed the searchlight on developmental dynamics, particularly relating to market fundamentals in consumer goods sector (cgs). the cgs is contextually notable because it constitutes the largest segment of the nigerian manufacturing industry (the real sector), controlling 22.5% of the activities in the industry. it accounts for more than 4.6% of gross domestic products (gdp) and 66% of total consumer expenditure. it generates over 1.5 million jobs and employs more than 5% of the nigerian workforce. it showcases an oligopolistic market structure: about 15% of the market players control 90% of the sales volume while the remaining 85% are small and medium-scale enterprises (smes) which account for 10% of total sales volume (nigeria agro food, 2016).against this backdrop, this paper conceptually addresses price-influencing corporate financial fundamentals as they relate to the nigerian stock market and similar scenes overseas. 2. factor dominance evaluation for the purpose of illuminating the extent of factor dominance, the price-swinging (determining) variables considered are eps, dps, and p/er, as further highlighted: 2.1 share price and eps nexus for many studies that focused on the extent to which stock price is influenced by eps, the regression results indicate positive and significant relationship. particularly among firms in the cgs of the nse, the outcomes strongly affirm the influence of eps on the market value of share prices. this is in tandem with the fundamental or intrinsic value analysis theory which holds that at any point in time, an individual security has an intrinsic value which depends on the earning potential of stock. by this, the earning potential of stock depends on such fundamentals as quality of management, outlook of the industry and the economy. through careful study of these fundamentals, an investment analyst is expected to determine if the actual price of stock is above or below the intrinsic value. if actual prices tend to move towards intrinsic values, then attempting to determine the intrinsic value of stock is equivalent to making a prediction of its future price; and this is the essence of the predictive procedure implicit in fundamental analysis. this tendency is further corroborated by some researchers, including almumani (2014) and srinivasan (2012). those with reservations about the functional association include umar and musa (2013) and dehuan and jin (2008). 2.2 share price and dps nexus as shown by outcomes of many scholarly investigations, positive and significant relationship prevails between stock price and dps. dividend is one of the ways firms share the wealth generated from running the business. as stock prices go up, resulting from payment of dividends, shareholder value increases. when a firm initiates the payment of cash dividend or withholds such payment, it makes an extremely visible and qualitative change in corporate policy. this decision portends short and long–term implications on the performance of the price and volume of the company’s shares. many researchers have equally established that dps is positively related to stock price. by this, stock price rises with an increase in dps, hence attach high value to those firms that pay dividends. current income in the form of dividend is preferred by most investors and they demonstrate greater willingness to buy the stocks that pay high dividends. thus, stock price of a company with higher dividend payout tend to go higher, to the end that where the earnings remain the same, stock price would increase as dividend pay-out increases. this trend is accounted for by the submissions that:  dividends tend to reduce the risk and uncertainty attached to the stock,  dividends refer to the psychological preference of investors for current rather than future earnings, and  dividend substantiates the information content of dividend pay-out,as investors reckon with them as tangible evidence of earnings capacity of a firm. www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 3 with respect to research findings on the extent to which dps affects stock prices, there is a significant influence on the market value of stock prices of listed firms. this is in tandem with the fundamental or intrinsic value analysis theory which adopts earnings and dividend prospects of the firm in the determination of stock prices. evidence from the studies conducted by srinivasan (2012) and khan (2009)lends credence to the position that a significant relationship exists between stock price and dividend. on the other hand, this stance is at variance with the disposition of gharaibeh (2015) and almumani (2014). 2.3 share price and p/er nexus some studies had hypothesized on the relationship between stock price and p/er, focusing on firms in the cgs. like other independent variables in similar frameworks, the regression results indicate that there is positive significant relationship between stock price and p/er. this outcome is supported by the price-earnings valuation model under the fundamental analysis theory, which holds that the p/er gives a good signal of the selling price of stocks. thus, it is commonly used in the owners’ appraisal of stock value, such that a low ratio would signal a good investment and rationally boost investors’ confidence. previous studies which affirm this association include those conducted by ӧzlen and ergun (2012) and srinivasan (2012). however, vijitha and nimalathasan (2014) have reservations, rather contending that there is no significant relationship between share price and p/er. 3. market-specific reflections thus far, investigations have been carried in many parts of the world to project the factors that affect stock prices, nigeria being on good account as well (agundu & wula, 2017). inyiama (2015) examined the effect, magnitude, strength, causalities and co-integration of the relationship between banks’ financial fundamentals and stock price in the nigerian banking sector. secondary data obtained from the annual reports and accounts of first bank plc, access bank plc, zenith bank plc and united bank for africa plc from 2004-2013 were utilized. the nature and magnitude of association between the dependent variable (average stock price) and the independent variables (bank age, eps, and return on assets) were determined using multiple regression analysis. granger causality procedure was applied to determine causality while johansen co-integration test was conducted to verify sustainability of the short-run relationship. the study reveals that eps has positive and significant relationship with stock price. there is unidirectional granger causality running from stock price to eps and bidirectional granger causality running from return on assets (roa) to eps and from eps to roa. since eps has the strongest explanatory power, the recommendations underscore:  efficient application of critical cost reduction strategies,  aggressive marketing, and  diversification strategies to improve on their earnings by extension, diversification may lead to enhanced dividend pay-out which further jell the corporate image. stephen and okoro (2014) examined the factors that determine stock price movements in nigeria from 20012011. they focused on 99 firms listed on the nse, which cut across all sectors of the nigerian economy. using the ordinary least squares (ols) technique, the impact of eps, book value per share (bvps) and dividend cover (dc) on stock price was analyzed, anchoring on ohlson’s (1995) model. the model expresses stock price as a function of eps and bvps, but the researchers added a third parameter (dc), to form an integrated ohlson’s model. the results reveal that the explanatory power of eps, bvps and dc are statistically significant in explaining the movement in stock prices. umar and musa (2013) examined the relationship between stock prices and eps, using a sample of 140 nigerian firms quoted on the nse from 2005 to 2009. the sampled firms cut across 31 sectors of the economy and are divided into four equal strata, with each stratum consisting 35 firms, such as:  firms with the highest eps,  firms with the lowest eps,  firms with the most performing stocks, and  firms with the least performing stock. adopting random effect regression to estimate the parameters of the dependent and independent variables, the results reveal an insignificant relationship between stock prices and eps. by the insignificance experienced in the period of the study, eps could not serve as a basis for predicting stock price movements. abiodun (2012) examined the significance of accounting information on firm value for 40 companies sampled randomly from various sectors of the nigerian economy. the sectors include:  food and beverages,  financial services,  automobile,  construction, www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 4  insurance, and  services. simple descriptive statistics coupled with price regression model, returns regression model and logarithmic regression model were utilized in evaluating the effect of earnings and book value on stock price from 1999 to 2009.the study reveals earnings as more value relevant than book value. this implies that information contained in the income statements of the sampled firms (earnings in context), dictates the corporate value of the firms more than information contained in the balance sheet (book values in context). information is relevant if it influences the investment decisions of users by helping them evaluate past, present and future events. to undermine information reliability in this regard is a sure way to investment futility (agundu, 2012). oyerinde (2011) examined the value relevance of accounting data in the nigerian stock market with a view to determining whether they provide information that affects stock prices of firms listed on the nse. it explored the difference in perception of institutional and individual investors about the value relevance of various items of financial statements in equity valuation, using secondary and primary data. the accounting numbers which constitute the secondary data were obtained from the nse fact-book, annual financial reports of companies quoted on the exchange, and the nigerian stock market annual reports from 2002-2008. using ols, random effects model (rem), and fixed effects model (fem) to gauge information content of earnings, book value and dividend, the study reveals that there is a significant relationship between earnings, book value and dividends and stock prices of companies listed on the nse. it also established that dividends are the most widely used accounting information for investment decisions in the market, followed by earnings and net book value. outside the shores of nigeria, dehuan and jin (2008) examined to what extent stock prices in the chinese stock market are driven by firms’ operating performance. their interest was informed by the widely held view that the chinese stock market is very speculative and policy-driven. the performance measures used were return on equity (roe), eps, profit margin (pm), roa, changes in sales, and total assets turnover (tat). they examined the variables on a sample of top 10% performers listed in the shanghai stock exchange (sse) from 1996-2000 by employing simple and multiple regressions to determine, at the firm level, whether and to what extent these variables are related to stock price changes and what portion of the stock price movements can be explained by the financial fundamentals. the results indicate that while firm performance measures have some explanatory power on stock price changes in the first two years of analysis, the operating performance measures’ explanatory power of the stock price movements generally declined as the stock prices went up. the revelations suggest that the significant stock price increases from 1998 to 2000 were not critically driven by the firms’ operating performance. 4. conclusion many price-swinging financial fundamentals have been featured in stock market – based research in recent times, with the critical factors being eps, dps, and p/er. among these three fundamentals, which constitute internal factors/determinants of stock price, p/er prevails as the most influential variable. against this backdrop, analysts contend that firms should uphold the p/er as dominant factor in the determination of stock prices. it equally obtains among the firms, including those in the cgs, that the p/er is a preferred financial fundamental when investors desire to know which stock price is cheap or expensive. those who refer to current trading prices of stock may get confused by the wide range of price data inputs. moreover, stock prices may change rapidly with firms’ capital decisions, but the stocks neither become cheaper nor more expensive. functionally, therefore, dividing stock price by eps makes the comparative analysis of low price stock and high price stock better insightful and more meaningful. contextually, however, the nexus illuminated in this conceptual analysis underscores the functionality of:  eps, which associates positively and significantly with stock price,  dps, which associates positively and significantly with stock price, and  p/er, which associates positively and significantly with stock price; and features as the most dominant fundamental among them all, even in the cgs. in the nigerian stock market context, many analysts have explored firms cutting across sectors, but there is yet no clear-cut method of selecting the firms across the sectors. furthermore, the outcomes of investigations did not focus on specific industry characteristics. some international studies which involved cross-sector evaluation reasonably availed results on the specific sector explored, but this has not been the case with most studies on the domestic scene. in this vein, it is underscored that the relationship between financial performance indicators should not be construed as generic, as it varies either by company or industry. aggregating the outcomes for the various sectors makes it impossible to trace the revelations to a specific industry (belesis & sorros, 2012). www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 5 notably also, many of the local investigations focusing on value relevance of accounting information did not include p/er in the analytical framework. the p/er indicates the extent to which earnings of stock are covered by the price. it reflects how many times earnings investors are ready to pay for each stock; hence it prevails as a major factor that determines whether stock is under-priced or overpriced. this ratio should, therefore, be harnessed in identifying which stocks in a given sector are expensive or cheap relative to one another. after all, many investors are prepared to pay a premium for high growth expectations in the form of high p/er. in line with the fore-going, gottwald (2012) asserts that p/er is still a widely used valuation tool in most stock markets. analysts adopt it when pricing new shares in an initial public offering (ipo); as well as a measure of relative value when comparing listed companies. accordingly, a company which has higher p/er than a competing (rival) firm in the same line of business would project or portend bad value for investors. well projected p/er, thus, fosters average expectations about future growth prospects, as high p/er would logically suggest an aggregate market expectant of significant future earnings growth. given that all the focal analytical factors (eps, dps, and p/er) positively and significantly influence stock price, they have proven to be of utmost relevance to investors, particularly in their decisional settings. by the explanatory power they possess, they remain useful in making more meaningful forecast of stock prices, and to that extent, stability and sustainability of the capital markets in context. it is, therefore, expected that:  analysts would appropriate more time in evaluating eps, dps, feature in their evaluations/predictions,  except for growth programmes intended to be financed from earnings or any other compelling reason to pay stock dividend, managers would be consistent in the payment of cash dividend; as it makes for more marketability/popularity and conveys a perception of corporate financial stability;  firms would develop and publish periodically their earnings growth rates, including the ones for the last five years, and the current year, as well as expected growth rates for the next five years (which are to be compared with the industry average or sector index). furthermore, the p/er should feature critically among the fundamentals that significantly influence stock prices, in their investment evaluations/projections, since the average investor seeks to earn good returns. the securities and exchange commission (sec) and nse, in particular, should adopt a benchmark p/er on sectorspecific basis, to facilitate inter-firm (cross-sectional) analysis/comparison. the status quo where only the p/er for the entire market is availed definitely elicits expeditious rethink in the interest of systemic innovativeness and competitiveness. references abiodun, b. y. 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(2008). firm performance and stock returns: an empirical study of the top performing stocks listed on shanghai stock exchange. academy of accounting and financial studies journal, 12(1), 17-23. gharaibeh, a.m.o. (2015). the determinants of common share prices: new empirical evidence from kuwait. epra international journal of economic and business review, 3(11), 28-40. gottwald, r. (2012). the use of the p/e ratio to stock valuation. grant journal (online), 21-24. inyiama, o.i. (2015). effect of banks’ financial performance on share prices: evidence from nigerian banking industry (2004-2013). european journal of research and reflection in management sciences, 3(3), 69-79. khan,s. h. (2009). determinants of share price movements in bangladesh: dividends and retained earnings (unpublished msc thesis), school of management, blekinge institute of technology. http://papers.ssrn.com/sol3/papers.cfm?abstract_id www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 6 nigeria agrofood (2016). food + bev tec nigeria. 3 rd international trade show on agriculture, food, beverages & packaging technology and food, beverages and hospitality. retrieved from www.agrofood-nigeria.com/food-bev+tec-nigeria.html. nigerian stock exchange (2011/2012). nse factbook. abuja–nigeria. nigerian stock exchange (2014). nse daily official list. abuja–nigeria. ohlson, j. a (1995). earnings, book values, and dividends in equity valuation. contemporary accounting research, 11, 661-87. oyerinde, d. t. (2011). value relevance of accounting information in the nigerian stock market(unpublished ph.d thesis), school of postgraduate studies, covenant university, ota, nigeria. özlen, s.& ergun, u. (2012). internal determinants of the stock price movements on sector basis. international research journal of finance and economics, 92, 111-116. srinivasan, p. (2012). determinants of equity share prices in india: a panel data approach. the romanian economic journal, 15(46), 205-228. stephen, e.a.& okoro, e.g. (2014). determinants of stock price movement in nigeria: evidence from the nigerian stock exchange. journal of economics and sustainable development, 5(3), 1-7. umar, m. s.& musa, t.b. (2013). stock prices and firm earning per share in nigeria. journal of research in national development,(2), 187-192. vijitha, p. & nimalathasan, b. (2014). value relevance of accounting information on share price: a study of listed manufacturing companies in sri-lanka. merit research journal of business and management, 2(1), 001-006. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) contents australian finance & banking review vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business 26 prime equity, leveraged structure and corporate earnings in nigeria: a comparative analysis lucky anyike lucky1 akobundu charles echewodo2 1department of banking and finance, rivers state university, nigeria 2department of finance and banking, university of port-harcourt, nigeria correspondence: lucky anyike lucky,department of banking and finance, rivers state university, nkpolu orowurokwo, port harcourt, rivers state, nigeria.email: lucky.anyike@yahoo.com received: october 04, 2017 accepted: october 09, 2017 online published: october 14, 2017 abstract this study examined prime equity, leveraged structure and corporate earnings in nigeria. the objective was to examine if equity value and debt equity ratio have relationship with earnings per share of quoted deposit money banks. earnings per share were modeled as the function of equity value and debt equity ratio. 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 74.2% and 66.7% variation on earnings per share can be traced to equity value. the β coefficient indicates that of equity value has positive impact on earnings per share, while debt equity ratio on of deposit money banks can explain 68.9% and 59.9% variation. the β coefficient proves that debt equity ratio have positive impact on earnings per share of the quoted deposit money banks. from the above results we conclude that equity value have greater impact on earnings per share than debt equity ratio. we recommend that management should ensure optimal capital structure of the quoted deposit money banks. keywords: corporate earnings, debt equity ratio, leveraged structure. 1. introduction the agency theory formulated by jensen and meckling in 1973 separate the owners of the firm from the management. the management entrust the operation of the firm with the objective of optimizing the interest of the owners without conflict of interest. maximizing the interest of the shareholders is a critical management function that requires strategic and tactical planning such as optimal capital mix. corporate organizations have financial goals and strategy which is the expression of a corporate mission and strategy that are determine by the long-term planning system as a trade-off among conflicting and competing interest. corporate objective relates to four corporate fundamental goals of maximizing corporate profitability, maximizing returns on investment, maximizing corporate growth and availability of fund (pandey, 2005). corporate earnings are the net benefits of a corporation‟s operation. it is the amount on which corporate tax is due. for an analysis of specific aspects of corporate operations several more specific terms are used as ebit earnings before interest and taxes, ebitda earnings before interest, taxes, depreciation, and amortization. earnings typically refer to after-tax net income. earnings are the main determinant of share price, because prime equity, leveraged structure and corporate earnings in nigeria: a comparative analysis lucky anyike lucky and akobundu charles echewodo 27 earnings and the circumstances relating to them can indicate whether the business corporate firms are profitable and successful in the long run. earnings are perhaps the single most studied number in a company's financial statements, because they show a company's profitability compared to analyst estimates and company guidance. corporate earnings are studied because they represent a direct link to company performance. earnings per share are a commonly cited ratio used to show the company's profitability on a per-share basis. it is also commonly used in relative valuation measures such as the price-to-earnings ratio. the price-to-earnings ratio, calculated as price divided by earnings per share, is primarily used to find relative values for the earnings of companies in the same industry. a company with a high price compared to the earnings it makes is considered overvalued. however, a company with a low price compared to the earnings it makes is undervalued. corporate earnings is mainly determine by management factors such as debt equity ratio, the market value of equity, profitability, composition of assets, investment and dividend policies (anyamobi and lucky, 2017).debt and equity are the two major classes of liabilities, with debt holders and equity holders representing the two types of investors in the firm. each of these is associated with different levels of risk, benefits, and control. while debt holders exert lower control, they earn a fixed rate of return and are protected by contractual obligations with respect to their investment. equity holders are the residual claimants, bearing most of the risk, and, correspondingly, have greater control over decisions. the classical opinion such as gordons (1959) opined that micro forces such as profitability level of a firm are an indicator that the firm is capable of adding value shareholders (lintner, 1956). the classical models of financial evaluation indicate that capital structure like the dividend policy is important, since optimal capital mix effect the value of the corporate firm. it is used as financial signaling to outsiders regarding the stability and growth prospects of the firm (ross, 1977). capital structure is the mix of the sources of finances that is used by the firms to finance their operations and assets (modigliani & miller, 1958). the debt-to-equity ratio of a firm determines how cash flows will be shared between debt holders and equity holders the justification of financial leverage existence is project earnings achievement before interest and taxes higher than the cost of funding and the increase or decrease in operating profits financing cost will lead to an increase or decrease in return on equity. corporate firms can reduce leverage level in order to reduce the risk level or because of unwillingness in adopting compressed financial policy in order commit toward debt holder (jensen, 1986). while there are many studies that have dealt with the problem of capital structure and corporate performance (akani and lucky, 2016, ujah and brusa, 2013, innocent et al, 2014, david and olorunfemi, 2010), there are limited studies of citable significant that include prime equity and corporate earnings in deposit money banks in nigeria, therefore this study intend to examine prime equity, leverage structure and corporate earnings with focus on quoted deposit money banks in nigeria. apart from section one above, section two focuses on both theoretical and empirical review of related literature, section three deals with the research methodology. section four deals with the data analysis and presentation and the fifth section contain the conclusion and recommendations from the findings. 2. literature review 2.1 financial leverage financial leverage is a measure of how much firm uses equity and debt to finance its assets. as debt increases, financial leverage increases. management tends to prefer equity financing over debt since it carries less risk (matt, 2000). financial leverage takes the form of a loan or other borrowing (debt), the proceeds of which are re-invested with the intent to earn a greater rate of return than cost of interest. an unlevered firm is an all-equity firm, whereas a levered firm is made up of ownership equity and debt (andy, chuck & alison, 2002). leverage allows a greater potential returns to the investor than otherwise would have been available, but the potential loss prime equity, leveraged structure and corporate earnings in nigeria: a comparative analysis lucky anyike lucky and akobundu charles echewodo 28 is also greater if the investment becomes worthless, the loan principal and all accrued interest on the loan still need to be repaid (andy et. al., 2002) pandey (2010) assert that the financial leverage employed by a company is intended to earn more return on the fixed-charge funds than their costs. the surplus (or deficit) will increase (or decrease) the return on the owners‟ equity. the rate of return on the owners‟ equity is levered above or below the rate of return on total assets. thus, financial leverage is considered as a double-edged sword because it provides the potentials of increasing the shareholders‟ earnings as well as creating the risks of loss to them 2.1.1 measures of financial leverage  total debt ratio total debt ratio measures the amount of a firm‟s total assets that is financed with external debt. this measure encompasses all short term liabilities and long-term liabilities. nwude (2003) contend that this measures portion of the firm‟s assets that is financed by creditors. as the total debt ratio increase, so do a firm‟s fixed-interest charges, if the total debt ratio becomes too high, the cash flow the firm generates during economic recessions may not be sufficient to meet interest payments. in terms of its significance to a firm, theoretical literatures predict that debt is positively correlated with level of investment. for example, long and malitz (1985) found a significant positive relationship between the rate of investment in fixed plant and equipment and level of borrowing. the total debt ratio is measured by dividing total debt with the total assets of the firm. total debt ratio = total assets total debt 1  debt equity ratio debt equity ratio is similar to the debt ratio and relates the amount of a firm‟s debt financing to the amount of equity financing. actually, this measure of leverage ratio is not actually a new measure; it is simply the debt ratio in a different format. debt equity ratio is the quantitative measures of the proportion of the total debt to residual owners‟ equity (nwude, 2003). thus, it is an indicator of company‟s financial structure and whether the company is more reliant on borrowing (debt) or shareholders capital (equity) to fund assets and activities. debt equity ratio = shareholders funds total debt 2  equity financing equity investment simply means shareholders‟ fund or sweat money (dagogo and ollor, 2009). two strands of equity investment exist: public and private equity investments. public equity investment involves raising share capital directly from the public through the stock exchange, while private equity involves investment in a private company by a few investors or institutional investors. it has been proved severally that the value of a firm increases more with increasing leverage, durand (1959) and ezra (1963). perhaps, this explains why there is still strong emphasis on the use of debt despite the overwhelming contribution of franco modigliani and merton miller (mm) in 1958 on the irrelevance of capital structure. however, mm position in a world of taxes (which is a more realistic assumption) implies that the expected return on equity increases as the debt-equity ratio increases. therefore shareholders cannot be indifferent to increased leverage when it increases expected return, brealey and myers (1996). 2.2 theorectical framework  the modigliani-miller: irrelevant and relevant theory prime equity, leveraged structure and corporate earnings in nigeria: a comparative analysis lucky anyike lucky and akobundu charles echewodo 29 modigliani and miller (mm) 1958 illustrates that under certain key assumptions, firm‟s value is unaffected by its capital structure. capital market is assumes to be perfect in modigliani and miller‟s world, where insiders and outsiders have free access to information; no transaction cost, bankruptcy cost and no taxation exist; equity and debt choice become irrelevant and internal and external funds can be perfectly substituted. the m-m theory (1958) argues that the value of a firm should not depend on its capital structure. the theory argued further that a firm should have the same market value and the same weighted average cost of capital (wacc) at all capital structure levels because the value of a company should depend on the return and risks of its operation and not on the way it finances those operations. miller brought forward the next version of irrelevance theory of capital structure. he appealed that, capital structure decisions of firms with both corporate and personal taxes circumstances are irrelevant (miller 1977). they first hypothesized that if markets are perfectly competitive, firm performance will not be related to capital structure, there by suggesting no significant relationship between a firm„s capital structure and its performance. the value of the firm is similarly unaffected by its financial structure. their assumptions of a perfectly competitive market exclude the impacts tax, inflation and transaction costs associated with raising money or going bankrupt. in addition they also assume that disclosure of all information is credible, thus there is no information asymmetry (hamada, 1969 and hatfield et.al, 1994).  static trade-off theory kraus and litzenberger (1973) opined that the static trade-off theory assumes that firm‟s trade-off the benefits and costs of debt and equity financing and find an optimal capital structure after accounting for market imperfections such as taxes, bankruptcy costs and agency costs. the theory states that there is a benefit to financing with debt, specifically the tax benefit. however there is also a cost of financing with debt, namely the indirect bankruptcy costs and the more direct financial distress costs of debt. this is thus the trade-off that all firms, whom are maximizing value, should focus on when choosing the amount of debt and equity needed to finance their operations. needless to say, there is a maximum point where the marginal benefit of further increases in debt declines as debt increases, whereas the marginal cost increases.  pecking order theory the pecking order theory of capital structure as introduced by donaldson (1961) is among the most influential theories of corporate leverage. it goes contrary to the idea of firms having a unique combination of debt and equity finance, which minimize their cost of capital. the theory suggests that when a firm is looking for ways to finance its long-term investments, it has a well-defined order of preference with respect to the sources of finance it uses. it states that a firm‟s first preference should be the utilization of internal funds (retain earnings), followed by debt and then external equity. he argues that the more profitable the firms become, the lesser they borrow because they would have sufficient internal finance to undertake their investment projects. he further argues that it is when the internal finance is inadequate that a firm should source for external finance and most preferably bank borrowings or corporate bonds. and after exhausting both internal and bank borrowing and corporate bonds, the final and least preferred source of finance is to issue new equity capital.  agency theory and capital structure choice most of the hypotheses formulated in the following are based on the economic principal-agent theory, where a positive effect stems from the amelioration of the shareholder-management conflict, by disciplining the management. analogously, an aggravation of the conflict results in a negative effect. the principal-agent theory is part of the new institutional economics, which developed as extension of the neoclassicism. it abandons the assumption of a complete market by allowing informational asymmetries and transaction costs to cause prime equity, leveraged structure and corporate earnings in nigeria: a comparative analysis lucky anyike lucky and akobundu charles echewodo 30 incomplete contracts. this leads to a methodological individualism, which does no longer consider institutions as profit maximizing collectives, but as a “nexus for a complex set of explicit and implicit contracts of individuals. consequently, the economic focus on markets is shifted to man-made institutions, incorporating the individual into economic theory. the agency theory in particular analyzes the contractual conflicts arising from informational asymmetry. an agency relation is based on an explicit or implicit contract between the agent and the principal delegating decision power to the agent. due to the contract, the agent‟s actions influence the utility of both contractual partners. however, the agent behaves opportunistically maximizing his profit regardless of the principal‟s interests. in the case of incomplete informational structures for the benefit of the agent, the principal cannot prevent those harming actions. consequently, an agency conflict requires two conditions, a conflict of interest through diverging utility functions of the principal and the agent as well as the existence of informational asymmetries.  empirical review anyamaobi and lucky (2017) examined corporate characteristics and value creation of quoted manufacturing firms in nigeria. the objective was to examine if factors within the control of management affects corporate value. cross sectional data was sourced from financial statement of twenty quoted manufacturing firms. market value was proxy for dependent variable while asset tangibility, return on investment, risk, liquidity, firm size, debt equity ratio, dividend payout ratio, retention ratio, corporate governance, management efficiency and cost of capital was proxy for independent variables. after cross examination of the validity of the pooled effect, fixed effect and the random effect, the study accepts the fixed effect model. findings reveal that assets tangibility, return on investment, debt equity ratio, retention ratio, management efficiency and cost of capital have positive effect on the market value of the quoted manufacturing firms while risk, liquidity, firm size and corporate governance have negative effect on the market value. akani and lucky (2016) examined the effects of capital structure on shareholders‟ value of quoted nigerian commercial banks from 1981 – 2014. the model built for the study proxy return on investment (roi), equity price (eqp) and earnings per share (eps) as dependent variables measuring shareholder‟s value as the function of percentage in debt capital to total capital (dc/tc), percentage of equity capital to total capital (eqc/tc), percentage of preference share capital to total capital (psc/tc as independent variables). the econometrics techniques of ordinary least square (ols), augmented dickey fuller (adf), unit root test, johansen co-integration test and pair wise granger causality test were employed in the empirical analysis. r2, regression coefficient, probability value, t-statistics and f-statistics were used to determine the extent to which the independent variables can affect the dependent variable. the co-integration result shows that long run equilibrium exists among the variables except preference share capital. in model i, the study found that all the independent variables have positive relationship with the return on investment. model ii found that equity capital and preference share capital have positive effects but insignificant relationship with return on investment while short term borrowings and preference share capital have positive relationship and debt capital have negative relationship with equity price of quoted commercial banks. model iii found that equity capital has positive relationship while debt and preference share capital have negative relationship with earnings per share. from the regression summary, model i can explain 79% variation on return on investment, model ii explains 48% variation on equity prices while model iii explains only 11% variation on earnings per share. from the above, the study concludes that capital structure has more effect on return on investment and equity prices than earnings per share. prime equity, leveraged structure and corporate earnings in nigeria: a comparative analysis lucky anyike lucky and akobundu charles echewodo 31 al – shimmiri, (2003) showed a relationship between firms‟ performance and datedness level, as well as a direct relationship between internal investor ownership and financing decisions for these industries, furthermore financing decision has a close correlation with firms size and profitability. kareem (2006) the study revealed a significant relationship between weighted average capital cost and stocks market returns, where external (debt) financing has more affection stocks market return compared to internal (owned) financing. salah, (2007) study revealed that ranking companies according to their assets growth rate in the previous year was not superior to ranking them according to profit / price percentage and distribution to price ratio. in general the study revealed that distribution to price ratio was superior to the other strategies. abdel ghani, (2008) study attempted to find out the effect of financing decision on institutions' financial performance and tax and financing cost effects. the study showed that positive financial performance is contingent on the institution ability in forming the optimal mix of financial structure. tian and zeitun (2007) investigated the effect of capital structure on corporate performance of corporations in jordan using a panel data approach of 167 companies for a period of 15 years from1989 to 2003. the study used roa, roe, ebit and tax plus depreciation to total assets (prof) as proxies for accounting performance measurements and tobin‟s q, market value of equity to book value of equity (mbvr), price/earnings (p/e) ratio and market value of equity plus book value of liabilities divided by book value of equity (mbve) as market performance measures. the results show that a firm‟s capital structure has significant negative effect on the firms‟ performance using both the accounting and market measurements. mwangi, makau and kosimbei (2014) investigated the relationship between capital structure and performance of 42 non-financial companies listed in the nairobi securities exchange, kenya. the study used secondary panel data contained in the annual reports and financial statements of the sampled listed firms, and employs panel data models (random effects) and feasible generalized least square (fgls). the results show that financial leverage is statistically negatively related to performance measured by return on assets and return on equity. maina and kondongo (2013) in an attempt to validate modigliani and miller (1963) theory in kenya, examined the effects of debt-equity ratio on performance of firms listed at the nairobi securities exchange for the period 20022011. the study finds that firms listed at nairobi securities exchange rely more on short term debt. the result also reveals that significant negative relationship exists between debt-equity ratio and all measures of performance. the result also provides support for mm theory that capital structure is relevant in determining the performance of a firm. ebaid (2009) carried out a study to investigate the impact of choice of capital structure on the performance of firms in egypt. roe, roa, and gross profit margin were used as proxies for performance while financial leverage was measured using short-term debt to asset ratio, long-term debt to asset ratio, and total debt to total assets. multiple regression technique was applied to determine the relationship between the leverage and performance. the result reveals that leverage has no impact on a firm‟s performance. maroko (2014) examined the influence of capital structure on organizational financial performance of firms listed in nairobi securities exchange. the study employs secondary data sourced from financial statements of sampled listed firms‟ which were selected using stratified random sampling technique. multiple regression technique was used to explain the relationship between financial leverage, cost of equity, debt interest and organization financial performance. the findings showed that positive relationship exist between financial leverage, cost of equity, debt interest and organization financial performance. gweji and karanja (2014) investigated the effect of financial leverage on firm performance of deposit taking savings and credit co-operative in kenya. the study utilized secondary data sourced from financial statements of 40 savings and credit co-operative societies (sccos) sampled for the study from 2000 to 2012. descriptive and analytical prime equity, leveraged structure and corporate earnings in nigeria: a comparative analysis lucky anyike lucky and akobundu charles echewodo 32 designs were both adopted. the result show perfect positive correlation between financial leverage surrogated by debt-equity ratio with roe and profit after tax at 99% confidence interval, and a weak positive correlation between debt-equity ratio with roa and income growth. innocent, ikechukwu and nnagbogu (2014) conduct a study on the effect of financial leverage on financial performance: evidence from quoted pharmaceutical companies in nigeria for the period 20012012. financial leverage surrogated by debt ratio (dr), debt-equity ratio (der), and interest coverage ratio (icr) was used as independent variable while financial performance proxy by roa was used as dependent variable. the study utilized secondary data sourced from financial statements of 3 pharmaceutical companies quoted on the nigerian stock exchange. descriptive statistics, pearson correlation and multiple regressions were employed in order to determine the relationship between financial leverage variables and performance measure variable identified in the study. the results showed that debt ratio and debt-equity ratio have negative relationship with roa, while interest coverage ratio has a positive relationship with roa in nigerian pharmaceutical industry. the study also reveals that on aggregate financial leverage variables have no significant effect on financial performance of sampled companies. thaddeus and chigbu (2012) studied the effect of financial leverage on bank performance using 6 banks from nigeria. the study utilized secondary data from nigerian stock exchange fact book and the financial statements of the sampled banks. debt-equity and coverage ratios were taken as proxies for financial leverage and these constitute the independent variables, while earning per share (eps) representing performance is the dependent variable. multiple regression technique was used to establish whether relationship exist between financial leverage and performance of sampled banks. the findings show mixed results. while some banks report positive relationship between leverage and performance, others revealed negative relationship between leverage and performance. laurent (2002) studied the relationship between leverage and corporate performance in france, germany and italy. the multiple regression technique was adopted on the study variables (leverage, tangibility, short-term liabilities, inventory and size). the study found mixed evidence depending on the country; while negative relationship was reported in italy, the relationship between leverage and corporate performance is significantly positive in france and germany. laurent (2008) investigates the relationship between leverage and corporate performance of medium-sized firms from seven european countries using a maximum likelihood procedure to estimate a stochastic cost frontier and the parameters of an equation relating cost inefficiency to leverage simultaneously. findings indicate that relationship between leverage and corporate performance varies across countries which tend to support the influence of institutional factors on this relationship. akhtar et al. (2012) examined the relationship between financial leverage and financial performance using the fuel and energy sector of pakistan. the findings showed a positive relationship between financial leverage and financial performance of the companies thus confirming that the firms having higher profitability may improve their performance by having high levels of financial leverage. in addition, the study provides evidence that the players of the fuel and energy in pakistan can improve their financial performance by employing the financial leverage and can arrive at a sustainable future growth by making vital decisions about the choice of their optimal capital structure. akinmulegun (2012) tests the effect of financial leverage on selected indicators of corporate performance earnings per share (eps), net assets per share (naps) in nigeria using the vector auto-regression (var) technique. findings indicated that leverage shocks exert significantly on corporate performance. also, the measures of corporate performance (eps, naps) depends more on feedback shock and less on leverage shock but the leverage shocks on eps indirectly affect naps of firms as the bulk of the shock on naps was received from eps of the firms. akande (2013) apply the ordinary least square (ols) prime equity, leveraged structure and corporate earnings in nigeria: a comparative analysis lucky anyike lucky and akobundu charles echewodo 33 regression analysis on panel data collected from financial statements of 10 nigerian firms over 20 years from 19912010. roa, roe, eps and dps on one hand and dc (total debts to capital employed) on the other hand, were surrogated for firm‟s performance and debt financing respectively. the findings show that positive relationships exist between dc and roe, eps and dps, while negative relationship exists between dc and roa. the study therefore, concluded that financial leverage will considerably impact on firm performance. onaolapo and kajola (2010) investigate the effect of capital structure on financial performance of companies listed on the nigerian stock exchange. this study was performed using 30 non-financial companies in 15 industry sectors in a 7-year period from 2001 to 2007. the results showed that financial leverage (debt ratio) has a significant negative effect on financial performance (roa and roe) of sampled firms. fosu (2013) examined the relationship between capital structure and firm performance using panel data approach comprising 257 south african firms for the period 19982009. the results uncover evidence that provides support for significant positive relationship between financial leverage and firm performance. david and olorunfemi (2010) study the impact of capital structure on corporate performance of firms in the nigerian petroleum industry for the period 19992005. the study employed panel data analysis using fixed-effect estimation, random-effect estimation and maximum likelihood estimation. the study found that there is positive relationship between leverage and firm performance surrogated by earning per share and dividend per share. chinaemerem and anthony (2012) carry out a study on the impact of capital structure on financial performance of nigerian firms using a sample of 30 non-financial quoted companies on the nigerian stock exchange (nse) for a period of 7 years from 20042010. panel data for the selected companies were generated and analyzed using ordinary least squares (ols) method of estimation. the results show that a firm‟s capital structure surrogated by debt ratio has a significantly negative relationship with the firm‟s financial performance surrogated by roa and roe. this finding provides evidence in support of agency cost theory. al-taani (2013) investigate the relationship between capital structure and firm‟s performance across 45 jordanian manufacturing companies listed on amman stock exchange for a period of 5 years from 20052009. the study variables include: return on assets (roa), profit margin (pm), short term debt to total assets (stdta), long term debt to total assets (ltdta) and total debt equity (tde). roa and pm constitute the dependent variables and were used as proxies for performance, while stdta, ltdta and tde represent the independent variables and were taken as proxies for capital structure. two multiple regressions in which roa was regressed on stdta, ltdta and tde, and pm was also regressed on the same explanatory variables were used. the results show that there is no significant relationship between stdta and roa, tde and roa, stdta and pm, ltdta and pm, and tde and pm. however, the result also reveals that significant negative relationship exists between ltdta and roa. leon (2013) investigate the impact of capital structure on financial performance of 30 listed manufacturing firms in sri lanka for a period of 5 years from 20082012. the study used correlation and regression techniques in the analysis of data using statistical package for social sciences (spss). the results show on one hand, that there was a significant negative relationship between leverage and return on equity, and on the other hand, there was no significant relationship between leverage and return on assets. rehman (2013) investigate the relationship between financial leverage and financial performance of 35 listed sugar companies in pakistan for a period of 6 years from 20062011. correlation technique was used by taking financial leverage proxy by debt-equity ratio as independent variable and financial performance surrogated by eps, npm, roa, roe and sales growth as dependent variables. the results show that financial leverage has a positive relationship with roa and sales growth, and negative relationship with eps, npm and roe. yoon and prime equity, leveraged structure and corporate earnings in nigeria: a comparative analysis lucky anyike lucky and akobundu charles echewodo 34 jang (2005) conduct a study on the relationship between return on equity (roe), financial leverage and size of 62 restaurant firms in us for the period 1998 to 2003 using ordinary least squares (ols) regressions. results show that high leveraged firms were less risky in both market and accounting-based performance measures. the results also found support for positive relationship between financial leverage and both measures of performance. additionally, the results further indicate that firm size had a more dominant effect on roe than debt, and regardless of the level of leverage, smaller firms were relatively more risky than larger firms. ujah and brusa (2013) examine the effects of financial leverage and cash flow volatility on earnings management using 559 us firms for a period of 20 years from 1990 to 2009. the findings provide evidence that suggest that financial leverage and cash flow has an impact on the extent to which firm‟s manage their earnings. the results also revealed that earnings management of firms varies according to industry they belong. 3. research methodology descriptive and longitudinal design was employed with a view to making statistical inferences on factors that determine corporate value of quoted manufacturing firms. a sampling frame of 15 quoted deposit money banks was selected using random sampling techniques. the required cross-sectional data were sourced from annual reports of the banks and stock exchange factbook from 2011-2016. 3.1 analytical framework and empirical model specification this analysis is carried out within a panel data estimation framework. the preference of this estimation method is not only because it enables a cross-sectional time series analysis which usually makes provision for broader set of data points, but also because of its ability to control for heterogeneity and endogencity issues. hence panel data estimation allows for the control of individual-specific effects usually unobservable which may be correlated with other explanatory variables included in the specification of the relationship between dependent and explanatory variables (hausman and taylor, 1981). the basic framework for panel data regression takes the form: 1 in the equation above, the heterogeneity or individual effect is iz which may represent a constant term and a set of observable and unobservable variables. when the individual effect iz , contains only a constant term, ols estimation provides a consistent and efficient estimates of the underlying parameters (kyereboah-coleman, 2007); hut if iz , is un-observable and correlated with itx , then emerges the need to use other estimation method because ols will give rise to biased and inconsistent estimates. similarly for endogeneity issues, it is generally assumed that the explanatory variables located on the right hand side of the regression equation are statistically independent of the disturbance it such that the disturbance term it is assumed to be uncorrelated with columns of‟ the parameters itx and itz as stated in equation (1), and has zero mean and constant variance  2 (hausman and taylor, 198). if this assumption is violated, itiitit zxy   ,, prime equity, leveraged structure and corporate earnings in nigeria: a comparative analysis lucky anyike lucky and akobundu charles echewodo 35 then ols estimation will yield biased estimates of the underlying parameters of  (mayston, 2002).hence, endogeneitv problems arise when the explanatory variables are correlated with the disturbance term it (mayston, 2002; hausman and taylor, 1981). in order to circumvent these problems, panel estimation techniques of fixed and random effects will be adopted in this study, in addition to the traditional pooled regression estimation. decisions will be made between the fixed and random effect models using the hausman specification test. the panel model for the study is specified base on the modified model of akeem, edwin, kiyanjui and kayode (2014). itiitit zxy   '' 2 where: y = dependent variable d = independent variable o = intercept i = coefficient of the explanatory variable e = error term i = cross-sectional variable t = time series variable model specification eps = f(ev) 3 pooled regression specification 4 fixed effect model specification itiiitit idumevoeps 111 9 1    5 random effect model specificatiosn ititit ievoeps 111   6 eps = f(der) 7 pooled regression specification itideroeps 11   8 fixed effect model specification itiiitit idumderoeps 111 9 1    9 itievoeps 11   prime equity, leveraged structure and corporate earnings in nigeria: a comparative analysis lucky anyike lucky and akobundu charles echewodo 36 random effect model specification ititit ideroeps 111   10 where eps = earnings per share ev = equity value der = debt equity ratio 1 = stochastic or disturbance/error term. t = time dimension of the variables α 0 = constant or intercept. 4. result and discussion 4.1 presentation of results: equity value and earnings per share table 1: testing the significance of the models test: redundant chi –sq stat df prob cross-section f 11.724740 (9,38) 0.0000 cross-section chi-square 66.445337 9 0.0000 test: hausman chi –sq stat df prob cross-section random 0.718309 2 0.6983 source: extract from e-view windows 9.0 for the purpose of decision making regarding choice between fixed and random effects hausman test was run. the decision of choice between fixed and random effect is based on p-value of hausman test. if the p value of the hausman test is less than 0.05, we have a preference to use a fixed effects model. on the other hand if the p-value of the hausman test is more than 0.05, we select to use fixed effects. in this study, the p-value of hausman test was more than 0.05 so fixed effects are used. for comparison purpose pooled regression results are also given. value may be shown as f-value. “f” value of the table signifies whether the overall model is statistically significant or not. the more the f value or wald chi square test value the more the model is considered not significant. from the above, the study adopts the fixed effect model for the three models above. table 2 equity value and earnings per share of deposit money pooled effect fixed effect random effect variable coefficient t-stat p-value coefficient t-stat p-value coefficient t-stat p-value ev 8.76e-05 1.138244 0.2608 7.44e-05 0.922395 0.3621 6.72e-05 0.909176 0.3679 β0 1.823160 4.100633 0.0002 2.338500 4.486475 0.0001 2.101920 3.594702 0.0008 r-squared 0.026857 1.138244 0.2608 0.742344 0.022935 adj r2 0.014554 0.667760 -0.018642 f-statistic 0.648548 9.953051 0.551628 f-prob 0.527419 0.000000 0.579695 dw 0.861168 1.888071 1.723324 source: extract from e-view windows 9.0 variable notation effect earnings per share eps dependent variable debt equity ratio der + equity value ev + prime equity, leveraged structure and corporate earnings in nigeria: a comparative analysis lucky anyike lucky and akobundu charles echewodo 37 result from the table above, proved evidence on the relationship between equity value and earnings per share of commercial banks. it is evidence that the independent variable which is equity value can explain 74.2% and 66.7% variation on the dependent variable which is earnings per share. the remaining 26.8% and 34.3% can be explained by exogenous variables not captured in the model. the f-statistics and the f-probability justifies that the model is significant as the probability value of 0.000000 is less than the critical value of 0.05. however, the t statistics and probability prove that equity value is statistically not significant in explain variation in earnings per share. the β coefficient indicates that number of equity value have positive impact on earnings per share. table 3: testing the significance of the models: model ii test: redundant chi –sq stat df prob cross-section f 7.181278 (9,38) 0.0000 cross-section chi-square 49.677937 9 0.0000 test: hausman chi –sq stat df prob cross-section random 0.718309 2 0.6983 source: extract from e-view windows 9.0 the table above explains the validity of the models based on decision making regarding choice between fixed and random effects hausman test was run. the decision of choice between fixed and random effect is based on p-value of hausman test. if the p value of the hausman test is less than 0.05, we have a preference to use a fixed effects model. on the other hand if the p-value of the hausman test is more than 0.05, we select to use fixed effects. in this study, the p-value of hausman test was more than 0.05 so fixed effects are used. for comparison purpose pooled regression results are also given. value may be shown as f-value. “f” value of the table signifies whether the overall model is statistically significant or not. the more the f value or wald chi square test value the more the model is considered not significant. from the above, the study adopts the fixed effect model for the three models above. table 4: debt equity ratio and earnings per share of deposit money banks pooled effect fixed effect random effect variable coefficient t-stat p-value coefficient t-stat p-value coefficient t-stat p-value der 0.004785 1.811650 0.0764 0.003873 0.473331 0.6387 0.005289 1.230725 0.2245 β0 15.99420 3.964834 0.0002 20.74188 1.471534 0.1494 16.55345 2.152492 0.0365 r-squared 0.161578 0.689569 0.045787 adj r 2 0.125901 0.599707 0.005183 f-statistic 4.528854 7.673669 1.127636 f-prob 0.015899 0.000001 0.332400 dw 0.826584 1.309553 1.227520 source: extract from e-view windows 9.0 adopting the fixed effect model as validated by the hausman test, we interpret the relationship between the dependent and the independent variables. the effect of debt equity ratio on earnings per share of deposit money banks proves that the independent variable can explain 68.9% and 59.9% variation. this is justified by the significance of the f-statistics and the f-probability as it proves that the model is significant. the t-statistics and the probability prove that the variable is statistically not significant which implies that variation on the independent variable have no significant impact on the dependent variable. the β coefficient proves that debt equity ratio have positive impact on the dependent variable which is earnings per share of the quoted deposit money banks. the durbin watson statistics of 1.309553 is less that 1.50 but greater than 1.00, this proves that there is absence of serial auto correlation among the variables within the time series. prime equity, leveraged structure and corporate earnings in nigeria: a comparative analysis lucky anyike lucky and akobundu charles echewodo 38 5. findings of the research findings from the panel data result shows that equity value and debt equity ratio of the quoted deposit money banks have positive relationship with earnings per share. this finding confirms the a-priori expectation of the results and validates the relevance theory of gordon against the irrelevance theory of miller and modigliani. the findings confirm the empirical findings of anyamaobi and lucky (2017) that debt equity ratio, retention ratio, management efficiency and cost of capital have positive effect on the market value of the quoted manufacturing firms, akani and lucky (2016) equity capital have positive relationship with the return on investment and the findings of rehman (2013) that financial leverage has a positive relationship with roa and sales growth, and negative relationship with eps, npm and roe. in comparing the effect on the variables, equity value can explain 74.2% and 66.7% variation on the dependent variable which is earnings per share while debt equity ratio explains 68.9% and 59.9% variation. from the above we conclude that have more effect on earnings per share of the quoted deposit money banks. 6. conclusion and recommendation this study intends to examine the relationship between equity value, debt equity ratio and earnings per share of quoted deposit money banks in nigeria. the study found that 74.2% and 66.7% variation on earnings per share can be traced to equity value. the β coefficient indicates that of equity value has positive impact on earnings per share, while debt equity ratio on of deposit money banks can explain 68.9% and 59.9% variation. the β coefficient proves that debt equity ratio have positive impact on earnings per share of the quoted deposit money banks. from the above results we conclude that equity value have greater impact on earnings per share than debt equity ratio. we recommend that management should ensure optimal capital structure of the quoted deposit money banks. rerferences . anyamaobi, c., & lucky, a. l., (2017). corporate characteristics and value creation: a panel data evidence of nigeria quoted manufacturing firms. world journal of finance and investment research, 2(1), 31-49. akande, j.o. 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copyright for this article is retained by the author(s), with first publication rights granted to the journal. contents australian finance & banking review vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business 66 turkey-africa relations: opportunities and challenges yusuf ibrahim gamawa1 1bauchi state university, gadau, nigeria correspondence: bauchi state university, gadau, nigeria.email: yusufgamawa@ymail.com received: october 07, 2017 accepted: october 10, 2017 online published: october 15, 2017 abstract the continent of africa had been of great importance to many countries outside africa, since the begining of the slave trade when european slave merchants invaded africa and estalished the trade in human beings, which forced the migration of millions of africans to america and the west indies. since then, the continent had faced a continued influx of people for different purposes even after the abolution of slavery. the main attraction to africa, has been its human and rich mineral resources scattered across the continent, as well as its vast market for foreign goods.this paper examines the relations between the republic of turkey and countries of the african continent, especially in 1990’s and 2000’s when the republic of turkey began to develop interest to have relation with african countries. there were so many reasons that motivated and ignited the interest of turkey in africa all of a sudden, and this paper tried to present such reasons and also show how the republic of turkey tried to establish such relations, the manner in which turkey went about realising this objective of having deep economic, political and social relation with countries of the african continent. the paper also tried to look at relations between ottoman turkey and africa, though as a background to the present relations.it tried also to see what challenges there are in this relations, in the future or now, and also tried as much as possible to look at some policy suggestions regarding this symbiotic relations between turkey and african countries. the paper argues that pan africanism poses a challenge to relations between turkey and africa and offered some policy suggestions that will deepen integration between turkey and african states. keywords: turkey, africa, opportunities, challenges, pan-africanism. 1. introduction the continent of africa has witnessed influx of different people from different countries in the past several centuries, and from continents outside africa.the continious interest in the continent may have come about as a result of several reasons. the continent first saw the coming of the europeans around the 15th century, during the transatlantic slave trade era, during which millions of africans were forcefully taken to europe and america to work in the plantation in the west indies and which resulted today in the emergence african american population in the us and other countries of europe. after the abolution of the slave trade and the subsequent introduction of legitimate trade, the europeans resumed their presence in africa, first through christian missionary activities and the european civilising mission in africa, which had been dismissed by many scholars as a camouflage of the imperial profit and motive, and this was followed by the introduction of trade and commerce with the african people. turkey-africa relations: opportunities and challenges yusuf ibrahim gamawa 67 another significant event in the history of african relations with countries and peoples outside the african continent was the berlin conference, it was at the conference that the continent of africa was partitioned between some european countries as colonies. this marked the begining of colonial conquest in africa and the eventual establishment of colonial rule and the native authority system of administration throughout africa by the british, french, portuguese, germans as well as the italian, who divided the continent among themselves. the entire continent was subjugated into adopting the new system with brute force, with it, the entire framework of the traditional african societies and kingdoms was broken down, and a new imperial system of production was thus introduced. new methods of agriculture, and new crops were introduced with free african labour, an export oriented economy was established throughout africa and was meant to feed the newly founded industries across europe, which had emerged as a result of the industrial revolution ,particularly in england in the 1700’s, with raw materials. this remained the basis of the relation between the western colonial powers and africa throughout the period of colonial rule, and what followed afterwards, was the gradual assimilation of the continent into the global imperialistic capitalist economy even after african nations had attained independence, the newly emerging states found themselves trapped in this system of global economic exploitation, and the never ending natural destiny of dependence on western industrialised nations for technical assistance and socio-economic development of the continent which has remained illussive despite all the resources and pottentials present in the continent. the relationship till today has remained one that is marked by in commensurate development of the continent and the exploitation of its resources and peoples. although many argued that the africans had benefited from their relation with the western nations, which the claim is sees in the modernisation of their societies and interms of western education, as against the primitive african societies that existed in the past. but many scholars also argued that it was european incursion into africa that interrupted the indegenous natural process of the development of the africans in all areas and even education, as a result of the contact with islam on the continent, which had led to the founding of islamic madrasas in many parts of africa. this indegenous development process of africa is evidenced by archaelogical findings in the form of the existence of traditional technology, in traditional medicines, development of tools, and of iron ore local industries in africa even in those times, is sufficient to support the natural development process of africa. the exploitation of africa continued till today, though in a very sophisticated and unpredictable manner, that today it is difficult to point out a particular way in which the continent is being sabotaged, but yet neo-colonialism is a phenomenum that is real in africa, and it means the continious manipulation and mangement of the african economy and its growth by the western industrialised capitalist nations and their cronnies, in league with indegenous africans who act as intermedairies to this exploitative and manipulative system that is against the growth and development of africa. the western nations succeeded in creating a very vast market for the goods produced in their various countries, and thus turned africa into a dumping ground for their manufactured goods and created an array services in the banking, insurance and communication sectors of the african economy which remains squarely under their control, and which has continued to attract other lesser developed nations to participate in the same venture. the result is that today africa has become a market not only to the western industrialised nations,but to many emerging economies in asia and other parts of the world such as china, japan, india, south korea, indonesia, malaysia, singapore, israel and a host of others. and many other countries are seeking opportunities to come into africa, and still strategising on how to tap from the vast resources of the continent. so today if turkey is turkey-africa relations: opportunities and challenges yusuf ibrahim gamawa 68 reaching out to africa, it is because of the huge market pottential as well as for its enormous mineral resources, including its oil and gas deposits that is scattered across the continent. turkey’s africa policy is designed to deepen relations for maximum benefit, and it remains an opportunity for turkey to prove to africa the genuineness of its africa policy, different from what the continent had experienced in the past with other countries. 2. background of turkey-african relations there are basically two distinct turkish conception of africa, based on geographical divide; north africa and subsaharan africa. however both conceptions have been shaped in the turkish psyche by historical developments, mainly from ottoman times, and this has been articulated in classical turkish foreign policy towards the continent. turkey has had strong relations with north africa, as it was part of the ottoman state, dating back to the 15th and 16th centuries, while relations with sub-saharan africa is more of a recent development, begining from the 19th century. north africa and their close historical connection with the ottomans, which created an understanding that it is part of the turkish periphery, is also seen to be part of the broader middle east, which turkey feels very close. whereas subsaharan africa is usually viewed as far away land, full of problem, hunger, diseases and civil wars. turkey’s relations with africa can be divided into three periods, the first can be regarded as the ottoman empire relations with africa until the establishment of the republic in 1923, and between 1923 and 1998, when relations between turkey and africa seemed to be non existent, and after 1998, when turkey’s interest in africa became gradually revived, and in 2005, turkey declared the year as the year of africa. in 2008, the first ever turkey africa cooperation summit was held in istanbul, with the participation of representatives from 51 african countries. the old ottoman empire had relations with north african states like egypt, libya, tunisia, and algeria, which were partially or totally included in the ottoman state, states such as sudan, eriteria, ethiopia, djibouti, somalia, niger and chad inclusive. the ottoman’s were also part of the balance of power system, having friendship and a defence pact with the kanem borno empire, which prevailed in todays northern nigeria, niger and chad. the defense pact was signed in 1575, during the reign of sultan murad iii, consequent upon which military equipment and defense officials were despatched to kanem borno to help the mai’s army in accordance with the defense pact between the two great empires. in 1849, the ottoman sent a special envoy to lagos when its first mosque was built. confering on the community leader the title of “bey”, whose family is stil playing an important role in social and political life of nigeria, the shitta bey family are still well known in nigeria. the ottoman state had diplomatic representation in south africa since 1861. the ottomans sent imams to muslims of the cape of good hope in 1863, upon the request of the community, resulting into a strong relationship between the muslims of the cape of good hope and the ottoman state. after the founding of the turkish republic in 1923, turkeyafrica relations witnessed tremendous decline, arising mainly from internal problems from within turkey, and also within the african continent, which at this time was going through the painful period of colonial rule. although during the cold war period, turkey began to consider its relations to africa with importance, and began establishing links with the north african countries economically and politically. however, these relations were shaped by the conditions of the cold war bipolarity, and thus were at odds with the historical public sentiment toward the continent. at ghana’s independence in 1957, turkey recognised ghana and opened an embassy, and subsequently recognised all newly independent states, established diplomatic relations and opened embassies in many of them. however this was not seen as a long turkey-africa relations: opportunities and challenges yusuf ibrahim gamawa 69 term significant relationship and turkey was not involved in african affairs. m.ozkan (2010). 3. turkey and africa today in 1998, the republic of turkey came up with its “opening up to africa policy”. and in 2005, turkey declared the year as “the year of africa”, which was followed by the turkey-africa cooperation summit held in istanbul in 2008, which proved to be a very important stage in the history of turkey – africa relations. at this summit “the istanbul declaration on turkeyafrica partnership: cooperation and solidarity for a common future” and “ cooperation framework for turkeyafrica partnership” were unanimously accepted. 49 countries participated in the summit, including 6 presidents, 5 vice presidents, 7 prime ministers, 12 ministers, 11 international and regional organisation representatives including the african union. these african countries at the end of the summit declared the republic of turkey as a “strategic partner”. since then, turkey attached great importance to the development of bilateral relations and rapproachment with african countries, and the establishment of new diplomatic missions in african countries which it hitherto had no relations with, paying mutual visits, having contacts at all levels, creating cooperation mechanisms and signing necessary agreements. turkey increased the number of its missions and opened new embassies in tanzania, ivory coast, in 2009. cameroun, mali, ghana, uganda, angola and madagascar in 2010. while zambia, mozambique, mauritania, zimbabwe, somali, gambia and south sudan were opened in 2011. niger, namibia, burkinna fasso and gabon were opened in 2012, bringing turkey’s mission in the african continent to a total of 31. in recent years, reciprocal high level visits have been made between turkey and african countries. turkey’s president, abdullah gul paid visits to the african countries of ghana and gabon in 2011, kenya and tanzania in 2009, congo, cameroun and nigeria in 2010. prime minister erdogan of turkey paid visits to ethiopia, sudan, somali and south africa. and on the other hand african heads of states and presidents of chad, somali, nigeria, tanzania, uganda, zambia, mauritania and djibouti also visited the republic of turkey as a result of turkey’s first step in establishing relations with countries of the african continent. orsam report (2012)the first overseas visit of 2013 by turkey’s prime minister recep tayyip erdogan was to the three francophone west african countries of gabon, niger, and senegal. he was accompanied by 250 businessmen. gabon has oil resources, while niger is an important source of uranium. turkey has begun building its first nuclear reactor and plans to build two more by 2023. according to ali engin oba, a former turkish ambassador in africa: "certain groups in africa are already showing efforts to break away from the influence of the big colonizing powers. those groups are aware of france's economic problems and could guess that france would not continue its former level of interest in africa because of those problems. so, they are trying to develop relations with powers that may want to develop economic, social and cultural solidarity with them, including turkey. courcy’s brief (2013) 4.turkey’s new foregn policy and the states in africa in discussing turkish foreign policy, geographical location must be taken into consideration. turkey is located at the crossroad of three different continents of asia, europe and africa, and has as a result interacted with people from the three different continents. africa is a huge continent with rich natural resources, vast agricultural arable land and human resources. there are 53 countries in africa, and about 12% of the world population live on the african continent. production of good and services in the continent is 3.3% in2010, africa’s population is expected to be more than 1 billion, which would represent 15.3% of the world’s population. the economic growth rates in africa in 1996 and 1998 had consecutively been 5.9% and 3.4% representing more than that of the world’s average growth rates. africa is very rich in natural resources, and turkey-africa relations: opportunities and challenges yusuf ibrahim gamawa 70 there is need for the natural resources of the country to be exploited, it is a huge market for traders and contractors to do bussiness and invest. many countries have strong foothold in africa, turkey is not among these countries. africa is considered to be the continent of the future as indicated by the statistical figures above.s.z.karaca (2000) the americans, british, germans, french, italians, chinese, japanese and many others are going to africa, and there is strong competition for control and influence among these powers. but despite all these, there is still a place for turkey in most african countries to establish new contacts and coperations as well as to further and develop all kinds of existing bilateral relationships for mutual interest. turkey with its big pottential for development has many things to share with friendly foreign nations. the model and level of turkey’s industrial development is more suitable for the economic development of african countries. statistics on trade between turkey and african states shows that turkey’s exports to africa rose from 748 million dollars in 1990, to 1.8 billion in 1998, while its import rose from 800 million usd in 1990, to 1.7 billion usd in 1998. exports increased by 115%, and imports by 104%. s.z.karaca (2000)the african import market has a volume of 134 billion in 1998, and turkey’s share was only 1.8 billion or 1.4%, in order for turkey to make sustained efforts to improve its trade transaction and economic cooperation, turkey must have more developed relations with african countries. and as a result, to achieve this, the government of turkey decided to implement a new plicy of openning up to africa, to overcome the difficulty and obstacles in promoting its relations with africa, and an action plan was prepared to implement this policy. s.z.karaca (2000) 4.1 political measures of the action plan  realisation of high level visits from african countries.  establishment of political consultation mechanisms at foreign ministry level.  intensification of contacts with african countries within international organisations such as un, oic etc.  mutual interparliamentary visits.  realisation of humanitarian assistance.  contribution to various technical assistance programmes. 4.2 economic measures of the action plan  conclusion of agreements of trade, technical, economic and scientific cooperations, prevention of double taxation and mutual promotion and protection of investments inorder to completethe legal frame work of economic and trade relations.  invitation of technical ministers form africa such as ministers of trade, industry, health, agriculture and education  invitation of experts to short term training programmes in technical fields.  organisation of technical assistance for african countries.  realisation of turkey’s membership in the african development bank as a non regional member.  realisation of turkey’s membership as share holder in the african exports and imports bank.  exchange of visits by bussinessmen.  creation of a joint bussiness council or chambers of commerce by encouraging contact among private sectors. orsam report (2012) turkey-africa relations: opportunities and challenges yusuf ibrahim gamawa 71 5.turkey’s soft power approach towards africa the institutionalisation of the initiative of the new policy of opening up to africa, remained a big challenge and yet important on for turkey, as it will determine the failure or success of the policy. this is despite the fact that the action plan had identified step and areas upon which the plan could be implemented. and it was generally thought that mere encouragement of bussinessmen and international contractors to do bussiness and invest is not enough, turkey’s approach considers the importance of cooperation in education and cultural fields, if openning up to africa policy is to succeed. turkey’s soft power approach considered three major areas of cooperation, and this includes; education, trade/ economic realations and humanitarian aid as the most important. 6. cooperation in education and cultural fields in the past two decades there has been influx of african students to turkey into turkish universities to study through the initiative of the turkish government, sometimes under the bilateral education agreement with some african countries, through the inter-govermental exchange of scholarship. these students have been required to acquire speaking; reading and writing competence in turkish language, to enable them integrate and function fully within the turkish society. turkish nile university was founded in nigeria, while turkish international colleges were strategically established in important african countries such as kenya, senegal and nigeria. 7. humanitarian aid aid remained one of the strongest elements in turkey’s overall policy towards africa in particular. the turkish aid agency, the cooperation and development administration of turkey, operates in africa, with offices located in addis ababa, khartoum and dakar, as part of turkey’s development aid to africa. turkey has promised to provide technical assistance to african countries through such cooperation, and is striving to open affiliate offices in other african countries to cement cooperation with africa on certain priorities which the turkish president abdullah gul identified as “health, education, agriculture, enviroment, infrastructure and capacity building”. through some international organisations like the un world food programme, turkey has donated 7.5 million dollars to various african countries. in 2008, 3.5 million usd was donated for a similar purpose through the world food programme. when turkey hosted the least developing countries summitat istanbul in 2007, it committed 20 million usd for the development aid of these countries which numbered 49, and 33 of which are african countries. 8. trade and economic relations according to the turkish confederation of bussinessmen and industrialists, through its turkey –africa bussiness meetings, african countries are mostly demanding furniture, apparels, durable house products, home textiles, processed food, packaging devices, iron-steel, electrical devices and construction materials. the turkish bussinessmen confederation has always underlined the importance of investing in drilling and construction industries. the current nature of relations is not exhaustive and the cooperation is yet to be fully explored. turkey’s import from africa includes oil, raw material, gold and minerals. turkey’s approach to developing trade with african nations differ from those of other countries seeking opportunity on the continent, and whose overiding interests are africa’s oil resources. africans seem to be interested in turkey’s agricultural expertise, and turkey carries non of the free market capitalist baggages aimed at securing the best deal at any cost by those countries, a policy which africans so resent, by concentrating on lower profile development issues such as agriculture. turkey’s iniatiatives arguably carry the promise of effecting genuine change in the lives of the masses of africans. turkey’s trade volume with africa was only 5.4 billion usd in 2003; since then it steadily increased more than two fold exceeding 12 billion usd in 2007. turkey’s total global trade volume turkey-africa relations: opportunities and challenges yusuf ibrahim gamawa 72 stands at about 300 billion, turkey aims to make its trade volume with africa to about 30 billion by 2010. contracting services provided by turkish firms alone in those african countries have reached a total of 18 billion usd. the amount of direct turkish investment in african countries exceeds 500 million usd, and is expected to increase in the future. turkey became a non regional member of the of the african development bank, and african export/ import bank such membership is expected to open new areas of cooperation which could assist contracting firms from turkey undertaking large infrastructural projects on the continent.m.ozkan (2010) the tables below shows the volume of trade between turkey and some selected african countries between 1997 and year 2008. exports million us$ 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 south africa 72 73 59 72 78 88 122 191 316 599 654 1239 nigeria 17 24 38 46 70 63 67 81 99 84 134 281 sudan 26 35 34 38 55 60 64 89 146 217 180 235 kenya 10 13 12 8 11 9 14 18 51 86 99 234 angola 3 3 3 5 9 12 14 23 27 45 48 183 total 128 148 146 146 223 232 281 402 639 1031 1115 2172 imports million us$ 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 south africa 184 153 124 172 346 212 336 1007 1260 1794 173 1503 nigeria 17 3 5 133 229 182 224 195 235 381 494 522 sudan 10 12 8 5 2 13 8 13 8 8 9 10 kenya 4 2 2 3 4 3 2 2 2 4 13 13 angola 1 1 1 1 1 1 1 1 10 27 1 17 total 216 171 140 314 582 411 571 1218 1515 2214 2690 2065 source: turkish pm, the undersecretary of customs website, http://www.gumruk.gov.tr (14.12.2009);totals may not add up, due to rounding. 9. activities of turkısh state agencies and ngo’s in africa since the adoption of the policy of opening up to africa, many state agencies started to play a very active role in many african countries. the turkish international cooperation agency (tika) and the dırectorate for religious affairs of turkey(diyanet) remain important and their activities reflect the level of turkish involvement in africa. part of the turkish policy is humanitarian aid to africa, and this is despite the fact that turkey is itself a recipient country. the humanitarian aid policy became more viable after tika as an organisation had been formed in 1992. it is the governments offical development cooperation agency, and had opened development offices in twenty one african countries with a view to offering assistance through technical projects and humanitarian activities. it was initially established to help transition of the states in central asia, caucasus and the balkans, but from 2003 it turned into a more global aid agency and expanded its areas of turkey-africa relations: opportunities and challenges yusuf ibrahim gamawa 73 operation paralel to turkey’s diversfying foreign engagements. between 1992-2002, tika had conducted 2,346 projects and activities throughout africa, its total number of projects increased in 2003 to 2,780 mostly in africa and the middle east. m.ozkan & b.akgun (2010) it sponsored projects in africa which rose from 45 in 2005, to 150 in 2006. tika’s projects and activities in africa were designed to serve long term purposes, which include among other things, the development of social infrastructure, cultural cooperation and communication, economic infrastructure and to a less degree, provide support in urgent humanitarian crises. in accordance with this, tika initiated an agricultural development programme to be implemented in 13 african countries. m.ozkan & b. akgun (2010) turkey’s policy towards africa has gone far beyond political and economic areas, diyanet had only recently invited religious leaders from african countries for consultation and cooperation. the religious leaders meeting of african continent muslim countries and societies was held in istanbul in 2006, with the participation of representatives from 21 african countries. the turkish conception of of islamic understanding is compatible with democratic values and provides an alternative to that fostered in africa, by a number of muslim states. in the past, the civil society played a limited role in turkish foreign policy, but for the first time, the civil society is playing an active role, promoting a policy backed by the state, especially of the relations between turkey and africa, than any field of turkey’s foreign policy. organisations such as the the confederation of turkich bussineesmen and industrialists of turkey (tukson) , and the internatıonal aid organisation and the foundation for human rights and humanitarian relief (ihh) , have not only paved the way for turkeyafrica relations, but have indeed accelerated the process for the development of such relations. these organisations raised raised awareness about africa, both for its economic opportunities, and for political and humanitarian engagements. the traditional turkish image of africa, as one of hunger, poverty and disease became reformulated and articulated by turkish civil society organisations present in africa. m.ozkan &b.akgun (2010) tukson had recently organised five international trade summits to boost turkey’s economic relations with 3 african countries. these summits brought africa to the attention of turkey, and created an avenue for both sides to intereact and explore possible forms of cooperation. tukson represent 11, 500 bussinessmen throughout turkey. today 134 tukson members have significant investments in africa, members have opened turkish schools totalling 60 in 30 different countries across africa. turkey’s flourishing new bussinessmen also provide funds for humanitarian works and relief efforts undertaken by turkish ngo’s in the continent. the ihh, a turkısh humanitarian organisation, operating in about 112 countries including africa, became a pioneer charity ngo in turkish society, creating awareness of human suffering to the larger turkish society, encouraging charity to poor african communities. the ihh also ientified hiv/aids as an area in health, as well as blindness due to cataract, and made donations and conducted operations to victims. it launched a programme to cure blindness caused by cataract, and had carried out operation to about 35,000 people across the african continent. m.ozkan & b.akgun (2010) turkey’s african opening was found beneficial by africans and as a result many african countries are considering turkey as a partner despite mixed feelings. 10. turkey–africa relations and challenges of pan africanism pan-africanism is perceived as the need to mobilise peoples of africa against racism, it is a political philosophy behind current efforts to achieve political unity in africa through the instrumentality of the african union. s.okhonmina (2008) the transatlantic slave trade was a significant landmark in the annals of african history, it turkey-africa relations: opportunities and challenges yusuf ibrahim gamawa 74 produced forced migration of millions of africans as slave labourers to europe, the americas and the carribean. the carry over of africans to the new world has kept alive their african roots. it is believed that this was what laid the foundations of pan-africanism and black nationalism in the united states and west indies. it began with the founding of the african association in london in 1897 and the pan-african conference 3 years later. dr w.e.b dubois had between 1900 and 1945 organised and participated in a series of pan-african congresses in the us and europe, which brought togather peoples of african descent from americas, africa and europe. in the 1920’s, marcus garvey also began to promote african nationalism with the motto “africa for africans”. the africans after independence shared the common experience of subjugation to slavery, colonialism and imperialism, this experience and memories of marginalisation and socio-cultural and racial affinities developed a collective solidaritya sense of oneness and concioussness of belonging to africa. this became a powerful mobilising and unifying force for african peoples and societies rooted in pan-africanism. p.g adogamhe (2008) the pan-african movement was essentially a protest of black people against their exploitation, against racism, and for the dignity and upliftment of the black people. a. bujra (2002) african states are systems of patronage, their external relation is designed to generate funds that oil this network of patronage in the form organisations and transnational bodies and ngo’s. most africans identify and place more emphasis on the external causes of their crises, even though colonialism created the basic conditions of these crises, of dependent economies, divided people, undeveloped human resources etc. the international commodity market and the financial system and the dominant role of western and transnational corporations are formidable barriers which weaken african countries, and africa finds it difficult to economically develop, create nation states and develop their human and natural resources. institutions and donor countries intervened in african economies to help africans overcome their crises, but such interventions simply perpetuated the unequal and exploitative relationship between africa and the global system. a.bujra (2002) pan-africanism has in the 21st century, transformed into a mobilising ideology and a development blue print. the idea of a united states of africa was first muted in a pan-african meeting in cairo in 1960, by dr kwame nkrumah. the african union was therefore a product of many years of pan africanist aspirations. it is the expression of pan africanism as a structural working frame work for action in regard to the multiple issues facing the african people. s.okhonmina (2008) the former president of nigeria, at the au meeting said “the goal of the african union must be the unity of all africans and people of african descent in the diaspora. such unity is merely a means to the ultimate goal, which is the development and transformation of our people and continent.” s.okhonmina (2008) 11. turkey-africa relations and mutual benefits  turkey’s experience as a medium-sized country that has both modernized politically and developed economically is one that resonates with many african countries and, in point of fact, is probably a more reasonable model for their emulation than china or india, both of which are unique in their global standing.  african states stand to benefit from turkey’s new interest in their continent insofar as the addition of yet another suitor enables them to diversify their sources of foreign investments and other partnerships so as to not become too dependent on the united states, france, china, britain, india, or any other single outside actor. the key, however, is that africa’s leaders must be prepared to approach this opportunity strategically – a feat that many have not always been particularly adept at if history is any indication.  not only does africa clearly provides a new market for the growing turkish economy, but, at a time when turkey-africa relations: opportunities and challenges yusuf ibrahim gamawa 75 the turkey’s eventual integration into the european union is very much in doubt, the nations of the continent provide ankara with a much-needed avenue to diversify its diplomatic portfolio. the recalibration of turkey’s foreign policy as well as the country’s bolder forays into global politics – as witnessed by the recent attempt by prime minister erdoğan and brazilian president luiz inácio lula da silva to broker a deal in the standoff over iran’s nuclear ambitions – will have considerable impact on the international system in general and regional balance of power in particular, to say nothing of the nato alliance which turkey has been a member of since 1952.  turkey’s reentry into africa does not come without its complications. in november, 2012 for example, controversy was stirred when sudan’s international criminal court-indicted ruler, umar hassan al-bashir, was invited to an economic and commercial cooperation conference being held in istanbul. faced with blistering global criticism for planning to host the subject of an international arrest warrant charging him with five counts of crimes against humanity and two counts of war crimes for his role in the humanitarian disaster in darfur, turkish officials prevailed upon the sudanese ruler to cancel his visit less than twenty-four hours before he was due to arrive. nonetheless the episode underscored the potential that american and european governments might find their ability to impose reform agendas and other leverage in africa diminished as a result the arrival of the turks on the scene.  while the turkish example of secularism in politics in the modern period is probably one worth considering for africans who have been faced with religiously-stoked communal tensions such as those in nigeria over the imposition of islamic law in northern states, the growing concern that the akp government in ankara may be chipping away at that very secularism is reason enough for a cautionary attitude concerning turkey’s increasing engagement on the continent. the geostrategic implications of a middle eastern power with an islamist orientation acquiring a greater stake in africa cannot be ignored. j.p.pham (2010) 12. policy recommendation  turkey should have different ways of considering and dealing with africa and african issues. africa is not one or united. a divisive and regional approach is necessary for success. in addition to north africa, one can see four regions: south, central, west and east africa. each has different characteristics, mostly due to varying ethnic-religious compositions and colonial backgrounds.  a gateway country-based approach is also needed. in each region, there are some key countries; if possible, turkey should pay special attention in developing bilateral relations with them without sidelining others. tentatively, south africa, ethiopia, nigeria, the democratic republic of congo, and senegal can be named. the more turkey strengthens its relations with these key countries, the more it can feel secure in africa.  the different colonial backgrounds of the countries in africa play quite decisive roles in african politics. british, francophone, portuguese and spanish africa are all different in their ways of thinking and their approach to issues. this fact should be taken seriously while developing relations with  each country.  there exist two types of leadership in africa. one is represented by the older generation, those who led the processes of decolonization and independence for their countries. the other is the second generation: turkey-africa relations: opportunities and challenges yusuf ibrahim gamawa 76 leaders after the independence. while the former are more or less inward-looking and suspicious of foreign help, the latter are for the most part forward-looking and willing to work with outside powers. intensifying relations with the latter group could make turkey’s relations with africa more meaningful and long-lasting.  turkey has recently developed its relations with africa at the institutional level, involving itself in such bodies as the african union and africa development bank. ankara should continue to strengthen ties with the existing institutions in africa (nepad, igad, sadc, ecowas, etc.) as part of its long-term policy. turkey should envision and implement the turkey-africa cooperation summit as a venue for forging a common, institutionalized form of turkish-african relations.  turkey’s africa policy should have global dynamics. following on, and if possible participating in, such inter-continental groupings as the india-brazil-south africa dialogue forum (ibsa dialogue forum) is the best way to link relations with africa and the world. this linkage could expand boundaries of relations between turkey and africa by adding an international dimension. the most persistent issue looming between turkey and africa is the lack of information about the other on both sides. three strategies could be implemented: a. promote support for sending exchange students to studying in each other’s countries and learn about each other. this will bridge the societal and informational gap. b. exchange academics between universities. especially in southern africa, there is a lack of experts on the middle east and turkey, and the same is true for turkey about africa. creating an african chair for african professors in one (or more) of the turkish universities that offer education in english would be a good start. this might lead to an institute in the long run. c. support cooperation between african and turkish think-tanks. organizing joint conferences and publications about both sides on turkish and african issues would create awareness, equally important on both sides.m.ozkan (2008) there is need to introduce the study of languages in both turkey and africa, some universities, even as regional centres, would be encouraged to offer courses in turkish language. and on their part, turkish universities could also embark on a program of introducing the major african lingua franca, such as kiswahili and hausa. all the three languages are important in enhancing cooperation, not only as languages of wider communication in their respective regions, but also as carriers of their cultural heritage. africans are unaware that the turkish language is spoken over large swathe of central asia, with speakers numbering 141 million, equally turks are unaware that there are over 100 million speaker of kiswahili, spread over east and central africa, and well over 200 million speakers of hausa mainly in nigeria, spread all over west africa. m.bakari (2005) 13. conclusion relations between turkey and africa started from ottoman times, even though these relation was interrupted by certain changes, both in turkey and in africa as well. the end of world war i saw the dissentegration of the ottoman empire and the emergence of modern turkey. in africa, it was the berlin conference that saw to the collapse of many empires that hitherto had relations with the ottomans such as kanem. relations remained limited between modern turkey and the emerging new african states until the 1990’s and the 2000’s. it was during this period that turkey realised the importance of the african continent to its economy and politics and carefully designed and came up with an active policy framework to deepen its relation with africa, which seems turkey-africa relations: opportunities and challenges yusuf ibrahim gamawa 77 to be way on course. but this relation is certainly not without some challenges and in this regard the pan africanist aspiration of the africans remains a big challenge to turkey and any foreign country on the african continent now and in the future, despite the flexible global integration policy within the continent. pan-africanism is at the heart of africa’s economic and political trasformation programme for over a century, and all major economic and political development programmes in africa are centred on pan-african ideals. a typical example of the misunderstanding in the perception and relations between turkey and africa can be seen in the recent activities of turkish bussinessmen in eastern nigeria where the sided and identified with ipob, an ethnic separatist group. the actions of the bussinessmen led to the call for the closure of turkish mission in nigeria, the embassy had to clearly disaasiciate itself from the activities of its citizens in nigeria but even then it had already created bad feeling among nigerians about turkey. references abdallah bujra. (2002) .africa: from oau to the african union, african centre for research and training in social development. ama biney.(2008)the legacy of kwame nkrumah in retrospect,journal of pan african studies, vol-2, no-3. aremu johnson olaosebikan, nkrumah and the proposed african common government, african journal of political science and international relations, 2011. country profile:turkey,(2008) library of congress, federal research division, www.icweb2.loc.gov, . courcy’s intelligence brief, (2013) a startegic early warning, 9 january. mehmet ozkan, (2008) turkey’s rising role in africa, turkish quaterly policy, vol 9, no 4. mehmet ozkan, (2008) turkey discovers africa: implication of prospects, seta foundation of political, economic and social research. mehmet ozkan, birul akgun, (2010) turkey’s opening to africa, cambidge journal. mohammed bakari,(2005)turkey-african social and cultural relations: reflections. paul g. adogamhe, (2008) pan africanism revisited; vısıon and reality of african unity and development, african review of integration, vol 2. peter pham , (2010) turkey’s return to africa, family security matters, www.familysecuritymatters.org pre-colonial sub-saharan african civilisation and evolution with wild life. www.libserv.5.tut.ac.za salih zeki karaca, (2006) foreign policy, a quaterly of foreign institute. samuel g. amoo,(1992)the oau and african conflicts: past succeses, present paralysis and future perspective, institute of conflict analysis and resolution george mason university. sean kay(2007). globalisation, power and security, ohio weslayan university, delware, usa. stephen okhonmina, (2008) african union: pan africanist aspirations and challenges of african unity, university of benin. orsam, (2012)turkey in africa: the implementation of the action plan and evaluation after fifteen years, no124. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. copyright © cc-by-nc 2019, cribfb | afbr australian finance & banking review; vol. 3, no. 2; 2019 research paper issn 2576-1196 e-issn 2576-120x published by centre for research on islamic banking & finance and business, usa 16 dividend policy and value of quoted firms in nigeria: a test of miller and modigliani irrelevant hypothesis lucky anyike lucky department of banking and finance rivers state university, port harcourt, nigeria e-mail: lucky.anyike@yahoo.com uzokwe grace onyinyechi department of banking and finance rivers state university, port harcourt, nigeria abstract this study tested miller and modigliani dividend policy irrelevant hypothesis in nigeria. the objective was to examine the validity of the irrelevant hypothesis. tobins q measure of market value was modeled as the function of dividend payout ratio, retention ratio, dividend per share and dividend yield. 20 firms were selected on the basis of availability of information necessary for conducting the study and the readiness of annual financial reports for the period of 10 years from 2008-2017. cross sectional data was sourced from financial statement and annual reports of the firms. based on the analysis of fixed and random effect results, random effect was used. the study revealed that 75 percent variation on the market value can be predicted by variation on independent variables in the regression model. the beta coefficient of the variables found that all the independent variables have positive and significant relationship with market value of the selected quoted firms. the study concludes that dividend policy is relevant as oppose to the irrelevant hypothesis of miller and modigliani. its therefore recommend that managers should manage their dividend policies effectively since it is relevant and has significant effect on market value and optimal dividend policy which implies policy of trade-off between dividend payout and retain earnings should be well managed and investors should have adequate knowledge of dividend policy of quoted firms that will correspond with their investment objectives of avoid conflict in dividend policy. keywords: dividend policy, value of quoted firms, nigeria, miller and modigliani, irrelevant hypothesis. 1. introduction dividend policy behavior assumes that the change in dividend can be explained by previous period dividends and target dividends, which can be expressed as a fraction of the profit for that period. lintner (1956) first published a basic model of this type of dividend policy. his model is based on a series of interviews with executives about their dividend policy. according to lintner's interviews, it was clear that the corporate dividend policy was not uniform. the complexity of dividend distribution has left many questions unanswered about the impact of dividends on company value and the conditions under which such effects are felt. in a company, management determines the amount or portion of profit to be distributed as dividends through its dividend policy and the amount withheld for internal operations. the post-tax profits of corporate organizations contribute to the source of dividend payments (toby, 2014). there are some areas of finance that have intrigued researchers. one is corporate dividend behavior. along with its capital structure, dividend policy has been one of the first areas of corporate finance to be analyzed in a rigorous model, and has since been one of the most studied topics in modern finance. dividend policy evolved with prescribed legal framework. in nigeria part xiii, section 379 – 385 spell out the legal framework for dividend policy. "section 381 of cama stated that company shall not declare or pay dividend if there are reasonable ground for believing the company would be unable to meet up with or pay its liabilities as they become due. section 382 states that companies cannot pay dividend out of capital since it will lead to depletion of capital which is against the legal principle that the capital must maintain. the decision to pay dividend is important for firms as it may affect the financial structure and stock price of the firm" pandy (2005). the classical opinion has been that dividend policy influenced share prices and market prices of an equity represents the present value of estimated cash dividend hat can be generated by the equity gordon (1959), while miller and modiliglani (1961) opined that stock prices is function of the earnings of the firm dividend policy is irrelevant. the controversies on the effect of dividend policy on stock price have deepened on the stock market of the emerging economics such as nigeria. the theoretical assumptions underlying the different argument are based on the stock market of the developed countries which is more efficient compared with the nigerian capital market which is characterized with insider dealings and undefined regime. the market cannot be considered deregulated or regulated to determine the effect of dividend policy on stock prices. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 17 dividend policy remains one of the most controversial issues in corporate finance. the relationship between dividend policy and stock prices of listed firms has remained very sharp point of departure among scholars in corporate finance. the intensity of the debate has remained largely unresolved in both the global and local arena. empirical evidence has shown that dividend policy is relevant as formulated by gordon. the age-long debate on the relationship between dividend policy and stock prices or put differently, the value of the firm rages on and dates back to walter and the “bird in hand” theory in 1928, gordon (1960) and the dividend relevance hypotheses and miller and modigliani (1962) and the dividend irrelevance hypotheses which have presented a serious challenge to academia and practitioners alike. prior academic literatures have attempted to provide answers to questions on dividend policy and harmonize the theories but mystery still shrouds the dividend policy decisions of corporate organizations in general and more on the emerging financial market like nigeria. the "complexity of dividend issues has left many questions unanswered regarding the relationship between dividend policy and the stock price of the firms and the direction of impact. the opinion of this study based on theory is that dividend policy is relevant." 2. literature review theoretical models of dividend policy walter’s model of dividend policy "walter argues that choosing a dividend policy almost always affects the value of the company. his model, one of the earliest theoretical works, demonstrates the importance of the relationship between the rate of return on a company and the cost of capital, k, in determining a dividend policy that would increase shareholder wealth." the model is specified as follows: k kdivepsr k div p /)(   1 where: p = market price per share div = dividend per share eps = earnings per share r = firm’s rate of return (average) k = firm’s cost of capital or capitalization rate k kdivepskrdiv p /)()/(   2 earning, investment and new financing e1 1* e2 r (rs) k = ka = km r = k r < k r > k r et ur n an d c os ts ( % ) copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 18 relevance of dividend policy the relevance of dividend policy based on future dividend uncertainty gordon (1962) proposed valuation models that associate the market value of shares with dividend policy. gordon examined the stock market price and the dividend policy and suggested that the dividend policy should be appropriate. the miller-modigliani (mm) hypothesis according to "miller and modigliani (mm), under a perfect market situation, the dividend policy of a firm is irrelevant, as it does not affect the value of the firm. iceshare lossorgainscapitaldividends r pr )(  3 0 011 )( p ppdiv r n  4 0 011 )( p ppdiv r n  5 )1()1( 1111 0 k pdiv r pdiv p       6 )1( )( 11 k pdivn npv n o    7 if the firm sells m number of new shares at time 1 at a price of p1, value of the firm at time 0 will be: )1( )( 1111 0 k mpmppdivn np    8 )1( 1111 k mpmpnpndiv    9 )1( )( 111 k mppmnndiv    10 mm’s valuation equation (18) allows for the issue of new shares, unlike walter’s and gordon’s models." 1111111 1)(1 ndivxndivxmp  11 "by substituting equation (19) into equation (18), mm showed that the value of the firm is unaffected by its dividend policy, thus: )1( )( 111 0 k mppmnndiv np    12 )1( )()( 11111 k ndivxipmnndiv    13 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 19 )1( )( 1111 k xippmn    14 the price of the share at the end of the current fiscal year is determined as follows: )1( 11 0 k pdiv p    15 101 )1( divkpp  16 the value of p1 when dividend is not paid is: p1 = rs 100(1.10) – 0 = rs 110 18 the value of p1 when dividend is paid is: p1 = rs 100(1.10) rs5= rs105" 19 gordon’s model myron gordon is developing a very popular model that is directly related to the market value of the company's dividend policy.          00 1 00 00 2 21 0 )1()1( ... )1()1( t t t k div k div k div k div p 20                  n t t t n n k gdiv k gdiv k gdiv k gdiv k gdiv p 1 3 3 2 2 0 )1( )1( )1( )1( ... )1( )1( )1( )1( )1( )1( 21 from equation (4): gk div p   1 0 22 from equation 5: brk beps p    )1(1 0 23 "the equation above explicitly shows the relationship of expected earnings per share, eps1, dividend policy as reflected by retention ration, β, internal profitability, r, and the all-equity firm’s cost of capital, k, in the determination of the value of the share. equation (6) is particularly useful for studying the effects of dividend policy on the value of the share. brk bra brk beps p       )1()1(1 0 24 (since eps = ra, a = assets per share) if r = k, then a r ra k eps brk bra brk beps p        )1()1(1 0 25 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 20 )0(0  b r ra p 26 if r< k then r/k < 1 and from equation (9) it follows that p0 is smaller than the firm’s investment per share in assets, a. it can be shown that if the value of b increases, the value of the share continuously falls. the bird-in-the-hand argument according to gordon’s model, dividend policy is irrelevant where r = k, when all other assumptions are held valid. but when the simplifying assumptions are modified to conform more closely to reality, gordon concludes that dividend policy does affect the value of a share even when r = k."             n t t t t t n n n k div k div k div k div k div p 1 3 3 3 2 2 2 1 1 0 )1()1( ... )1()1()1( 27              n t t t t t n n n b k div k gdiv k gdiv k gdiv p 1 0 2 2 2 0 1 1 1 0 )1()1( )1( ... )1( )1( )1( )1( 28 brk epsb gk gdiv k gdiv k gdiv k gdiv p tt n n n n b                )1()1( )1( )1( ... )1( )1( )1( )1( 10 2 2 2 0 1 1 0 29 empirical review abor (2008) "discovered that there is a correlation between corporate earnings and dividend payments and concluded that both past and current earnings influence corporate dividend policy." musa (2009) "examined the impact of dividend policy on stock prices of 53 listed companies in nigeria using a similar multiple regression model that used five variables: current earnings, previous dividends, cash flow, investments and assets. the study found that five metric variables affect the dividend policy of nigerian companies." abubakhar (2012) "investigated the effect of dividend payout ratios on stock prices of non-listed nigerian companies in a probabilistic sample of twenty-six companies using multiple regression models. the study found a statistically significant relationship between dividend payments and stock prices. he also discovered that the size of unlisted companies significantly explains nigerian stock prices. both the payment of dividends and the size of companies had a positive effect on stock prices . however, the results of the study do not provide sufficient evidence of the insignificance of dividends, as the study did not take into account the impact of profits and dividends on the model." adesina, uwuigbe, uwuigbe, asiriuwa and oriabe (2017) investigated the impact of dividend policy on nigeria stock price valuation. during ten years (2006-2016), four of the twenty-two banks were analyzed. in their study, they noted that earnings per share have a strong impact on stock prices, while dividend yields and a percentage of stock price stability have a significant impact. however, it was concluded that nigerian companies need to consider other companies' dividend policies in order to increase their profits and future performance. adesola and okwong (2009) "tested the relevance of nigeria stock price dividend theories with cross-sectional data from twenty-seven companies over the period 1996-2006. they commented that they have discovered the positive and significant impact of dividends on stock prices. the a-sample activities of nigerian companies indirectly call into question the empirical validity of the dividend insignificance." khalid, chijioke and aruoriwo (2010) "investigated the effect of dividend yield and dividend payout ratio on changes in uk listed companies' stock prices. a regression model was used to analyze the data, which showed a positive relationship between dividend yield and stock prices and showed that dividend payouts are statistically insignificant." amadasun (2011) tried to test the hypothesis that dividend would not increase the price of nigerian equities using first bank (nig) plc as a case study. the study used a regression model that included share price per share as the explanatory variables, earnings per share, return on capital employed, retained earnings, and price-earnings ratio. the results of the study showed a statistically insignificant regression coefficient for both per-share dividend and earnings per share." black and scholes (1974) "examined the impact of dividend policy on the value of companies listed on the new york stock exchange. the capital asset pricing model (capm) was used to analyze five-year secondary data (equity and dividend prices) of 25 listed companies. they concluded that corporate dividend policy had no effect on the price of their shares. on the contrary, aharony and swary (1980) used a model of naïve expectations of quarterly dividends and earnings and found that stock prices responded to increases in dividend payments while overlapping with earnings announcements. his finding confirms copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 21 the dividend relevance proposal." budagaga's (2017) study supported the theory of dividend significance after examining the impact of dividend payments on forty-four companies on the istanbul stock exchange over a nine-year period. chirima (2015) examined the effect of dividend payment on stock prices of zimbabwe listed service companies over a five-year period (2008-2012). data were analyzed by chi-square and regression model. the result showed a statistically significant correlation between dividend announcements and stock prices. dada, malomo, and ojediran (2015) "support this claim and conclude that investors prefer paying dividends rather than future growth. iqbal, ahmed and shafi (2014) analyzed the effect of the dividend bubble on the stock prices of thirty karachi listed companies over a period of eleven years. the time series of the thirty listed companies were analyzed using a linear regression model. the result showed that earnings per share, return on equity, holding ratio are positively correlated with share price, while dividend yield and price to earnings ratio have a negative impact on price. activities. however, the study concluded that the dividend has a strong positive impact on kse stock prices and therefore supports the theory of dividend significance." there are failures in the study resulting from the use of thirty company time series over eleven years. the data obtained by the panel would have been more accurate in reaching its conclusions and conclusions. de angelo and de angelo (2006) also found that "dividend content is very relevant. adefila, oladipo and adeoti (2004) studied the impact of dividend policy on the market price of equities. the methodology used was the correlation of the dividend of the pearson product to the stock price of fifteen companies. the study found that the correlation coefficients are statistically insignificant for most of the fifteen companies. he also found that the correlation between net profit (earnings) and stock prices is statistically insignificant for all the companies analyzed." edward (2014), studying the effect of dividends on the stock price of some selected companies on the ghanaian stock exchange between 2005 and 2009, using descriptive analyzes of primary data, found that dividends are highly correlated actions in ghana. ojeme, mamidu, and ojo (2015) examined "the impact of dividend policy on the assets of shareholders of listed banks in nigeria before and after the global financial crash over a four-year period (2007-2010). secondary data of the 21 banks quoted during this period were obtained from the nse and from the company's published annual reports. the study concluded that the positive correlation between the average market value of shares and the dividends paid by banks indicates that the payment of dividends is appropriate and that the amount paid affects the market value of banks' shares. this is not valid evidence of the dividend insignificance theory. he used only correlation analysis and four-year data. it did not consider the effect of earnings on stock prices according to the theory of dividend insignificance." egbeonu, edori and edori (2016) "examined the weighted average of five year financial summary data of twelve listed firms from the various sectors of the nigerian stock exchange in order to measure the impact of dividend policy on firms’ value. the study reported that internal rate of return is inversely insignificant, dividend per share is inversely significant while earning per share is positively significant to share price." iftikhar, raja and sehran (2017) "established that dividend has a positive statistical influence on stock price after they investigated the impact of dividend policy on five state banks of the karachi stock exchange (kse) for a period often years. they concluded that dividend is relevant in kse. budagaga’s (2017) study supported the dividend relevance theory after observing the effect of dividend payment on forty-four firms’ value of istanbul stock exchange for duration of nine years." kanwal (2012) "studied the impact of dividend on stock prices of chemical and pharmaceutical companies in pakistan stock exchange for the period 2001-2010. secondary data of five variables: stock dividend, earning per share (eps), profit after tax (pat), retention ratio and return on equity (roe) were analyzed with panel regression model. the study showed that stock dividend, (eps), (pat) are statistically significant. in other words, these variables have positive impact on stock prices while retention ratio and return on equity have negative impact on share prices. the study asserted that changes in dividend policy provide statistically significant information content which can be used to make predictions about future stock prices, and that the findings support the informational content of dividend hypothesis. these findings’ assertions indicate that changes in dividend payment merely create occasions for changes in stock prices and that there was no sufficient evidence to suggest that stock price changes are caused by dividend payments." khan (2012) "sampled of twenty-nine companies to explicate the effect of dividend on stock prices for the period 2001 to 2010. the study used fixed and random effect model on panel data and found that dividend policy has positive effect on share prices after controlling for the effects of earnings per share, profit after tax, and return on equity and concluded that dividend irrelevance theory is not applicable in case of pakistan stock market." oduwole (2015) "assessed and compared the predicted power of nigerian earnings and dividends over fourteen years (2001-2014). quarterly data on the used variable (eps, interim and final dividends) were obtained from the nigerian stock market. the study used portfolio valuation dimensions (sharpe index and jensen alpha) to assess portfolio return on investment based on dividend and return, respectively. the results show that the weighted market capitalization portfolio, which has the highest quarterly dividend yield, outperformed the market and retained policy, while a similar return-based portfolio did not outperform the market. this is not proof of the theory of dividend insignificance." ordu, enekwe and anyanwaokoro (2014) conducted a study to determine the effect of dividend payments on nigerian market share prices. during the twelve years (2000-2011), the activities of seventeen listed companies were considered. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 22 using the regular least squares technique, a positive effect was found between the market share price (mps) and the stock dividend (dps). this result supports the theory of the importance of dividends, confirming that an increase in dividends causes a rise in the market share price. oyinlola and ajeigbe (2014) studied the "impact of dividend policy on stock prices of listed companies in nigeria using 22 companies listed on the nigerian stock exchange over the period 2009-2013. he used a panel regression model to determine the effect of per-share dividends and retained earnings on the share price. the results show that both dividends and retained earnings have a significant impact on the share price. in addition, granger causality tests show that a dividend on a granger stock causes the stock price." ozuomba, okaro, and okoye (2013) "conducted a study to assess the impact of dividend policy on nigerian stateowned shareholders' wealth over a twelve-year period (2000-2011). secondary data from ten randomly selected two hundred and sixteen public limited companies were analyzed by multiple regression models using dividend per share variable, while earnings per share (eps) and share price per share (mps) are independent variables. the results showed that eight companies' eps and mps are statistically significant and affect the wealth of listed companies, while the two companies are not statistically significant with a 10% confidence interval." the research model is wrong because, to reflect the wealth of stockholders, the dividend used the stock variable as a dependent variable instead of the stock price as shown in the target. eps, dps, and mps data are not synchronized. there is also little data to use, as instead of using panel data, he performed analyzes on individual companies' time series and his findings are therefore very misleading. rabindra (2012) studied the impact of dividends on nepal stock exchange financial and financial institution stock prices by analyzing secondary data using a regression model. the price of shares is a dependent variable, while the explanatory variables are dividend per share (dps), retained earnings per share, lagged earnings per share and lagged market price per share. the result showed that the dividend affects stock prices more than retained earnings. toby (2014) investigated the importance of dividend policy in determining the price of nigerian stock market stock by selecting a couple of dozen shares between 2005 and 2012, along with a dividend regression analysis and timing of retained earnings in individual companies. the study found that there is no significant relationship between the change in dividend policy and the change in share price. this surprising result differs from the existing literature on the effect of dividends on stock prices. the result was company-by-company analysis (separate regression analysis for each sample), rather than using panel or crosssectional data to reflect differences between firms. in addition, the study did not include a well-defined income variable in its analysis. instead, he used retained earnings. the results showed that dividend and retained earnings were not a statistically significant determinant of share price. the study's conclusion that the results are in line with previous research stating that dividend policy is irrelevant in determining the value of the company is therefore highly dubious and invalid. udobi, iyiegbuniwe & ezike (2018) "examined the impact of current dividend on market shares prices of the nigerian stock exchange. the study analyzed fifteen years (15) secondary data of nse quoted firms with mediation analysis. stock prices is the dependent variable while current dividend, current earnings, asset-growth, sales-growth, insider-shareholding and leverage are the independent variables. the findings indicate that current dividend has a direct (unique) effect on share price, and at the same time has indirect effect on share price through current earnings. it concluded that current earnings partially mediate the effect of current dividend on quoted nigerian firms." miller and modigliani (1961) (m&m) investigate various issues related to dividend policy. they use a multi-period valuation formula to show the irrelevance of dividend policy to shareholders in a tax-free world. in addition, m&m derives a company valuation equation that explicitly includes the existence of favorable opportunities for the company (those that earn more than the cost of capital) and associates this growth component with the definition of a commonly used growth company. m&m also analyzes the relationship between stock price increases, earnings per share and dividends paid per share on the amount of foreign and domestic financing, and uses the term "informative content" of dividends. in addition, m&m claims the concept of customer effect, stating that each company tends to attract a group of shareholders who prefer a particular corporate payment relationship. lee (1976) "reviewed the results obtained by gordon (1959) and friend and pucket (1964) and made his crosssectional model general, using the general functional form specification (gff) for the model. gff models use data to specify a specific ecological way of studying the impact of dividend yields on stock prices. lee shows that the choice of the particular ecological form used in the statistical test significantly influences the empirical results. it submits that the most accurate functional form of dividend effects tests is the non-linear form and that the effect of the dividend on stock returns does not differ significantly from the effect of retained earnings." black (1976) "examines the contradiction between dividend convenience theories and the actual practices of companies and investors. theories developed by m&m use restrictive assumptions (such as tax assumptions or different tax treatment of dividends and capital gains) to analytically show that dividend policy is irrelevant. however, almost all successful companies pay dividends and dividend policy is a major concern for financial executives." black (1976) continues to study the theoretically derived effects of taxes (in which companies pay little or no dividends) and the informative effects of dividends (an unexpected increase in dividends may indicate a better future for the copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 23 company). then, consider the different dividend preferences of shareholders over bondholders (bondholders should prefer lower dividends because dividend payments mean they are less active in the event of bankruptcy). but black goes on to say that shareholders may also prefer lower dividends if they result in lower investment fund raising costs. irrational beliefs can play a role in claiming an investor's dividend. in addition, the impact of owning high or low dividend shares on the portfolio is simply unknown. black concludes that we cannot currently prove that dividends matter, but we are not prepared to say that dividends are certainly not important. joannos and filippas (1997) evaluated the dividend payment practices of 34 companies listed on the athens stock exchange between 1972 and 1988 and found that the greek corporate dividend policy reflected the lintner model. current income dividend formation is the most related and important variable that causes a change in dividends, while corporate dividend payment practices and policies are also affected by the previous dividend payment period. vasiliou and eriotis (2003) tested the lintner model and concluded that there are two ways to improve the original model; for the purpose of treating the change in the dividend between t and t-1 as dependent variables and independent variables, the change in the profit of the enterprise between t and t-1 and the change in the dividend between t-1 shall be taken into account. 1 yacht -2. vasiliou and eriotis believe that greek companies adopt dividend payments, ie dividend payments, depending on the long-term goal of dividend payments (denoted by the dividend variable delay), which is adjusted accordingly to net income. brav et al. (2004) have shown that us corporate executives do not like dividend cuts, but prefer to keep dividends at their current levels. signal theory assumes that dividend increases can be seen by the administration as a signal that it believes profits are above market consensus. because management attaches great importance to maintaining dividend levels, an increase in dividends does not mean a sign of short-term profit growth, but rather a level of long-term sustainable profit. if this theory is correct, it should be possible to observe a real improvement in corporate earnings after dividend increases. dittmar and mahrt-smith (2007) studied "relationships in the us market based on corporate governance index, participation rates and other data on institutional investors and public pension funds, and the market value of cash deposits. pinkowitz et al. (2007) examined the relationship between corporate governance in 35 countries and the market value of cash holding in these countries. in both cases, the investigation concluded that the introduction of corporate governance had an impact on the value of cash deposits. a factor other than the cost to the institution of influencing the market value of the cash deposit is the actual option value of financial slack." this is due to the fact that economic weakness is of greater value to many companies with growth potential, which are insecure but have difficulty in raising money (suwabe, 2006). pinkowitz and williamson (2002) showed that the market value of cash holdings in the us market is significantly influenced by the existence of growth opportunities, uncertainty about investment opportunities and good access to capital markets. deciding on the optimal funding options and dividend policy are some of the most difficult financial decisions. in this context, two capital structure theories (hierarchy theory and substitution theory) are related to the company's dividend policy. hierarchy theory (hierarchical theory) assumes that entrepreneurs determine the priority sources of capital, not the optimal relationship between liabilities and social capital. entrepreneurs prefer to finance their activities from internal sources, such as net profit less dividends, depreciation income, and proceeds from the sale of short-term securities and other surplus assets. in cases where debt financing is required, bonds are first issued, followed by new operations (quan, 2002; mazur, 2007; mcmanus et al., 2006). nitta (2006) analyzed dividend policy from the perspective of an interactive game between corporate executives and shareholders, looking at the key question of how dividend policy could affect shareholder value. dividend policy can provide shareholders with information on management's position on earnings trends and current stock prices, as well as their financial position. asghar et al. (2011) have shown a positive and significant relationship between price volatility and dividend yield, but after adding control variables, dividend payment and dividend yield are an insignificant relationship and positive with price volatility and an insignificant relationship with income volatility. naser et al (2013) "show the bird-in-hand theory and the relevant value theory managers consider to explain dividend policy. external factors related to the economic conditions together with the state of the capital market and lending conditions are all important factors in formulating dividend policy by companies listed on the abur dhabi securities exchange. the extensive review of dividend policies and the empirical evidence in husan-aldin, et al (2010) still conclude that the reason why companies pay dividends, or adopt a particular dividend policy is still a puzzle." the works of murekefu and ouma (2012) "sought to establish the relationship between a dividend payout and firm performance among listed firms in the nairobi securities exchange. the results indicated that dividend payout was a major factor affecting firm performance, hence dividend policy is relevant." mehta (2012) "attempted to determine empirically the important factors which affect the dividend payout decisions of uae firms. the study provides evidence that profitability and size are the most important considerations of dividend payout decisions by uae firms." arshad et al (2013) "studied the association between dividend payout policy and ownership structure of karachi stock exchange firms over the period 2007-2011. the results did not consistently support the positive association between ownership structure and dividend payout policy and dividend decision." copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 24 ramadan (2013) "investigates the influence of dividend policy on the share price volatility for jordanian industrial firms. the experimental results showed that the two components of dividend policy studied, dividend yield and dividend payout, have a significantly inverse correlation with share price volatility." khan (2012) "has studied a sample of 29 chemical and pharmaceutical companies listed on the karachi stock exchange for the period 2001-2010 and found that stock dividend, earnings per share and profit after tax have a significantly positive relationship with stock prices." ozuomba et al (2013) "found that the dividend policy of public limited companies influences the wealth of shareholders in nigeria." adediran and alade (2013) "found a significantly positive relationship between dividend policy and profitability in nigeria." illaboya and aggreh (2013) "examined the relationship between dividend policy and share price volatility in 26 sampled firms listed on the nigerian stock exchange (nse) for the period 2004 to 2011. the finding indicates that dividend yield exerts a positive and significant influence on share price volatility while dividend payout exerts a negative and insignificant influence on share price volatility." bougatef (2014) "investigates the impact of dividend payments on common stock prices using a panel data of listed firms in tunis stock exchange for a period of 2000 to 2008. the empirical evidence reveals that tunisian investors reward firms paying cash dividends." 3. methodology "this study used quasi experimental research design approach to test the validity of mm hypothesis on irrelevance of dividend policy in nigeria. this approach combines theoretical consideration (a-prior criterion) with the empirical observation and extract maximum information from the available data. the researcher’s aim in this study is to ascertain whether dividend policy is irrelevant in nigeria as proposed by miller and modigliani in 1959." sources of data collection the study used for collecting data for this research is the secondary source of data collection obtained from various issues of: (i) nigerian stock exchange (nse) annual reports and statement of accounts. data analysis instrument the study employed a "panel data regression analysis. this is because the data set consists of observations of multiple variables over multiple time periods. thus panel data combines time series and cross sectional data. it allows the researcher the flexibility in modeling differences in behaviour across individuals firm, it is also appropriate for this study because of its ability to take into account heterogeneity problem or individual effects in cross sectional data and give more informative data. the panel regress ion equation is different from a regular time-series or cross section regression by the double subscript attached to each variable. the general form of the panel data model is specified as": titii xy ,,,   1 the "subscript i denotes the cross-sectional dimension and t represents the time-series dimension. the left-hand variable y represents the dependent variable in the model which represents the value relevance of firms listed on the nigeria stock exchange, x contains the set of explanatory variables in the estimation model,  and is taken to be constant overtime t and specific to the individual cross-sectional unit" model specification  dpsdyrrdprfmv ,,, 2 the regression models are thus formulated as   iiii dpsdyrrdprmv 432101 3 where mv = market value proxy tobin q dpr= dividend payout ratio rr = retention ratio dy= dividend yield dps= dividend per share method of estimation and testing i. panel data regression model specifications copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 25 panel data can be estimated and analyzed in three different specification models. these are the correlation matrices the fixed effect model (fem) and the random effect model (rem). in this study the fixed effect model is chosen over pooled ols regression because of the advantages the former has over the latter. ii. pooled regression model albrigim zappe and winston (2011) stipulated that the error term should be independently and normally distributed with zero mean and constant variance and more importantly must not correlated with the independent variables pooled ols linear regression is given as follows: itititititit uxxxxy  544322110  4 where yitis the dependent variable; 0 is a constant term: x1, to x5, are the independent variables; 41  to are slope parameters: i...n refers to the cross-sectional units and t is the time period. ii. the fixed effect model the fixed model can be specified as itititititiit uxxxxy  43211  5 where i in refers to the cross-sectional units representing the intercept value for each cross-sectional unit. a-priori expectation base on theories such as market efficiency theory and empirical results examined in this study, the variables are expected to have a positive effect on the dependent variables. the mathematical implication is stated as follows: 1 > 1 > 1 > 1 >0 reject mm hypothesis 1 < 1 < 1 < 1 >0 accept mm hypothesis 1t > 1t > 1t > 1t >0 reject mm hypothesis 1t < 1t > 1t > 1t >0 accept mm hypothesis 4. analysis and discussion of findings the objective of the study as earlier stated was to the validity of mm dividend policy irrelevant hypothesis in among nigeria quoted manufacturing firms. table 1 random effect versus fixed effect models redundant fixed effects tests effects test statistic d.f. prob. cross-section f 2.529902 (14,69) 0.0056 cross-section chi-square 36.458539 14 0.0009 correlated random effects hausman test test summary chi-sq. statistic chi-sq. d.f. prob. cross-section random 3.144965 4 0.0009 source: computed from e-view output the "hausman test tests the null hypothesis that the coefficients which are estimated by the efficient random effects estimator are the same as the ones estimated by the consistent fixed effects estimator. therefore, this includes insignificant p-value, prob>chi2 larger than 0.05, the null is more suitable to use random effects. according to above table shows hausman specification test the model has the value of p=0.0009 for the regression model of dependent and independent variables. this copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 26 shows fixed effect model is more appropriate, because the null hypothesis is not accepted. therefore, this includes insignificant p-value, prob>chi2 larger than 0.05, then it is more suitable to use random effects. however, if we have a significant p-value, then we should use fixed effects models." regression results the table below has detail of the regression results for the study. table 2: presentation of regression results fixed effect model variable coefficient std. error t-statistic prob. dpr 0.818574 3.167067 3.276949 0.0026 rr 0.733345 4.451247 2.650678 0.0174 dy 0.800215 3.401035 4.207544 0.0362 dps 0.612747 3.560265 2.870861 0.0356 c 10.45667 4.374480 2.390380 0.0196 effects specification cross-section fixed (dummy variables) r-squared 0.753232 mean dependent var 14.35273 adjusted r-squared 0.484510 s.d. dependent var 4.122745 s.e. of regression 3.723024 akaike info criterion 5.655537 sum squared resid 956.4025 schwarz criterion 6.190417 log likelihood -229.8436 hannan-quinn criter. 5.871027 f-statistic 2.093574 durbin-watson stat 2.362240 prob(f-statistic) 0.005125 random effect model dpr 0.619454 3.062691 3.310320 0.0001 rr 0.539439 5.349744 4.792833 0.0000 dy 5.606305 2.301002 3.055870 0.0006 dps 0.988076 3.357661 1.527497 0.1304 c 11.85007 4.179509 2.835278 0.0057 effects specification s.d. rho cross-section random 2.038155 0.2306 idiosyncratic random 3.723024 0.7694 weighted statistics r-squared 0.636903 mean dependent var 8.647318 adjusted r-squared 0.509511 s.d. dependent var 3.717629 s.e. of regression 3.706214 sum squared resid 1140.090 f-statistic 5.795075 durbin-watson stat 2.126371 prob(f-statistic) 0.000718 unweighted statistics r-squared 0.015568 mean dependent var 14.35273 sum squared resid 1455.720 durbin-watson stat 1.759121 source: computed from e-view output discussion of findings the opinion that dividend policy has effect on the market value of listed companies has long been a point of departure among scholars in the field of finance, what is today known as the dividend puzzle. the gordons relevant theory was challenged by the miller and modigliani irrelevant theory. however, it is important to note that the assumptions of the mm hypotheses are not attainable mostly in the emerging financial market like nigeria where the financial market cannot be defined as a regulated or deregulated market. empirical evidence has validated the relevant theory as opposed to the irrelevant theory. the findings in the sectors above consolidate the opinion of gordons and invalidate the mm hypotheses. this finding shows that dividend policy is a major determinant of stock prices of the quoted firms. "this finding confirms the findings of lucky et copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 27 al., (2015) on the effects of dividend policy on the stock prices of nigeria commercial banks, it confirm the findings of baskin (2005) on the relationship between dividend policy and stock prices in united states of america. it is in line with the findings of naziret al (2010) who concluded that share price volatility is significantly correlated to dividend policy; the findings of suleiman et al., (2011) studied the association of dividend policy with share price volatility in pakistan and the findings of hussainey et al (2011) on the relationship between dividend policies in uk." 5. conclusion the study used pooled panel data regression analysis to test the irrelevance of mm hypotheses of quoted companies in nigeria. data from 20 quoted companies spanning 2008 to 2017 were analyzed. the empirical results obtained from the panel regression analysis show that dividend policy, measured by dividend payout ratio, retention ratio, dividend per share and dividend yield. the study found there is positive and significant impact on the market value of quoted companies on floor of nigerian stock exchange. it can therefore be concluded that dividend policy is relevant in the valuation of market value. this signifies that managers and policy makers can influence value of quoted firms by variation in dividend policy. 6. recommendation based on the findings of the study, the following recommendations are made:  quoted companies should manage their dividend policies effectively since it has significant impact on their market value and optimal dividend policy which implies policy of trade-off between dividend payout and retain earnings should be well managed and investors should have adequate knowledge of dividend policy of quoted firms that will correspond with their investment objectives of avoid conflict in dividend policy.  management, the regulatory authorities and macroeconomic variables should be properly planned to affect positively dividend policy and the market value of quoted firms and the dividend policy of the quoted firms should be properly defined in such a way that environmental factors would not affect the market of the quoted firms.  the regulatory bodies should device policies that help create conducive environments that will enhance stock prices of quoted firms and nigerian capital market and the regulators should make policies that will enhance and advance the operation of the capital market for better dividend policy and stock prices.  policies should be made to enhance optimal capital structure of the quoted firms for better dividend policy and positive effect on stock prices and policies should be formulated by the management of the quoted firms and the regulatory authority to manage external forces such as global financial crises that affects the capital market and the stock prices of the quoted firms. references abdul, a., & muhibudeen, l. 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(2016). an empirical analysis of miller & modigliani dividend policy irrelevance theory: evidence from the nigerian stock market. unpublished ph.d thesis, universityof lagos. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). copyright © cc-by-nc 2019, cribfb | afbr australian finance & banking review; vol. 3, no. 2; 2019 research paper issn 2576-1196 e-issn 2576-120x published by centre for research on islamic banking & finance and business, usa 1 capital structure and the value of quoted firms in nigeria: a test of miller and modigliani irrelevant hypothesis uzokwe grace onyinyechi department of banking and finance rivers state university, port harcourt, nigeria abstract this study tested an insignificant hypothesis of the capital structure of miller and modiglian in nigeria. the aim was to investigate the validity of the irrelevant hypothesis. the tobins q market value measure was modeled as a function of debt-toequity ratio, long-term debt to equity ratio, and retained earnings ratio. twenty companies were selected on the basis of the information needed to conduct the survey and the availability of annual financial reports for the ten-year period 2008-2017. cross-sectional data were obtained from the annual accounts and annual reports of the companies. random effects were used in the analysis of fixed and random effects. the study showed that 77% volatility in market value can be predicted by the variation of independent variables in the regression model. the beta coefficient of the variables found that the debt-to-equity ratio, the long-term debt-to-equity ratio, the capital-to-earnings ratio is positively and significantly related to the market value of the selected listed companies. the study concludes that capital structure is relevant, unlike miller's and modiglian's irrelevant hypothesis. therefore, it is recommended that managers ensure an adequate combination of capital and debt. keywords: capital structure, miller and modigliani, irrelevant hypothesis. 1. introduction classical opinion, like gordons (1959), considered that micro-power as a measure of the profitability of a company is an indicator that the company is capable of adding value to its shareholders (lintner, 1956). classic models of financial valuation show that capital structure as a dividend policy is important because the optimal combination of capital affects the value of the company. it is used as a financial token for external people in relation to the stability and growth prospects of a company (ross, 1977). capital structure is a combination of sources of finance used by companies to finance their activities and assets (modigliani and miller, 1958). the concept of capital structure was not discovered until modigliani and miller (1958) explained it in the theory of the insignificance of their capital structure. how a company can finance its operations and assets through the issue of shares, bonds or preferred shares. the structure of capital is the right side of the balance sheet. the insignificance proposition theorem is a theory of the capital structure of a company, which assumes that leverage does not af fect the value of the company unless the costs of the tax and hardships are incurred in the business environment. modigliani and miller published their pioneering work on capital structure in 1958. in their article, they show that in a frictioned world where capital markets are ideal and where corporate income tax is lacking, the value of a company is not affected by the structure of that capital. . in other words, capital structure is irrelevant (modigliani and miller, 1958). since then, researchers have sought to determine the importance of a firm's capital structure in the face of frictions and shortcomings in the capital market, such as leveraged tax shield profits (modigliani and miller, 1963), bankruptcy (bradley, jarrell and kim, 1984; kraus and litzenberger, 1973) and meckling, 1976) and information asymmetry (myers and majluf, 1984). modiglian and miller's (1958) milestone has been evaluated by numerous theories of capital structure, referring to the condition that capital structure is irrelevant to the value of the business. miller and modigliani used the theory of insignificance proposition as a starting point for their compensation theory, which describes the idea that a company chooses how much debt financing and how much capital financing to use to balance costs and growth. criticism of the irrelevant proposal theorem, however, focuses on the lack of realism to eliminate the impact of income tax and exemption costs on the capital structure of a company. since the value of a business is affected by many factors, including profits, assets and market opportunities, it becomes difficult to prove the theorem. for economists, theory describes the importance of financial decisions rather than describing how financial transactions work. in addition, there may be a positive or negative relationship between capital and the value of the company in the short term, depending on whether the bank is above or below the optimal capital index (mathew et al., n.d). "the relationship between capital structure and the value of the firm has long been a point of controversy among scholars in corporate finance, since the seminar work of miller and modiglani in 1959 which noted that capital structure is irrelevant as passed to gordon copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 2 view that it is relevant. more of the empirical evidence supports the relevant view of" gordons, delbor et al (2007), cheng and izeng (2011), suderat et al., (2012), rathinasamy et al., (2000), altan and arkan (2011), ugbuhe and emeni (2012) while "few evidence supports to irrelevant view aggarwary and zhao (2007), rayan 2008, aggarval et al., (2011). this study tests the validity of mm hypothesis on capital structure irrelevance." 2. literature review theoretical bases of capital structure and value of firms the net income and the traditional views there are several variants of traditional theory. but the central point of all standpoints is that capital structure matters. the earlier version of the notion that capital structure is appropriate is network the net income approach "value of equity = discounted value of net income ek ni equityofcost incomenet e  3 dk int debtofcost interest e  4 therefore, the firm’s overall expected rate of return or the cost of capital is": firmtheofvalue incomeoperationnet capitaloftsfirm cos' 5 v noi ko  5 the total cost of capital of a company is the weighted average cost of capital (wacc). there is an alternative way to calculate wacc (k0). wacc is the weighted average of the costs of all company values. company l values include debt and equity. wacc = cost of equity x equity weight + cost of debt x debt weight v d k v e kk deo  6 suppose "firm l operates in a frictionless world. there are no taxes and transaction costs and debt is risk-free and shareholders perceive no financial risk arising from the use of debt. under these conditions, the cost of equity, ke and the cost of debt, k, will remain constant with financial leverage. since debt is a cheaper source of finance than equity, the firm’s weighted average cost of capital will reduce with financial leverage. suppose firm l’s substitute, debt for equity and raises its debt ratio to 90 per cent." rearranging equation (5), we get v d k v d kkwacc deo        1 7   v d kkkkwacc deeo  8 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 3 "equation (6) that, given constant cost of equity, ke and cost of debt, kd, and kd less than ke, the weighted average cost of capital, k0, will decrease continuously with financial leverage, measured by d/v. you may also notice that k0 equals the cost of equity, ke minus the spread between the cost of equity and the cost of debt times d/v. wacc, ic0, will be equal to the cost of equity, k e if the firm does not employ any debt (i.e. d/v 0), and k0, will approach kd, as d/v approaches one (or100 per cent). under the assumption that ke and kd remain constant, the value of the firm will be": de k int k intnoi dev    9 d k dknoi k dk k dknoi e d d d e d      10 e d e k dk d k noi  11          e d e k k d k noi v 1 12 the "cost of dept with 100 per cent debt ratio (d/v),the optimum capital structure occurs at the point of minimum wacc. under the ni approach, the firm will have the maximum value and minimum wacc when it is 100 per cent debt-financed. the traditional view the traditional view has emerged as a compromise to the extreme position taken by the ni approach. like the ni approach, it does not assume constant cost of equity with financial leverage and continuously declining wacc. wacc = ko = kex we + kd x wd 13 the value of debt is interest income to dept-holder divided by the most of debt: dk int d debtofcost incomeinterest debtofvalue  14 the sum of value of debt and equity is the firm’s total value, and is direct tly given by net operating income divided by wacc": ok noi ds wacc incomeoperatingnet firmofvalue  15 proposition i "firms with identical net operating income and business (operating) risk, but differing capit1 structure, should have same total value. value of levered firm = value of unlevered firm v1 = vu capitalofyopportunitsfirm incomeoperatingnet firmtheofvalue cos'  16 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 4 a u k noi vvv  1 17 where v is the market value of the firm and it is sum of the value of equity, e and the value of debt, d; not = ebit = the expected net operating income; and ka = the firm’s opportunity cost of capital or the capitalization rate appropriate to the risk class of the firm. the average rate of return required by all security-holders in a levered firm is the firm’s weighted average cost of capital; i.e., wacc = k0 or k1 . thus akk noi v   1 1 18 1 1 v noi kko  19 in the case of an unlevered firm, the entire net operating income is the shareholders net income. therefore, the unlevered firm’s wacc or k is equal to its opportunity cost of capital: u ua v noi kk  20 since the values of the levered and unlevered firms and the expected net operating income (nol) do not change with financial leverage, the weighted average cost of capital would also not change with financial leverage. hence, mm’s proposition also implies that the weighted average cost of capital for two identical firms, one levered and another unlevered, will be equal to the opportunity cost of capital. levered firm’s cost of capital (k1) unlevered firm’s cost of capital (ku) k1 = ko = ka = ku to determine the levered firm’s cost of equity, ke   e d kkkk daae  21 since itl is an unlevered company, its opportunity cost of capital will be equal to its cott of equity, ke equityanddeptofvaluemarket iexpectedno kk ea  22 the expected eps is: sharesofnumber incomenet epse  23 the cost of equity will increase to compensate for the financial risk:   e d kkkk daae  24 interest tax shield corporate tax rate x interest copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 5       dtktxdtktx dd  11 25 the cash flows arising on account of interest tax shield are less risky than the firm’s operating income that is subject to business risk. interest tax shield depends on the corporate tax rate and the firm’s ability to earn enough profit to cover the interest payments. the corporate tax rates do not change very frequently. firm l can be assumed to earn at least equal to the interest payable otherwise it would not like to borrow. thus, the cash inflows from interest tax shield can be considered less risky, and they should be discounted at a lower discount rate. it will be reasonable to assume that the risk of interest tax shield is the same as that of the interest payments generating them. thus, the discount rate is 10 per cent, which is the rate of return required by debt-holders. thus, under the assumption of permanent debt, we can determine the present value of the interest tax shield a follows: debtofcost erestratecorporate int shieldax interest t of pv   26 td k dkt vints d d   p 27 you may note from equation (32) that the present value of the interest tax shields (pvints) is independent of the cost of debt: it is simply the corporate tax rate times the amount of permanent debt (td)." value of the levered firm the value of the unlevered firm debtofcost erestratecorporate int firmunleavedtheof value   28 d d a k dtk k tx v    )1( 1 29 tdvv u 1 30 "equation (15) implies that when the corporate tax rate, t, is positive (t> 0), the value of the levered firm will increase continuously with debt. thus, theoretically the value of the firm will be maximized when it employs 100 per cent debt." enhancing the firm value through debt: v1= tdvu  31 111 1 v td v v v v u  ,1=  1v vu tl 32 vl= tl vu 1 33 thus, for 1> 0, v1 will increase with l, and will be maximum at l =1 debt-holders’ interest income after personal taxes will be on the other hand, if the firm’s expected net operating income is distributed as equity income, then the firm will pay corporate tax. assume that the personal tax rate on equity income is the equity income after personal tax will be: copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 6 equity income after personal tax = (1-t)-tpe(1-t)=(1-t) (1-tpe) 34 we can see that corporate borrowing will be advantageous if the interest income after personal tax is greater than the equity income after personal tax: (1-tpd)>(l-t) x (1-tpe) 35 a firm will stop borrowing when (1tpd) becomes equal to (1tpe) (1-t). thus, the net tax advantage of debt or the interest tax shield after personal taxes is given by the following: net tax advantage of debt= (1-tpd )-(1-t)x (1-tpe) 36 net tax advantage of debt = (t -tpd) + tpe(l -t) 37 personal tax rates for equity income and debt income: suppose we are in a country where the government does not distinguish between interest income, dividends and capital gains for the purpose of ta.xes and has one rate of personal tax for all personal incomes. in this situation, the relative advantage of debt comes from the corporate tax rate as shown by the debt advantage ratio: tax advantages of debt ratio = )1( 1 )1()1( )1( ttt t pe pd     38 if the personal tax rate for equity income and interest income is same (i.e., tpd = tpe = tp) then the interest tax shield (ints) after all taxes is given as follows: ints=kd d(1-tp)_(1-t)(1-tp) 39 =kd dt (1-tp) (since tpd=tpe=tp) when there is no difference between the personal tax rates o1. equity income and interest income, then the levered firm’s total income after all taxes is: levered firm’s income after all taxes = unlevered firm’s income after all taxes + net tax advantage of debt =(1-t)(1-tpe)+kd td(1-tp) 40 you may notice that the total income after all taxes of the unlevered firm is: unlevered firm’s income after all taxes = (1-t)(1-tpe) 41 for the levered firm, the total income after all taxes is: levered firm’s income after all taxes\       pddped tdkttdxx  111 42         pddpedpe tdkttdkttx  11111 43 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 7         pdpddpe tttdkttx  11111 44 taxespersonalafterdebtofcost taxespersonaaftershieldtaxinterest pvints ;  45 this present value of the interest tax shield after personal taxes is same as obtained earlier when the personal taxes were ignored. )1( ;1( ratetaxpersonaldebtofcost ratetaxpersonalratetaxcorporateinterest pvints    46   td tk ttdk pdd pdd     1 1( 47 unequal personal tax rates for equity income and debt income: in reality, in a number of countries, dividends are treated differently from interest income for tax purposes. debt-holders are required to pay personal tax on interest income. miller’s model "as we know, the present value of interest tax shield (pvints) represents gain from financial leverage, and it is the difference between the value of the levered firm and the value of the unlevered firm. you will recall that this is the mm hypothesis with corporate tax. miller introduced personal taxes in the model. unlevered firm’s income after all taxes" = x (1-t) (1-tpe) since these cash flows are after the corporate tax as well as the personal tax, the appropriate discount rate will be the pure-equity capitalization rate, ka (or k) adjusted for personal taxes, i.e., ka (1-tpe) the value of the unlevered firm with corporate and personal taxes will be:          peu pe u tk ttx v 1 11 49 in case of the levered firm, the shareholders’ income is adjusted for interest before calculating corporate and personal taxes as shown below: the levered firm’s debt-holders’ income after personal taxes will be: debt-holders’ income after personal tax = kd d (1-tpd) 50 the levered firm’s combined income to investors (shareholders and debt-holders) after corporate and personal taxes will be: levered firm’s combined income after all taxes       pedpe ttdkttx  1111 51   ped tdk 1 52 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 8         pepedpe tttdkttx  11111 53 the unlevered firms’ income after all taxes. hence, the value of these cash flows is equal to the value of unlevered firm, v. the second term is interest tax shield including the effect of personal taxes. therefore, these cash flows have the same risk as the interest payments, and the appropriate rate to discount these cash flows is kd (1 tpd). thus, the value of the levered firm is equal to the value of the unlevered firm plus the present value of interest tax shield:             ped peped ped pe tk tttdk tk ttx v       1 111 1 11 1 54 modigliani and miller (mm), 1958, illustrate that, under certain basic assumptions, the value of a company is not affected by its capital structure. the capital market is supposed to be perfect in a modiglian and miller world where internal and external people have free access to information; no transaction costs, bankruptcy costs or taxes; the choice of equities and debt becomes irrelevant and domestic and foreign funds can be perfectly replaced. m-m theory (1958) states that the value of a company should not depend on its capital structure. the theory further argued that a company should have the same market value and the same weighted average cost of capital (wacc) at all levels of the capital structure, since the value of the company should depend on its performance and risks. and not on the way fund these operations. miller presented the following version of the theory of capital structure insignificance. he appealed that decisions on the capital structure of companies and companies subject to personal taxation are irrelevant (miller 1977). if these key assumptions are relaxed, the capital structure may become relevant to the value of the business. therefore, research has helped to alleviate ideal assumptions and describe the consequences. this theory was criticized because there was no perfect market in real life. attempts to alleviate these assumptions, especially bankruptcy-free costs and taxes, led to the theory of static exchange. these theories proposed by modiglian and miller (1958 and 1963) argue that, under perfect capital market conditions, the value of a company depends on its profitability rather than its capital structure, ie value is insignificant (modigliani and miller, 1963). a corporation tax rate of t and p after tax gives a leveraged enterprise a market value: "vl=  x (1-tc)/+ tcdl 55 where,  x equals expected earnings before interest and taxes,  x (1tc)/  = vu, value of the firm ii all-equity-financed, and tcdl is the present value of the interest tax-shield, the tax advantage of debt." empirical review akani and lucky (2016) "examined the effects of capital structure on shareholders’ value of quoted nigerian commercial banks from 1981 – 2014. the model built for the study proxy return on investment (roi), market value (eqp) and earnings per share (eps) as dependent variables measuring shareholder’s value as the function of percentage in debt capital to total capital (dc/tc), percentage of equity capital to total capital (eqc/tc), percentage of preference share capital to total capital (psc/tc as independent variables). annual time series data were sourced from stock exchange factbook and financial statement of quoted commercial banks. the econometrics techniques of ordinary least square (ols), augmented dickey fuller (adf), unit root test, johansen co-integration test and pair wise granger causality test were employed in the empirical analysis. r2, regression coefficient, probability value, t-statistics and f-statistics were used to determine the extent to which the independent variables can affect the dependent variable. the co-integration result shows that long run equilibrium exists among the variables except preference share capital. in model i, the study found that all the independent variables have positive relationship with the return on investment. model ii found that equity capital and preference share capital have positive effects but insignificant relationship with return on investment while short term borrowings and preference share capital have positive relationship and debt capital have negative relationship with market value of quoted commercial banks. model iii found that equity capital has positive relationship while debt and preference share capital have negative relationship with earnings per copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 9 share. from the regression summary, model i can explain 79% variation on return on investment, model ii explains 48% variation on market values while model iii explains only 11% variation on earnings per share. from the above, the study concludes that capital structure has more effect on return on investment and market values than earnings per share." imad (2015) "examined the impact of the leverage on the firms’ value utilizing unbalanced pooled ordinary least square (ols) cross-sectional time series panel data regression approach to all listed companies in amman stock exchange (ase) during the period 2000-2013 after excluding the financial sector and services sector, due to their own characteristics. f-test was used to test the hypothesis that the changes in the firms’ leverage level significantly explain the changes in the firms’ value. the results shows that the firms’ leverage level affect the firms’ value for the jordanian listed companies included in the sample test, this result inconsistent with the result of rajan and zingales (1995) who find inverse association between debt and performance." taiwo adewale muritala (2015) "examined the optimum level of capital structure through which a firm can increase its financial performance using annual data of ten firms spanning a five-year period. the results from im, pesaran & shine unit root test show that all the variables were non-stationary at level. the study hypothesized negative relationship between capital structure and operational firm performance. however, the results from panel least square (pls) confirm that asset turnover, size, firm’s age and firm’s asset tangibility are positively related to firm’s performance. findings provide evidence of a negative and significant relationship between asset tangibility and roa as a measure of performance in the model. the implication of this is that the sampled firms were not able to utilize the fixed asset composition of their total assets judiciously to impact positively on their firms’ performance. hence, this study recommends that asset tangibility should be a driven factor to capital structure because firms with more tangible assets are less likely to be financially constrained." saeed & badar (2013) "examined the impact of capital structure on firm performance by analyzing the roa and atr against different levels of debt i.e. std, ltd and td. the results came were different from most of the previous studies. according to the results ltd has a significantly positive impact on the roa." the results were compatible with aghabeygzadeh & akbarpour (2011) "as they found a positive impact as well. on the other hand td and std were found to have a negative but significant effect on the roa. the reason mentioned by the author is that because the ltd is mostly given by banks and due to competition among the banks the ltds are usually taken with lower required rate of returns and also efficiently use of the funds." "std has relatively higher required rate of return and because in pakistan the money market is not well developed and that’s why affect negatively the roa" (saeed & badar, 2013). patel & bhatt (2013) "discussed the impact of the capital structure on the performance of the firm for the nonfinancial firms listed on the national stock exchange by studying any alteration in firm’s net operating profitability (nop) due to change in capital structure variables. the author ended up with a conclusion that total debt has a negative impact on the firm’s profitability." "ltd was also found to have an indirect impact on the firm’s net profitability, this was attributed by the author that as ltd increases the management started fearing about their jobs and thus lead to underinvestment, plus the high interest rates incurred on ltd increases the fixed cost and ultimately financial leverage and thus decreases free cash flows and eventually profitability" (mesquita & lara, 2003). "equity was found to have a positive impact on the net profits and the author has suggested for the firms to go for equity financing. size of the firm has also a direct impact of net profitability of the firms" (raheman, zulfiqar, & mustafa, 2007). saeed, gull, & rasheed (2013) "gave empirical results for the impact of capital structure on firm performance by observing firm performance against the capital structure decisions. based on the results of the study stdta has a positive and significant impact on roa, roe and eps while ltdta was found to be negatively related to all the performance variables. on the other hand td was proved to have an optimistic impact of roa, roe and eps. size of the firm also affected the performance positively and significantly as well." "ag (assets growth) affected roa and roe insignificantly negative but for eps the relation was significantly negative. the reason for positive impact of stdta was because of its lower required rate (mesquita & lara, 2003). an addition to that according to the author stdta is easily accessible as compared to ltdta because bonds market is not yet developed in the country." yuvarajsambasivam and abate gashaw (2013) "examined the effects of firm specific factors (age of company, size of company, volume of capital, leverage ratio, liquidity ratio, growth and tangibility of assets) on profitability proxies by return on assets. profitability is dependent variable while age of company, size of company, volume of capital, leverage, liquidity ratio, growth and tangibility of assets are independent variables. the sample in this study includes nine of the listed insurance companies for nine years (2003-2011). from the regression results; growth, leverage, volume of capital, size, and liquidity are identified as most important determinant factors of profitability hence growth, size, and volume of capita are positively related. in contrast, liquidity ratio and leverage ratio are negatively but significantly related with profitability. the age of companies and tangibility of assets are not significantly related with profitability." copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 10 babalola (2014) "used 31 manufacturing firms with audited financial statements for a period of fourteen years (1999-2012) from static trade-off point of view. he employed the triangulation analysis and the study revealed that capital structure is a trade-off between the costs and benefits of debt, and it has been refuted that large firms are more inclined to retain higher performance than middle firms under the same level debt ratio." akinyomi (2013) "used three manufacturing companies selected randomly from the food and beverage categories and a period of five years (2007-2011) using the static trade-off and the pecking order theory point of view. he adopted the use of correlation analysis method and revealed that each of debt to capital, debt to common equity, short term debt to total debt and the age of the firms’ is significantly and positively related to return on asset and return on equity but long term debt to capital is significantly and relatively related to return on asset and return on return on equity. his hypothesis also tested that there is significant relationship between capital structure and financial performance using both return on asset and return on equity." bassey, aniekan, ikpe and udo (2013) "used a sample of 60 unquoted agro-based firms in nigeria within a period of six years (2005-2010) from the agency cost theory point of view. they employed the ordinary least square regression and descriptive statistics and revealed that only growth and educational level of firms owners were significant determinants of both long and short term debt ratios, assets structure, age of the firms, gender of owners and export status impacted significantly on long term debt ratios, while business risk, size and profitability of firms were major determinants of short term debt ratio for the firms under investigation." khalaf (2013) "used a sample of 45 manufacturing companies listed on the amman stock exchange were used for this study which covers a period of five (5) years from 2005-2009. multiple regression analysis was applied on performance indicators such as return on asset (roa) and profit margin (pm) as well as short-term debt to total assets (stdta), long term debt to total assets (ltdta) and total debt to equity (tde) as capital structure variables. the results show that there is a negative and insignificant relationship between stdta and ltdta, and roa and pm; while tde is positively related with roa and negatively related with pm. stdta is significant using roa while ltdta is significant using pm. the study concludes that statistically, capital structure is not a major determinant of firm performance. it recommends that managers of manufacturing companies should exercise caution while choosing the amount of debt to use in their capital structure as it affects their performance negatively." nirajini and priya (2013) "used data of trading companies listed in sri lanka from year 2006 to 2010 and used correlation and multiple regression analysis and found that there is a significant relationship between capital structure and firm performance. there are mixed results about the influence of capital structure on firm performance." park and jang (2013) "also found a positive relation between capital structure and firm performance after examining the data from 1995 to 2008 of 308 restaurant firms. debt can efficiently be used to reduce free cash flows and to increase firm profitability, park and jang (2013). capital structure does impact firm performance in a positive way, nirajini and priya (2013) found after analyzing financial statements of companies in sri lanka." mitani (2014) "chosed 799 manufacturing firms listed on the tokyo stock exchange (tse) and presented the evidence of positive correlation between leverage and market share under both types of competition, cournot competition and bertrand competitions. huang and song (2006) conducted research on chinese firms and found negative relation between capital structure and firm performance. ghosh (2007) came to know that leverage is inversely correlated with profitability." smith, chen and anderson (2012) "studied 100 companies listed on the new zealand stock exchange (nzx), proved that leverage has a positive relation with sales growth but it also decreases return on assets (roa). pouraghajan et al. (2012) used 400 companies listed on the tehran stock exchange (tse) which belonged to 12 sectors and they found that debt ratio is significantly and negatively related to firm performance." al-taani (2013) "used short term debt to total assets (stdta), long term debt to total assets (ltdta) and total debt to equity (tde) as indicators of capital structure and used return on assets (roa) and profit margin (pm) as performance indicators to study 45 companies listed on the amman stock exchange (ase) and capital structure and firm performance were correlated negatively and insignificantly. firms with moderate level of long term debt, as in the market, will face an increase in sales, but firms with higher levels of debt standard will not have significant growth in sales or in market." 3. methodology this study used quasi experimental research design approach to test the validity of mm hypothesis on irrelevance of capital structure in nigeria. this approach combines theoretical consideration (a-prior criterion) with the empirical observation and copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 11 extract maximum information from the available data. the researcher’s aim in this study is to ascertain whether capital structure is irrelevant in nigeria as proposed by miller and modigliani in 1959. sources of data collection the study used for collecting data for this research is the secondary source of data collection obtained from various issues of: (i) nigerian stock exchange (nse) annual reports and statement of accounts. data analysis instrument the study employed a panel data regression analysis. this is because the data set consists of observations of multiple variables over multiple time periods. thus panel data combines time series and cross sectional data. it allows the researcher the flexibility in modeling differences in behaviour across individuals firm, it is also appropriate for this study because of its ability to take into account heterogeneity problem or individual effects in cross sectional data and give more informative data. the panel regression equation is different from a regular time-series or cross section regression by the double subscript attached to each variable. the general form of the panel data model is specified as: titii xy ,,,   1 the subscript i denotes the cross-sectional dimension and t represents the time-series dimension. the lefthand variable y represents the dependent variable in the model which represents the value relevance of firms listed on the nigeria stock exchange, x contains the set of explanatory variables in the estimation model,  and is taken to be constant overtime t and specific to the individual cross-sectional unit model specification  rerecrltdderfmv ,,, 2 the regression models are thus formulated as   iiii rerecrltdrdermv 432101 3 where mv = market value proxy tobin q der= debt equity ratio ltd= long term debt ratio ecr= equity capital ratio rer= retained earnings ratio method of estimation and testing i. "panel data regression model specifications panel data can be estimated and analyzed in three different specification models. these are the correlation matrices the fixed effect model (fem) and the random effect model (rem). in this study the fixed effect model is chosen over pooled ols regression because of the advantages the former has over the latter. ii. pooled regression model albrigim zappe and winston (2011) stipulated that the error term should be independently and normally distributed with zero mean and constant variance and more importantly must not correlated with the independent variables pooled ols linear regression is given as follows: itititititit uxxxxy  544322110  4 where yitis the dependent variable; 0 is a constant term: x1, to x5, are the independent variables; 41  to are slope parameters: i...n refers to the cross-sectional units and t is the time period. ii. the fixed effect model the fixed model can be specified as copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 12 itititititiit uxxxxy  43211  5 where i in refers to the cross-sectional units representing the intercept value for each cross-sectional unit. a-priori expectation base on theories such as market efficiency theory and empirical results examined in this study, the variables are expected to have a positive effect on the dependent variables. the mathematical implication is stated as follows": 1 > 1 > 1 > 1 >0 reject mm hypothesis 1 < 1 < 1 < 1 >0 accept mm hypothesis 1t > 1t > 1t > 1t >0 reject mm hypothesis 1t < 1t > 1t > 1t >0 accept mm hypothesis 4. analysis and discussion of findings the objective of the study as earlier stated was to the validity of mm capital structure irrelevant hypothesis in among nigeria quoted manufacturing firms. table 1 "random effect versus fixed effect models redundant fixed effects tests effects test statistic d.f. prob. cross-section f 2.745830 (14,70) 0.0028 cross-section chi-square 38.956792 14 0.0004 correlated random effects hausman test test summary chi-sq. statistic chi-sq. d.f. prob. cross-section random 7.593197 4 0.0077 source: computed from e-view output regression results the table below has detail of the regression results for the study. table 2: presentation of regression results variable coefficient std. error t-statistic prob. fixed effect model der 5.404256 8.785037 3.845004 0.0010 ltd 4.114058 6.536689 2.101652 0.0392 ecr 3.97e-05 6.789103 3.770943 0.0433 rer 4.567476 4.016006 1.244798 0.0174 c 1.112783 4.431482 2.578978 0.0120 effects specification cross-section fixed (dummy variables) r-squared 0.770126 mean dependent var 0.715629 adjusted r-squared 0.508158 s.d. dependent var 0.417724 s.e. of regression 0.371714 akaike info criterion 1.045440 sum squared resid 9.671980 schwarz criterion 1.576722 log likelihood -27.52208 hannan-quinn criter. 1.259585 f-statistic 2.285185 durbin-watson stat 2.386338 prob(f-statistic) 0.007412 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 13 random effect model variable coefficient std. error t-statistic prob. der -4.391873 2.424867 -2.179422 0.0280 ltd 4.859817 4.856175 2.589808 0.0156 ecr 9.209705 9.948605 4.924922 0.0077 rer 5.054671 4.235692 3.820656 0.0142 c 4.912649 8.407194 2.241314 0.0276 effects specification s.d. rho cross-section random 0.174110 0.0099 idiosyncratic random 0.371714 0.0001 weighted statistics r-squared 0.639380 mean dependent var 0.471406 adjusted r-squared 0.416364 s.d. dependent var 0.378087 s.e. of regression 0.379436 sum squared resid 12.09359 f-statistic 3.860877 durbin-watson stat 1.956302 prob(f-statistic) 0.000981 unweighted statistics r-squared 0.614596 mean dependent var 0.715629 sum squared resid 15.13129 durbin-watson stat 1.612342 source: computed from e-view output" discussion of findings the "hausman test tests the null hypothesis that the coefficients which are estimated by the efficient random effects estimator are the same as the ones estimated by the consistent fixed effects estimator. therefore, this includes insignificant p-value, prob>chi2 larger than 0.05, the null is more suitable to use random effects. according to above table shows hausman specification test the model has the value of p=0.0009 for the regression model of dependent and independent variables (table i). this shows fixed effect model is more appropriate, because the null hypothesis is not accepted. therefore, this includes insignificant p-value, prob>chi2 larger than 0.05, then it is more suitable to use random effects. however, if we have a significant p-value, then we should use fixed effects models." like the dividend policy, the opinion that capital structure has effect on the market value of listed companies has long been a point of departure among scholars in the field of finance. the gordons relevant theory was challenged by the miller and modigliani irrelevant theory. however, it is important to note that the assumptions of the mm hypotheses are not attainable mostly in the emerging financial market like nigeria where the financial market cannot be defined as a regulated or deregulated market. empirical evidence has validated the relevant theory as opposed to the irrelevant theory. the findings the study as shown in the table above consolidates the opinion of gordons and invalidates the mm hypotheses. this finding shows that dividend policy is a major determinant of stock prices of the quoted firms. this finding confirms the findings of akani and lucky., (2016) on the effects of capital structure on the share wealth of nigeria commercial banks, it confirm the findings of patel and bhatt (2013) whose study found significant relationship between capital structure and stock prices of firms listed on pakistan stock exchange. it is in line with the findings of ahmad, abdullah, & roslan (2012) whose study validated the relevant theory of gordon. 5. conclusion the arguments, simulations and evidence in the foregoing studies seem not to agree on the exact causal direction between corporate capital structure and profitability and also on the impact of capital structure and the value of corporate firms. however the above issues that was raised in the literature review still remains largely controversial. "like the dividend policy theories, the assumptions of capital structure theories are based on the well-developed financial policies as opposed to an emerging financial environment such as nigeria. for instance the assumption of the perfect capital market compared to other emerging capital market that is characterized with insider dealings and other insider abuse. the theories suggest that firms select capital structure depending on attributes that determine the various costs and benefits associated with debt and equity financing. the divergences among scholars have deepened as more theories emerge with different opinions on the relationship between capital structure and performance of corporate firms." from the findings of the study, we conclude that capital structure is relevant. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 2; 2019 14 6. recommendation in line with the findings of this study, the following recommendations are made:  "the study recommends internal and external policies to deepen the efficiency of the nigerian capital market to improve an easy source of capital to produce better returns for listed nigerian listed companies and that a financial system such as a banking institution should reform to facilitate low-cost debt .  the study recommends that a proper monetary and macroeconomic environment be created so that it has a positive impact on investment and those nigerian companies' investments should be properly managed to maximize the profitability of a better shareholder fund.  the study recommends structural reforms in the capital structure of some companies to improve their profitability. nigerian companies should strive to match their high market performance with actual activities that can help to reflect market performance in their internal growth and accounting performance. and companies should rely less on debt capital, which accounted for most of their leverage, and focus more on developing internal strategies that can help further improve capital performance, and companies should develop a good strategy to maximize their capital effects in a way that creates growth opportunities. references abbasali, p., & esfandir, 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), 166 – 181. abdul, g. k., (2010). the relationship of capital structure decisions with firm performance: a study of the engineering sector of pakistan. comsats institute of information technology, vehari aghabeygzadeh, s., & akbarpour, m., (2011). reviewing relationship between financial structure and firms performance in firms traded on the tehran stock exchange. international journal of business administration vol. 2, no. 4, p. 175-180. ahmad, z., abdullah, n. h., & roslan, s., (2012). capital structure effect on firms performance: focusing on consumers and industrials sectors on malaysian firms. international review of business research papers 8 (5), 137-155. akani, h. w., & lucky, a. l., (2015). econometrics analysis of capital adequacy and the impact on profitability of commercial banks in nigeria. iosr journal of economics and finance, 6(6), 11-24. akinyomi, o. j., (2013). effect of capital structure on firms performance: evidence from nigerian manufacturing company. international journal of innovative research and studies. 2 (9), 2319-9725 al-taani, k., (2013). the relationship between capital structure and firm performance: evidence from jordan. journal of finance and accounting; 1(3):, 41-45. aman, s., (2011). ownership structure and corporate performance: evidence from india. international journal of humanities and social sciences, 1(1), 23-29. amanuel, m., (2011). the determinants of capital structure evidence from manufacturing share companies of addis ababa city‘, master‘s thesis, addis ababa university. amjed, s., (2011). impact of financial structure on firm’s performance: a. society of interdisciplinary business research (sibr), 454-476. azhagaiah, r., & gavoury, c., (2011). the impact of capital structure on profitability with special reference to it industry in india. managing global transitions, 9 (4), 371-392. babalola y. a. 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(2011).perceived relationship between corporate capital structure and firm value in nigeria.international journal of business and social science vol. 2 no. 19 (special issue october 2011) shibru, w., (2012) determinants of capital structure of commercial banks in ethiopia. master‘s thesis, addis taiwo, a. m., (2012). an empirical analysis of capital structure on firms’ performance in nigeria, international journal of advances in management and economics.1 (5), 116124 tongkong, s., (2012). key factors influencing capital structure decision and its speed of adjustment of thai listed real estate companies procedia -. social and behavioral sciences 40, 716 – 720. umar, m., tanveer, z., aslam, s., & sajid, m., (2012). impact of capital structure on firms’ financial performance: evidence from pakistan. research journal of finance and accounting, 3 (9), 133-149. velnampy, t., and niresh, a., (2012). the relationship between capital structure & profitability sri lanka, global journal of 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exploration of micro-finance banking policies and strategies for poverty reduction in nigeria umar farouk musa1 inuwa baba abubakar2 1department of political science, faculty of social and management sciences,bauchi state university, gadau, nigeria. 2bauchi state debt management agency, gadau, nigeria. correspondence: umar farouk musa, department of political science, faculty of social and management sciences, bauchi state university, gadau, nigeria, tel: +2348030910747, e-mail: umar_farouk@gsgs.uum.edu.my received: october 01, 2017 accepted: october 05, 2017 online published: october 10, 2017 abstract poverty is one of the socioeconomic challenges bed evilling many families, particularly the northern states of nigeria. this study applied qualitative research paradigm and generated the perceptions of informants via convinience sampling. we analyzed the data through thematic, narrative and interactional apparoach. our objective is to explore microfinance institutions strategic policies for poverty reduction and recommend to policy makers. the results exposed that micro financial institutions were classified into formal, informal, development and those with mortgage outlook.the central bank of nigeria issue the certificate for authorization, the licensing and ownership. the paid-up capital requirements, the permissible and acceptance of deposits, savings from individuals, groups and associations were the policies which propel these institutions. the non-permissible policies are restrictions on acceptance of public sector deposits. the study identified inadequate supervsions and loans defaults, poor infrasturectural facilities in rural areas, pitiable communication and derisory banking experience among the poor and low income earners, limited standardization and operating system as well hampered their services in the quest to mitigate poverty in the study area.the re-capitalization, efffective regulatory control via financial control, regularly supervision, checks and balances. capacity building programs and proper staffing.provision of appropriate business model; strategies and creation of awareness. the provision of door to door banking marketing awareness, establishment of financial literacy; consumer protection programs and provision of non-interest banking programs were perceived to overcome the perils of these institutions respectively. the study recommended for establishment of islamic financial institutions and takaful insurance scheme. keywords: poverty reduction, microfinance institutions, types, policies, challenges, strategies. 1. introduction the expansion of micro financial institutions started earlier in the form of informal cooperatives societies, micro credit and savings by various communities in nigeria (taiwo, alege & olokoyo, 2016). however, the establishment of grameen bank in bangladesh in the 1970s led to the adoption of modern formal financial exploration of micro-finance banking policies and strategies for poverty reduction in nigeria umar farouk musa and inuwa baba abubakar 2 institutions and banks in many developing countries. in the same vein, the government of nigeria established various policies and programs to cover 65 percent of the economically active population by the year 2020, improve the services of micro credit schemes, increase women access to financial services, jobs creation and poverty reduction.nevertheless, literature indicated an unequal distribution of microfinance banks in the country. the northern part accomodates only 25 percent while the southern part of 75 percent respectively.these imbalances contributed to shortages of capital and increased poverty level in northern nigeria. studies equally reveal that the northern regions have higher of poverty indices for instance thenortheast 73.3 percent, west 77.7 percent and central 67.5 percent. these uncover that the northern region have higher socio-economic defies compared to the southern region. other challenges bed eviling the north include jobnessness, illiteracy and crimes leading to the under developmentof this part of the country (acha, 2012; khan & cheri, 2016). prior studies reveals that insufficiency of capital, misppropriation of funds, frequent change of government policies, inadequate technical skills and high risk as well as lost of loans recovery difficulties were some of the factors militating against the actvities of microfinancial banks in nigeria (edwin,taiwo, yewande, & benson, 2016). literature attested that nigeria microfinance institutions are emerging with unique structures compared to other african countries particularly the formalization policy of 2005 and effective 2008 transform community banks to mfis. for instance in zambia microfinance policies were unspecified but the government realizes the imperatives of under-banked; un-banked financial services for poverty reduction and established some regulations in the year 2006 (siwale & okoye, 2017).these problems motivated this study in order to explore the strategies to address these imbalances; disparity affecting the country and specifically the north. the study is structure into introduction, research questions, objectives, and research methodology and data analysis. four interview protocols were developed as well as literature review on the concept of microfinance and poverty.a thematic analysis was applied in aswering the research questions. the results were discussed and corroborated by previous studies.the recommendations; conclusion and references were as encapsulated. 1.1 research questions  what are thetypes and policies established for micro-finance institutions to reduce poverty?  what are the strategies to improvethe servicesof micro-finance institutions to reduce poverty in nigeria? 2. research objectives  to identify the tyes and policies established onmicro-financal institutions to reduce poverty.  to explore the strategies of improving the services micro-financial institutions to reduce poverty. 3. research methodology this study applied the qualitative research design; exploratory approach and convinience as well as snowball sampling framework. the population of the study covers the northern states of bauchi, jigawa, niger and kano states. literature indicated that bauchi and jigawa state have high rate of poverty; while kano have high concentration of microfinance institutions in the northern nigeria while niger state have high agricultural potentials. the data was collected from lecturers, bankers, individual customers of micro financial institutions and the poor alike.the study also adopted semi-structured interview and generated relevant data, thereby achieving the stated research objectives. we employed this approach due its adaptability, flexibility and compliance to the changing nature of the phenomenon under study (creswell, 1994; tansey, 2007). a thematic, narrative analysis, via interactional approach was adopted (riessman, 2005; riessman, 1993).the interaction facilitated the exploration of micro financial institutional types, policies, challenges and strategies to revamp its exploration of micro-finance banking policies and strategies for poverty reduction in nigeria umar farouk musa and inuwa baba abubakar 3 social services to mitigate poverty. 3.1 interview protocols  could you mention the types of micro-finance institutions in nigeria?  what are the policies that propel micro-finance instituions to mitigate poverty in nigeria?  what are the challenges of micro-finacial institutions in nigeria?  explain the strategies to improve the policies and services of micro-finance institutions to reduce poverty. 4. literature review this section of the study reviewed previous literature on the poverty and microfinance instutitions. the concept of poverty is broad and generic. however, the world bank (2011), defined it as the condition of the absence of basic needs to enable individuals to live comfortably. the manifestations comprises of denial of education, portal driking water, health services, sanitation, low of expression, inadequate protection and social security (ijaiya, 2015; musa et al, 2016). studies have identified different manifestation of poverty which include absolute or severe, relative, multidimensional and dollar per day poverty (lame &yusoff, 2015; ige, 2014; hettne, 2002; obikeze, & mathias, 2000). absolute poverty is the severity in the acute shortage of food, educational support, sanitation and medical facilities, portable drinking water, low income; information and access to financial services. on the other hand, relative poverty is the condition in people faces the inadequancy of income needed to maitain an acceptable average standard of living in a country they live. these differ from country to country for instance relative poverty implies the position of a particular household or an individual in relation to the standard of living in a country. relativity is measured in three elements of income, disposable income and low level of household income (foster, 1998). 4.1the concept of micro-finance the term microfinance refers to a broad range of monetary services to middle, low-income businesses as well as household. these services usually include loans, savings, leasing, insurance and transfer of monies among others. microfinance instititions provides microcredit services and loans facilities to small and medium scale entreprises to generate income and provide employment opportunities.studies indicated that micro-finance institutions were categorized into formal and noninformal structures. the proliferation of microfinance institutions in nigeria became into being in the form of microcredit facilities.these development addresses the challenges of inadequate financial services to the small scale businesses and the poor alike. government provided some policies, initiatives, particularly through the promulgation of the cooperative society’s ordinance 1963. primarily, these societies were regualted, supervised and coordinated by the department of cooperatives in the federal ministry of agriculture.the government established nigerian, agricultural and cooperative bank (nacb) in the 1973 and provided loans to small, medium and large scale via states governments in the country. the federal government equally launched agricltural, credit gurantee scheme fund (acgsf) in the year 1978 and was mandated to minimise risk associated with agricultural lending policies by banks and other natural occurence beyond the control of the farmers. the central bank of nigeria later mandated universal or commercial banks to establish some of their branches in specific and identified rural communities and this led to the launching of over seven hundred branches in nigeria (adeyemi, 2008). this program was as well suspended in 1989. as result of this development, particularly in 1986 to 1990 these banks were neither having does not branch in the rural areas or does the legal framework survives. the country witnessed a serious set back in the exploration of micro-finance banking policies and strategies for poverty reduction in nigeria umar farouk musa and inuwa baba abubakar 4 rural banking programs immediately after the liquidation of many regional banks in 1993 and 2003 respectively. the scenario affected the poor, hence bankings services became difficulty. studies in many developing countries of bangladesh, india, indonesia, philipinnes and thailand indicated that despite the apparent defy, confronting microfinancial institutions particularly, administrative difficulties, systemic risk, repayment slog and absence of standardized informantion; these banks had recorded success, for instance the grameen bank in bangladesh provided loans to the poorest in the rural areas, its women focused initiatives, about 94 percent of the beneficiaries and customers are the female folk, borrowing and lending were operated devoid of colleteral or security and the bank supported borrowers to excel in businesses;became self reliant there by cushioning their surferings (bakhtiari, 2011). literature divulge that the since 1984, the bank rakyat in indonesia provided deregulated policy services via autonomous microfinance system to rural and urban customers. the bank had a massive staff recruitment, retraining and incentives. this development transforms the bank from ailing public financial institution into profitable, liberated and self-reliant financial intermediary. for instance, the 3,700local branches served a sum of 29.8 million savings accounts with 3.1 million borrowers as at 2001. the packages reach the rural poor as well as other entrepreneurs; influences their decision making capabilities and family wellbeing respectively (panjaitan-drioadisuryo, & cloud, 1999). studies in india indicated that society for helping awakening rural poor through education (share) which stated operation in 1992 had substantailly grown into a microfinancial institution in the country; disbursed over 13 million usd loans to borrowers, 1.3 million and provided technical in addition to financial services to bearly 61,000 women living in abject poverty particularly rural areas of andhra pradesh state. these policy strategies, according to the results, usher in improved living condition, they became self employed and 50 percent of the beneficiaries had already traversed the poverty line (bakhtiari, 2011).however, despite the achievements recorded by microfinancial institutions on poverty reduction in many developing countries as mention above, poverty remains one among the socioeconomic predicaments in parts of the world. literature further supposed that countries such as india and nigeria recorded economy growth but multidimensional poverty indices exist side by side along with other forms of deprivation in which policy makers consistently aspire for robust solutions (aku, 2017; alkire, & seth, 2015; imai, arun & annim, 2010). based on the above arguments, studies indicated that microfinance institutions were utilized as effective strategies in poverty reduction in bangladesh, india, indonesia, philipinnes and thailand. however, studies in other developing countries, specifically nigeria, uncover that some predicaments were identified and rendered these institutions weak in the quest to reduce the paucity of resources. for instance insufficient capital, diversion of the funds, frequent change of government policies, inadequate technical skills and high risk as well as lost of loans recoverydifficulties were some of the factors militating against the actvities of microfinancial banks in nigeria(edwin,taiwo, yewande, & benson, 2016). okpara, (2010) studied the impact of microfiance banks and poverty alleviation in nigeria using secondary data obtained from the national bureau of statistics and analysis the results through factor analysis. findings from the survey reveals that low profit, inadequate capital to set of business and high prices of commodities were some of the factors that causes poverty in the nigeria context. the study further discovered two major phases in which microfinance influence poverty reduction: the take-off stage, which explains that poverty is increasing while as at the year 2001, the proliferation of more microfinancial institutions led to the decrease of poverty level, thus, microfinance facilitated the reduction of paucity of resources in the country. the study exploration of micro-finance banking policies and strategies for poverty reduction in nigeria umar farouk musa and inuwa baba abubakar 5 recommendated for the government to established more microfiance institutions in the country. however, the study was limited to secondary data hence; survey on the causes of poverty requires primary data via interview and a survey. in a study on the challenges and prospects of microfinance banking institutions in nigeria, acha, (2012) discovered that inadequate infratsructures, poor legal and regulatory institutions, social misconception, paucity of qualified manpower among others were the challenges of microfinance banks in the country. the study equally unveil that despite the aforementioned chllenges the growing entrepreneurial awareness, high population of the poor and increasing interest of the policy makers in allevaiting poverty were as well discovery to influence the viability and flourishment ofthese institutions. the study suggested for the restablishment of the regulations and articulated commitment to push microfinance banking instutitions in nigeria. this study is constraint by the shortfall of proper methodological techniques in the process of data collection and unable to esatablish limitations as well as direction for future studies. based on the literature reviewed, several gaps were identified which this study intends to fill and explore startegies to cushion the difficulties the poor encountered in accessing microfinancial packages in the nigeria context. for intance bank rakyat in indonesia had yielded remarkable improvement on poverty reduction via uniformity of packages.while the center for agriculture and rural development (ca rd) had afforded 34,000 poorest women with capital and in the long run became self-employed in philippines. additionally, a sum of 17 .25 million usd was disbursed and these development translated into poverty reduction via microfinance institutions (bakhtiari, 2011).liman, hashim, & arshad, (2017) attested that microfinance institutions in nigeria lacks uniform lending policies, organizational strategies and heterogenous in terms of ownership. they further identify that insufficient capital, frail legal framework, financial products and expertise services constraints, cummulated into fragile services rendered to their respective customers. 5. data analysis and results the results were articulated according to types of microfinance in nigeria, policies, challenges and strategies to improve microfinance institutional services to reduce poverty respectively. 5.1 types of micro-finance institutions in nigeria the informants narrated that the types of microfinancial banking instututions in nigeria consist of formal, informal, development and mortgage. others include community bank, public or government owned, private and foreign microfinance and thus: formal microfinancial institutions were design by the cenral bank of nigeria purposely to provide financial services to the active poor population who were excluded from government financial institutions.their services comprises of issuence of microcredits facilities, acceptance of deposits, facilitation of credit transfer and offering leasing as medium term finance (informant1). the informal microfinancial institutions consist of cooperative credit society, community savings and loan associations. cooperative credit society serve as associations of individuals that pooled resources collectively on mutual basis for specific socio-economic purposes.the community savings and credit schemesareforms of financial institutions established by societies for mutual benefits of their members. they are mostly owned by communities,they offer loans within the duration of three to six months with less than five percent and not more than twenty percent interest rate. these banks usually established a policy of repayment daily, weekly and monthly respectively. they offers a minimum loans package of ten thousand naira. the schemes were informal in nature with low interest rate (informant 1&5). exploration of micro-finance banking policies and strategies for poverty reduction in nigeria umar farouk musa and inuwa baba abubakar 6 informant two maintained that microfinance were categorised into those engaging develoment programs such mortgaging, community financing services such as issuence of loans and microcredit facilities to the poor and low class citizens. these institutions equally provided financial services to with low interest rate, mostly one percent in nigeria. there are basically three different types of microfinance institutions in nigeria and specifically in kano: public owned microfinance banks with about thirty eight branches in the state such as gaya, dambatta-makoda, access, albasu, north bridge, sauna and municipal microfianance banks respectively.commmunity microfinance banks especially in the southern part of nigeria. there are equally those with islamic packages and orientation. these are called islamic microfinance banks (informant four). informant five, attested that microfinancial banks in nigeria are categorised into community, private, ngos, public and foreign institutions. for instance the public owned mfis offers a minimum loans facility of ten thousand for duration of six months and repayment installment period of weekly and monthly.the ngos usually offers loans packages with a minimum amount of ten thousand naira for duration of six months and repaymen period of daily and weekly respectively. these were the classifications and types of mfis in nigeria, based on the supposition of the informants. literature indicated that the practice ofinformal microfinances arrangements existed in nigeria in the form of self help organizations called rotating savings; credit union and cooperative societiesrespectively (siwale & okoye, 2017). 5.2 policy thrusts on mfis as poverty reduction strategies in recognition of the economic and social developmental roles of mfis on poverty reduction, the central bank of nigeria launched the national microfinance regulatory policy, and supervisory framework (nmprsf) in the year, 2000 and 2011 respectively.a comprehensive review on the policy for the development and expansion of microfinance institutions, the national microfinance development strategy (nmds) were to revamp the industry and overcome the challenges of the earlier policies. informant four maintained that: the aforementioned policies were established to ensure the mfis become efficient and accessible to the poor both in terms of financial services as well as cover 65 percent of the economically active people by 2020. to increase the share of micro credit from 0.9 percent in 2005 to 20 percent in the year 2020, promotion of the participation of at least two-thirds of the states and local governments, reduction of gender disparity and improve women`s accessibility to financial services by 15 percent annually and increase synergy among mfis and other financial institutions by 10 percent annually. he further upheld that to achieve these objectives, the following policies were established. the licensing and ownership: the cbn provides the license to them to operate as community banks, private mfis, government mfis, ngo mfis and foreign mfis. the cbn equally, determines the ownerships of these mfis include individuals, group of individuals, government body, community development associations, private corporate entities and foreign investors respectively. paid-up capital requirements, include unit microfinance banks, the state mfis and the national mfis. for instance, the unit microfinance banks are authorized to operate in only one location and is required to have a minimum paid-up capital of n20 million (twenty million naira). the state mfi is authorized to operate in only one state or the federal capital territory (fct), abuja and is required to exploration of micro-finance banking policies and strategies for poverty reduction in nigeria umar farouk musa and inuwa baba abubakar 7 have a minimum paid-up capital of n100 million (one hundred million naira). the national mfis is required to have a minimum paid-up capital of n2 billion (two billion naira) and is authorized to operate in more than one state, including the fct, abuja respectively. the permissible and acceptance of several types of deposits including savings, time, and target from individuals, groups and associations.the provision of credit to its customers the formal and informal self-help groups, individuals and associations.promotion and monitoring of loan usage among its customers by providing ancillary capacity building in areas such as record keeping and small business management.others include buying, selling and supplying industrial and agricultural inputs, livestock, machinery and industrial raw materials to low-income earners on credit and to act as agent for any association for the sale of such goods or livestock. the non-permissible activities are prohibited from engaging in the following activities: acceptance of public sector (government) deposits.foreign exchange transactions.international commercial papers. international corporate finance; international electronic funds transfer; clearing house activities and dealing on land or any facility for speculative purposes.financing of any illegal/prohibited activities such as gambling, drug-trafficking, and firearms. 5.3 challenges of mfis in the nigeria the informants categorically identified different problems which hampered the services of mfis in the quest to mitigate poverty in nigeria and specifically the northern states;these includes; lack of access to electricity supply; inadequate supervision and loan defaults. unsustainable intervention programs; insufficient cheap funds; low public awareness and poor regulatory enforcement; poor communication and deficiency of banking experiences among poor and low-incomeearners; high operating cost; low literacy rate among the population; insufficient donor funding, loan and equity.limited standardized reporting and performance monitoring system.lack of good roads and transportation system respectively. kanu, 2017, pinpointed difficulties related to infrastructure, finance and other predicaments especially in rural areas. for instance, informant four attested that: lack of access to regular electricity supply appeared to be the most common and pressing challengefaced by mfis in nigeria. this is probably due to the insufficiency of electricity supply in the country. the estimated electricity supply in the country is as low as 1,327 megawattsnevertheless, the average usage of electricity amounted to 10,000mw. literature, attested that out of the 23 electricity plants stations in the country, only five are functional(udo, 2015). these implies thatmfis have to source generate power via generators to provide the electricity they needed in running their administrative and business operations. the study found that mfis have inadequate supervision and seen to experiencing loans default. the lack of supervision as well as control in operational procedures which affected not only their loan disbursement and repayment but also in some cases resulted in fraudulent practices among the staff of the mfis (informant four). the informants opined that intervention programs for mfis provided by the government were unsustainable.generally, they have limited source of funding and therefore, needed financial support to expand their lending packages.most mfis in nigeria wereprimarilyreinforced by the government, large companies and non-government organizations. however, the amount and types of assistance provided to mfis are limited on short basis. exploration of micro-finance banking policies and strategies for poverty reduction in nigeria umar farouk musa and inuwa baba abubakar 8 insufficient funds: another pressing problem faced by the mfis as identified in the study involved the lack of access to cheap funds. given this challenge they needed expansion of lending capabilities; mfis were compelled to borrow additional funds from conventional banks. however, borrowing from the banks is sharply inconvenient for them. the commercial banks charge the mfis an interest rate of 22 percent per annum on theseloans. (cbn, 2016). low public awareness and regulations: these problems affected their performance in poverty reduction process, certain proportion of the population in the country, especially at the rural areas are still not familiar with the types of financial products and services provided by the mfis. additionally, the introduction of lending regulations has also limited their abilities in loan services. these regulations restricted them from accepting cash deposit from their customers.the restrictionsaffected the liquidity of these financial institutions. lack of infrastructural facilities such as roads and transportation system has also affected the operations of the mfis. the informants indicated that good roads are needed to link their institutions with customers in the urban and rural areas across the country.literature divulge that about one third of the network of roads in nigeria needs to be rebuilt (akinwale, 2010). 5.4 strategies to improve mfis services to reduce poverty in nigeria the informants suggested for efffective regulatory control via financial control, regular supervisor and checks as well as balances to enhance their performance. capacity building programs and proper staffing were equally suggested.provision of appropriate business model; strategies and creation of awareness.the provision of door to door banking marketing awareness, establishment of financial literacy; consumer protection programs and provision of non-interest banking programs respectively. for instance, in order to improve the services of the microfinance banks, there is the need for the expansion of access to capital to the poor and reduction of the interest rate or where necessary an interest free services. these will go along way in allevaiting poverty (informant three). literature indicated that microfinancial institutions provided loans and other financial services to the low income and the poor. it further play significant roles in economic development, poverty reduction, employment generation and easy access of loans to small scale business in kwara state, nigeria (yahaya & osemene, 2011). informant three: recapitalisation and innovations: these institutions required more capital in order to increase accessibility of the funds by the small scale business and the poor. other attractive revolutions such as marketing of the products and services in the villages will influence the entrepreneurs and farmers to patronised mfis activities. literature attested that recapitalization of microfinancial banks will ensure vibrant support for small scale business and enhance proper management of loans disbursement as well as granting adequate credit facilities to poor and small scale businesses operators (taiwo, yewande, edwin & benson, 2016). establishment of additional branches across towns and villages. the expansion of mfis services to remote areas will accelerate easy access to their services and encourage competition across the towns and villages .i suggested for establishment of three to five branches in each lga especially in the northern part of nigeria( informant three). i am of the view that mfis needs focused to specific sectors of the economy for instance if individuals are interested in agriculture, the loans services should be perculiar to agriculture, small and medium scale enterprises, transportation and other services requires (informants three). exploration of micro-finance banking policies and strategies for poverty reduction in nigeria umar farouk musa and inuwa baba abubakar 9 5.5 discussion this study utilized the thematic and interactional narrative data analysis method in which the results were discussed according to the research questions and facilitated the achievements of the stated objectives. thus, theme one answered research question one and theme two answered the second question respectively. theme one, addressed the types and policies adopted by the government and other operators of microfinancial banking institutions to reduce poverty. the results reveals that the different formsand practices of microfinancial banking instututions in nigeria include formal, informal, development and mortgage. others comprise of community banks, public or government owned, private and foreign microfinance institutions. literature divulge that the informal microfinancial institutions existed before the establishment of the formal banks in all parts of the countryand provided some traditional forms of banking services for the mutual benefits for their members such as savings and credits facilities to carry out their businesses. on the other hand the formalized institutions provided services in the areas of savings, credit and insurance. the formal institutions targeted the improvement of the socio-economic status of women particularly in the rural areasvia loans, skills aquisitions, adult literacy and reproductive health care. the services equally covers community services on wealth creation amid the poor and the entrepreneurs respectively (olomola, 2002).prior studies indicated that the inability of the formal financial bodies to provide efficient services to the rural and urban poor; the unsustainable attitude of the public financial institutions led to the proliferation of the private microfinancial banks in nigeria. the foreign mfis are those owned by some multinational corporations, shareholders and partners (liman, hashim & arshad, 2017; anyanwu, 2004). the informants maintained that other forms of mfis consist of those with mortgage and developmental outlook which finance housing and other long term businesses. the central bank of nigeria regulated and supervised the mfis in the country. there were different policies which legalize their activities, in same vein the informants narrated that national microfinance development strategy (nmds) were established to revamp the industry and overcome the challenges of the earlier policies and the national microfinance regulatory policy, and supervisory framework (nmprsf) in the year 2000 and 2011 respectively.these policies comprises of the licensing and ownership. the central bank of nigeria issue the certificate for authorization to all the categorize of mfis such community, private, government, ngo and foreign mfis. the cbn likewise regulated the ownerships of these mfis either individuals, or group of individuals, state or local government body, community development associations, private corporate entities and foreign investors respectively. these currently defines the size, duration of loans and initial capital to set up mfbs. preceding study uphold that the regulations wereprofessionally organizedbut yielded insignificant impact on the empowerment of the poor in the country (siwale & okoye, 2017). the paid-up capital requirements policy which encompasses the operational permission on the aspect capital and coverage in the states, the federal capital and the country at large.for instance, a sum of twenty million pay-up capital are required for states mfis whereas the fct and the national branches should have one hundred million and two billion naira respectively. literature indicated that viable capitalization requirement depends on the geograhical coverage of these banks, population, volume of business and scope.thesefurther solidify their efficiencies as well as compentencies in making capital available for their customers (ebomuche, ihugba, & bankong, 2014). other regulatory policies consist of the permissibility and acceptability ofdifferent transactions such as savings, time, and targeted individuals, groups and associations. the mfis provides credit to the customers formally and exploration of micro-finance banking policies and strategies for poverty reduction in nigeria umar farouk musa and inuwa baba abubakar 10 informal. they also promote and monitored loans disbursement particularly on capacity building in the areas of small business management and record keeping. additionally, the policy permitted the buying, selling, and supply of industrial and agricultural inputs. the services also covers machinery and industrial raw materials to low-income persons on credit and to act as agent for any association for the sale of such goods or livestock.the mfis were constrained from accepting public deposits, foreign exchange transtions, international corporate finance, commercial papers, electronic funds transfer and clearing house business. the policies equally restricted them from any facility for speculative purposes and financing illegal transtions such as gamling, firearms and drug-trafficking. astudy from the central bank of nigeria, attested that the rationale for the regulations were to ensure economic reforms and achieve price stability, employment, economic growth; internal and external balances as well as repostioned the country amid 20th vibrant economies by 2020(sanusi, 2012). answering research question two, the informants identified and narrated various challenges bedevilling the successful operations of mfis, especially in the study area which includes deficiency of access to electricity supply; inadequate supervision and loan defaults. unsustainable intervention programs; insufficient cheap funds; low public awareness and poor regulatory enforcement; poor communication and low awareness in society; lack of banking experience among poor and low-income earners; high operating cost; low literacy rate among the population, insecurity in the northern eastern states; insufficient donor funding, loan and equity.limited standardized reporting and performance monitoring system.lack of good roads and transportation system in some rural areas respectively. literature established and attested that there were cases of diversion of funds allocated for the loans packages to small scale farmers especially among public mfis, other perils include inadequate finance to effectively operate, low capacity building and technical expertise in management of mfis led to increase in the poverty level especially in the northern nigeria (taiwo, yewande, edwin & benson, 2016). re-capitalisation and innovations in addition to the establishment of additional branches across towns and villages.prior study uphold that for mfis to effectively function viable financial services should be establish and expand the coverage in addition to the scope of these institutions across rural areas. these services will go along way in influencing the small scale business to mitigate poverty especially in the northern part of the country (ogujiuba, jumare & stiegler, 2013). the efffective regulatory control via financial control, regularly supervisor and checks as well as balances to ensure that these institutions operate within the premise of the guidelines, effective, efficient regulatory and supervisory fron the central bank of nigeria and nigerian deposit insurance corporation.futhermore, the roles of government in terms of establishing good governance practices, the poltical and economic environmental atmosphere shall boost mfis especially via inclusive approach such as involvement other stakeholders in its administration(ikeanyibe, 2009).capacity building programs and proper staffing were applied bythe stakeholders in equiping the client alongside skills acquisition, capabilities and empowerment services to benefit from the services offered by mfis. these shall remedy some of the challenges of these organizations in poverty reduction. again human resources management and development were proposed in strengthening the manpower needed in the overal achievement of inter and intra organizational productivity in the areas of staff selection, training, compensation and addressing the core areas of poverty alleviation, unemployment and inequality (ikeanyibe, 2009).provision of appropriate business model; strategies and creation of awareness. the provision of door to door banking marketing awareness, establishment of financial literacy; consumer protection programs exploration of micro-finance banking policies and strategies for poverty reduction in nigeria umar farouk musa and inuwa baba abubakar 11 and provision of non-interest banking programs.studies in india reveals that clients were able to utilize microfinance products to increase their income, social welfare and the microfinance is positively associated with increased income and asset buildup. microfinance interventions are well-recognized world over as an effective tool for poverty alleviation and improving socio-economic status of the rural poor. previous study exposed that for mfis to effectively function and mitigate poverty, visionary, transformational and goal driven leadership style is a prerequiste. a statemanship that will be result oriented and ensure effective public services to these organiztions. the study additional indicated that creativity, innovative, transparent, futuristic leadership qualities and inundating on all the policies and programs is highly required for microfinancial institutions in nigeria to address the phenomenon of poverty (ezeanata walter, & parimoo, 2016). 6. recommendation the study recommended for an establishment of islamic microfinance and takful insurance programs to avail the poor and potential customers the opportunity to access interest free loan and business coverage in case of lost. the need for microfinance banks especially those operating in the northern part of the country to be proactive in product development became imperative. since the religious precepts of the people in north make them abhor interest on loans and lending schemes.provision of infrastructural facilities such as good road network, electricity, and security across the towns as well as villages to increase the output of micro entrepreneurs. special attention should be given to power supply as this constitutes a major cost to microfinance banks in the country. microfinance policies; programs should further be publicized and advertised via the media so that the poor will be aware of the services of these institutions to access financial awareness to expand their businesses.the provision of capacity building for the staff and customers of these microfinancial institutions to ensure service delivery and provision of appropriate business model to reduce the poverty level in the northern region of nigeria.review of the policies in the areas of licensing and ownership; capital requirementsand recapitalization. these institutions required adequate capital in order to increase accessibility of the funds by the small scale business and the poor respectively. 7. conclusion thestudy concluded that the results exposed that mfis were classified into formal, informal, development and mortgage outlook. other types explored consist of community banks, public or government owned; private, foreign microfinance and islamic microfinancial institutions.we have discovered some policies such as paid-up capital requirements, the permissible and acceptance of several types of deposits including savings, time, and target from individuals, groups and associations. the non-permissible activities are prohibited from engaging into foreign exchange transactions, international commercial papers. international corporate finance; international electronic funds transfer and clearing house activities respectively.the study also discovered lack of access to electricity supply; inadequate supervision and loan defaults. unsustainable intervention programs; insufficient cheap funds; low public awareness and poor regulatory enforcement; poor communication and lack of banking experience among poor and low-income earners; high operating cost; low literacy rate among the population; insufficient donor funding, loan and equity. limited standardized reporting and performance monitoring system.the informants suggested for efffective regulatory control via financial control, regular supervisor; checks and balances.capacity building programs for the poor and staff developmentwere recommededappropriate business model; awarenesscampaign among others. the provision of door to door banking marketing awareness, establishment of financial literacy; consumer protection programs and provision exploration of micro-finance banking policies and strategies for poverty reduction in nigeria umar farouk musa and inuwa baba abubakar 12 of non-interest banking programs were advocated to revamp the ills of mfis on poverty reduction and empowerment. practically, the study will encourage policy makers to redifined the policies on mfis in the quest to mitigate poverty in the nigeria context.methodologically, the use of qualitative paradigm on mfis was applied which explored the perceptions of the interviewees on the strategic policies to empower the poor and small scale businesses and farmers respectively. however, the limitations of this study comprises of the application of nonprobability sampling technique and selection of few states from the nineteen states in northern nigeria. in order to overcome these limitations future study should apply quantitative design to achieve generalizability; 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(2011). effectiveness of microfinance banks in alleviating poverty in kwara state nigeria. global journal of management and business research, 11(4). copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. contents australian finance & banking review vol. 1, no. 1; 2017 published by centre for research on islamic banking & finance and business 41 cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky1 1department of banking and finance, rivers state university, nigeria correspondence:department of banking and finance, rivers state university, nkpolu orowurokwo, port harcourt, rivers state, nigeria.email: lucky.anyike@yahoo.com received: october 06, 2017 accepted: october 11, 2017 online published: october 14, 2017 abstract this study examined cost of capital and corporate earning of quoted firms in nigeria. the objective was to examine the effect of short term, medium term and long term cost of capital on earnings per share. cross sectional data was sourced from financial statement of twenty quoted firms from 2011-2016. earnings per share was proxy for dependent variable while cost of trade credit, cost of short term bank loans, cost of commercial paper, cost of banker acceptance, cost of line of credit, cost of revolving credit, cost of hire purchase, cost of operating lease, cost of debt, cost of preference share and cost of equity are proxy for independent variables. after cross examination of the validity of the pooled effect, fixed effect and the random effect, the study accepts the fixed and random effect models. findings reveals that cost of short term and cost of long term have significant relationship with corporate earning while cost of medium term have no significant effect on corporate earnings. it recommends the need for corporate strategies that will reduce cost of capital. keywords: cost of capital, corporate earnings, quoted firms. 1. introduction financing decision of any economic or financial unit, whether a private household, a business firm or government, consists of planning for, generation, and organizing of funds needed for investment and other activities. the two main sources of capital are the equity and debt which both needs to be remunerated at their own cost of capital. thus, a discussion on financing decisions must include analysis of the various sources through which the units can raise funds, and the associated costs, which is call the cost of capital (ezirim, 2005). a necessary angle to financing decision would include the determination of the optimal proportions of each form to be utilized by the concerned economic unit, noting the financial implications. the finance management function is a critical success factor and determines the earnings and survival of firms. these functions include the dividend and the financing decision. while the dividend decision determines the proportion of earnings to be distributed to shareholders and proportion to retain, the financing decision determine the optimal combination of debt and equity to maximize shareholders wealth. the cost of equity can be defined as the return expected on a firm’s common stock in the capital market. it represents the composition demanded by shareholders for providing capital and assuming the risk of waiting for this return. this implies that cost of equity reflects the opportunity cost of investigating in a firm’s stock as opposed to potential investments with similar risks. cost of cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 42 debt refers to cost of external source of fund such as cost of long term debt and cost of short term borrowings. determining optimal cost of capital constitute one of the key finance management functions for financing corporate growth of listed organizations. the central normative preposition of the micro theory of capital is that firms should adjust its capital stock until the marginal rate of return on further investment is equal to the cost of capital (jonathan & lorie, 2007). under condition of perfect market, certainty which is the basic assumption for the classical theory, develop the concept of capital which means the market rate of interest. due to the increasing global mobility and flexibility of capital, companies needs to ensure that they offer the required return since the risk of losing their investors which might more costly to the firms. the firm’s cost of capital can be used for discounting the cash flows of the investment projects which have risk equivalent to the average risk of the firm. it is needed for investment and financing decisions, business valuations, capital budgeting and determining recoverable amount for improvement test (brav, 2009). cost of capital is used as a discount rate or bench mark return in financing corporate growth. it is used to discount rate for company valuation with the help of the discount cash flow techniques such as the net present value, internal rate of return (dempsey, 2013). in international financial reporting standard (ifrs), cost of capital is relevant for impairment test as stated by international accounting standard (ias 36). there are limited studies of citable significant that dealt with problem of cost of capital and corporate earnings in nigeria. therefore this study intends to examine the effect of cost of capital on corporate earnings of quoted firms in nigeria. apart from section one above, section two focuses on both theoretical and empirical review of related literature, section three deals with the research methodology. section four deals with the data analysis and presentation and the fifth section contain the conclusion and recommendations from the findings. 2. literature review a firm raises funds from various sources, which are called the components of capital. different sources of fund or the components of capital have different costs. the cost of raising funds through issuing equity shares is different from that of raising funds through issuing preference shares. the cost of each source is the specific cost of that source, the average of which gives the overall cost for acquiring capital. the firm invests the funds in various assets. so it should earn returns that are higher than the cost of raising the funds. in this sense the minimum return a firm earns must be equal to the cost of raising the fund. the cost of capital may be viewed from two viewpoints acquisition of funds and application of funds. from the viewpoint of acquisition of funds, it is the borrowing rate that a firm will try to minimize. on the other hand from the viewpoint of application of funds, it is the required rate of return that a firm tries to achieve. the cost of capital is the average rate of return required by the investors who provide long-term funds (ezirim, 2005). in other words, cost of capital refers to the minimum rate of return a firm must earn on its investment so that the market value of company’s equity shareholders does not fall. estimating the cost of equity capital estimating the cost of equity involves estimating the expected return on a firm’s common stock. the cost of equity includes a risk premium to compensate shareholders for holding a risky equity security rather than a risk-free security:   ifi rprecoe r  (1) where icoe = firm i’s cost of equity, cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 43  ire = the expected future return on firm i’s equity, where returns include capital gains and dividends, fr = the risk-free rate, and irp = the equity risk premium for holding firm i’s stock. determining the cost of equity using the implied approach is analogous to determining the nominal yield to maturity on a bond. the implied cost of equity is the discount rate that sets the current stock price equal to the present value of expected future dividends per share. the relation between the current stock price (p0), the cost of equity (r), and future expected dividends per share (d1, d2, d3 …) is represented by the dividend discount model (ddm). 3 3 2 21 )1()1()1( r d r d r d po       (2) the simplest form of the ddm, the gordon dividend growth model, assumes a constant perpetual rate of growth (g) in expected dividends per share. with this assumption, dividends are an infinite geometric series, and the cost of equity can be written as a function of the dividend yield plus the constant growth rate: g p d r o  1 (3) residual income valuation (riv) models address the difficulties in estimating a long term growth rate by utilizing accounting information (lee, ng and swaminathan, 2004). these models equate the current share price to the sum of two components: (1) the present value of expected dividends per share over a short or medium-term horizon (n); and (2) a discounted terminal value, which is the present value of the expected share price at the end of the forecast period, assuming that dividends then grow at a constant rate (gl) in perpetuity: n n n t t t o rglr d r d p )1)(()1( 1 1        (4) riv models assume clean surplus accounting which requires that earnings are fully allocated between dividends and retained earnings; whatever portion of earnings that is not paid out in dividends is added to book value of equity. hence, book value per share (bvt) evolves according to the following equation: 111   tttt debvbv (5) and as roet = return on book equity = et / bvt-1 then bvt+1 )1(1( 1 1 1     t t tt e d roebv (6) cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 44 assuming that return on book equity and the dividend payout ratio after time n+1 remain constant, the following constraint is imposed on the long-term growth rate of dividends per share (gl) in equation (4) )1( 1 1 1     n n nl e d roeg (7) claus and thomas (2001) implement the riv model using a four-year forecasting horizon (n=4) and set the growth rate (gl) equal to the expected inflation rate (pe) in order to calculate a nominal cost of equity.8 dividends per share in year five are backed out from equation (6) as follows: 55 1()1( roe es roe g ed el ss   (8) so the cost of equity in the claus and thomas (2001) model is the value of r that solves the following equation: 4 5 4 1 )1)(()1( rr d r d p et t t o       (9) if dividends are all positive and the cost of equity is greater than the expected inflation rate, there is only one value of r that will solve this equation. another class of implied models assumes that the change in abnormal earnings from year to year grows at a constant rate into perpetuity (gode and mohanram, 2003). this is similar to assuming that the forecasted change in dividends grows at a constant rate, if the change in dividends is calculated as: )()( 111212 degeedd l  (10) in the ohlson and juettner-nauroth (2003) version, a closed form solution for the cost of equity can be backed out from the following relation between prices, next year’s earnings per share estimate and next year’s expected dividends per share: )( )(11 l ls l o grr gge gr d p      (11) where sg = short-term dividends per share growth rate =   112 / eee  lg = a long-term dividends per share growth rate easton’s (2003) model, called the modified-peg ratio model,10 is just a special case of the ohlson and juettner-nauroth model, where the growth rate in the change in dividends is set equal to zero (gl = 0) so that dividends grow by the same dollar amount every year into perpetuity. the current stock price is related to the cost of equity, the next two year’s forecasted earnings, as well as the next year’s dividend: cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 45 2 1 1 r ge r d p s o  (12) cost of debt when companies borrow funds from outside or take debt from financial institutions or other resources the interest paid on that amount is called cost of debt. the cost of debt is computed by taking the rate on a risk free bound whose duration matches the term structure of the corporate debt, then adding a default premium. this default premium will rise as the amount of debt increases (since, all other things being equal, the risk rises as the cost of debt rises). since in most cases debt expense is a deductible, the cost of debt is computed as an after tax cost to make it comparable with the cost of equity (earnings are taxed as well). thus, for profitable firms, debt is discounted by the tax rate. the formula can be written as: (rf + credit risk rate)(1 – t) where t is the corporate tax rate and rf is the risk rate. lenders expect payments of their loans both on the due date and at the contracted amount. they face the risk that payments are made too late and in for a lesser amount, including the risk of a total loss of capital and interest. to protect themselves against such contingencies lenders restrict their loans to certain amounts, require security and adjust their interest rates to compensate for the known risks; these adjustments are usually spreads over the risk-free rate of return reflecting the creditworthiness of the borrowers. the risk-free rate is that an asset would yield without any default, timing or exchange rate risk; as such, it is a non-observable theoretical construct. it is usually measured by the rates of return on government securities, which have the lowest risk, in any particular currency. sources and cost of short term funds sources of funds can be perceived in the light of their time duration, hence we have long-term, medium-term, and short-term sources of finance. it is conventional to look at short-term sources as those avenues with maturities of not more than one year. thus, short-term capital constitutes funds obtained for one year or less (ezirim, 2005). they are mostly employed for working capital requirements. examples include overdraft advances from banks, credit purchases, deposits or advances from customers, bills receivable, and bills of exchange. medium or intermediate funds are such that are usually arranged for periods longer than one year but less than ten years. they include bank loans and overdrafts, hire purchase and installment credits arrangements, mortgage loans, equipment leasing, sale and lease back contracts. long term sources involves those avenues for raising the long term/permanent capital attracts maturity dates of ten years more. examples of long term or permanent capital include ordinary shares, preference share capital and debentures. shares and debentures are hereby referred to as permanent capital because the funds supplied to the economic concerned units, in this case the firm, by investors when they buy the shares or debentures are not usually returnable (at least in the near future) to them except in the event of liquidation(ezirim, 2005). however, redeemable preference shares and redeemable debentures are distinguished from permanent capital since they are usually returnable and are therefore described merely as long-term capital. capital generation can also be viewed from the angle of intra-ultra considerations. in other words, funds can be generated from internal sources and /or from external sources. internally generated capital includes funds raised from within the firm itself. internal sources are exemplified by provisions set aside out of profits, reserves and cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 46 retained earnings (ezirim, 2005). with respect to ultra considerations, funds are raised externally by way of permanent capital, long-term redeemable preferences shares and debentures, medium or intermediate capital, and short-term funds. cost of short-term capital the calculations of cost of short-term involves the manipulations in simple interest, simple discounts, compound interest and even annuities with relevant adjustments as demanded by each case in question. pit (13) where i is the interest amount, p is the principal, i is the nominal rate of interest, and t is the time. to find the nominal rate of interest, we make i the subject of the formula to have: tp i i  (14) thus, the interest rate per time period, i, equal to the interest amount in naira divided by the product of principal and time which is actually the time here is the number of time periods (ezirim, 2005). the above expression can be rearranged as follows: tp i i 1  where t = n (15) thus, the interest rate i, equal to the fractional interest cost per period i/p, times divided by the owner of time periods, 1/n. to find the annual financing cost (afc) for short-term financing sources, we use variation of the expression (15) above: afc = )( 365cos daysmaturityfundsusable feestsinterest   (16) the above expression presupposes that short term funding source may involve fees in addition to the interest element. equally, the term usable funds are used in place of principal or present value because some funds from some short term sources may not be available for the academic unit to use. the term, 365/maturity (days), converts the financing source to the annual rate (ezirim, 2005). it is of note that the annual financing cost (afc) is only an approximation of the true (effective) annual percentage rate (ear), or (apr), of a loan. the afc expressed above in (16) does not consider compounding and slightly understates the true apr. more so, the afc as above is normally used for financing sources of 1 year or less. putting these considerations into focus, the annual percentage rate (apr) or effective annual rate (ear) for short-term financing is given by 1 cos 1         m fundsusable feestsinterest apr (17) when a business experiences difficulty in connection with liquid resources, it may be able to improve its situation by resorting to the use of trade credit facilities. cost of trade credit trade credit as a source of indirect financing has gained wider recognition, acceptability and sophisticated over time in the nigerian investment hemisphere (ezirim, 2005). if r limited buys raw materials worth n36 million cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 47 from its major suppliers each year, with a 5% discount the net purchases are given by dpdc n d d apc     1 (18) where, apc = approximate (annual) percentage cost d = discount rate n = number of days in a year dc = days of credit is outstanding dp = discount period bank loans and overdrafts these are short-term loans and overdrafts generally repayable within the period of one year. when extra cash is needed for working capital purposes, banks and overdrafts provide necessary sources of cash. bank loans are compared with overdrafts here in the sense that in the case of former, interest will be paid for the full period of the loan, whereas in the case of the latter, interest is calculated on a day-to-day basis. in nigeria, short-term bank loans and overdrafts constitute more than one half of the naira amounts of the total loans made by banks. in addition to commercial banks, merchant banks, finance house and even mortgage finance institutions finance short-term business needs. on a general note, short-term loans are employed to finance changes in working capital and temporary financing of fixed assets pending when agreements are reached for longer commitments. it is a norm for financial institutions to renew at maturity short-term loans and overdrafts especially when the customer financial condition and profitability is continually guaranteed (ezirim, 2005). a number of types of short-term loans include bridge loans, take out commitments, receivables financing, unsecured business loans, and secured business loans. cost of bank loans the cost of bank loans tends to have a linear relationship with the type of borrower, the riskiness of a given proposal and the prevailing state of the economy. given a regime of interest rate deregulation rates are usually determined by the forces of demand and supply in the light of the factors identified above as determinants of interest rates (ezirim, 2005). thus, a high credit risk attracts high interest charges while a low or prime risk commands reasonably lower rates. the effective annual rate of interest (costs of funds) is determined using the formula: )(pr )(int pincipal ierest iers  (19) where ers is the effective rate of simple interest thus, suppose the loan is for 180 days, the effective rate can be determined using the expression: 11        m m r i (20) where i = effective rate, r = nominal rate and m = no. of conversion intervals discount interest a discount interest loan is exemplified by one in which the bank deducts the interest in advance or upfront. cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 48 erd = )(re )( arcievedamount iinterest (21) erestfcaevalue interest d int  (22) alternatively we use the expression below r r derd   1 % (23) 1 /(int / 1 2         merestfacevalue minterest erd (24) if however we want to know how much the borrower would actually borrow if it requires a loan of we can use the formula: r fn fvalueface   1 )( (25) where fn = funds needed and r = nominal rate in fraction. thus, 2/)( int ivedamountrece erest aera  (26) t r rapv         1 1 (27)   11  m a rer commercial papers a commercial paper is a short term debt instrument in the form of negotiable, bearer promissory notes issued for set maturities by reputable companies with the intent of borrowing short-term funds from interested public. perhaps, the only collateral required for this type of facility is the good financial standing and repute of the firm attempting to raise funds; no specific security is required to back up the notes. most commercial papers are issued for between 30 and 90 days, though issues of 180 and 270 days are obtainable. in nigeria, commercial papers are not only issued by non-bank firms of repute, but also by bank themselves. in view of its unsecured nature, commercial papers are highly risky, though some are secured by the inventories of issuing companies. when commercial papers carry the guarantee of a bank to repay the sum due in event of a default, it is in all respects like a bankers’ acceptance (ezirim, 2005). cost of commercial paper commercial papers are sold at a discount from its par, or face, value. the interest received by the buyer or paid by the issuer of commercial paper is determined by the size of the discount and the length of time to maturity. the actual interest earned by the purchaser is obtained using similar procedure as we used in computing simple cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 49 discounts. prcp% = 1 100   p pfv (28) where: prcp% = the periodic rate of interest paid on commercial paper fv = the face value of the paper p = the purchase price of papers. afc = )( 365cosint daysmaturitysusablefund feeplacementtserest   (29) where: usable funds = face amount – [interest costs = placement fee] thus, denoting interest costs as i; placement fee as pf, face value or amount as fv; and maturity (days) as md; the above expression changes to: afc = mdpifv pi f f 365 )(    (30) 11        m cp cp m k ear (31) where: earcp = effective annual rate on commercial paper m = the compounding frequency which we defined as conversion intervals. aprcp = the normal annual rate sources and cost of medium term funds commercial banks and more especially merchant banks have been known to extend credit facilities in form of loans for periods more than one year. these facilities with maturities in excess of one year are known as term loans. this has constituted a worthwhile avenue for funding business and industrial concerns, the world over. even in certain cases overdraft facilities can be renewed a number of times of the extent that when summed or put together their durations would be more than one year (ezirim, 2005). a number of reasons have accounted for the development of term lending by banks and other financial institutions in nigeria. first, the maturity patterns of term loans are easily amenable to the time frame attending to the borrowers needs. thus, they can be manipulated to suit the borrowers’ needs. second, high-valued firms that can off-set the payment for fixed assets in a relatively short time may find it less advantageous to use equity or long term borrowing. in which case, medium-term loans become the preferred alternative. third, benefits accruable to a company from the use of financial leverage can still be derived while using term borrowing without having to subject the firm to the problems associated with recalling bonds, debentures, or preferred stocks when no apparent need exists for the funds which were earlier generated using these means. lastly, this type of loan is usually repaid according to earlier agreed upon schedule as reflected in the cash flow projections. this removes the difficulty of having to pay in a lump sum as may be required by a renewable short-term loan (ezirim, 2005). cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 50 lines of credit an economic agent that needs funds from time to time throughout the year for different or specific purposes may decide to approach a bank negotiates a line of credit. the line of credit represents an agreement that permits the economic unit to borrow funds up to an agreed limit at any time during the life of the agreement. the obvious benefits of a line of credit, compared with single loan, are that the economic unit does not have to renegotiate with the bank at every time funds are needed. drawdown can be made at the shortest possible notice. it also enables the economic agent to plan for its future short-term financing requirements without having to know exactly how much it would have to borrow each month. usually, a line of credit is agreed upon for a period of 1 year, with renewals being subject to re-negotiation each year. banks usually takes into consideration such factors as the customers’ personal characteristics-character, capacity, and capital-in determining the size of the credit line. the overall credit-worthiness of the unit is important in all credit considerations. for business customers, the need to produce a projected cash flow statement alongside the balance sheet and income statement cannot be overstressed (ezirim, 2005). cost implications of lines of credit the interest rate chargeable on a line of credit is usually determined by adding to the prime-lending rate, a premium based on the borrower’s credit-worthiness. i = pit i = p x i x t revolving credit agreement for a revolving credit agreement, usually called a revolver, the bank is committed to making loans to an economic unit up to the agreed credit limit whether or not the financial position of the economic unit is deteriorating or whether or not the bank lacks sufficient lonable funds to meet the loan requirements (ezirim, 2005). cost of revolving credit agreements the annual financing cost of revolvers involves more rigorous manipulations than single-loan or line of credit arrangements. afc = )( 365cosint daysmaturitysusablefund feecommitmenttserest   (32) afc = )( 365cosint daysmaturitysusablefund feecommitmenttserest   (33) hire purchase this is a useful method of indirect finance. by this method, an economic unit can obtain fixed assets by mere payment of the initial deposit, called an earnest sum or down payment, and thereafter pays agreed installments. the hire purchase arrangement is with interest and at times attracts service charges. there is no need to have one form of collateral or the other before entering into the agreement; as the assets, once in use, will normally generate enough profit to discharge agreed installments. despite the somewhat glaring advantages of this indirect method of financing, hire purchase can attract a very high cost of financing, in the form of high rate of interest. also, it calls for a very short period for which assets may be obtained and too many of such agreements can drain the profits of the company substantially (ezirim, 2005). cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 51 cost of hire purchase in hire purchase contracts, the buyer usually makes an initial deposit called down payment, or more traditionally, an earnest payment and further agrees to pay off the remainder in regular (or otherwise) installments. the initial down payment is a type of guarantee. since the total payment is not completed on the day of purchase, a carrying cost (an extra charge for the privilege of deferred partial payments) is often included by the seller spreading alongside the installments. this carrying cost is a type of interest a price for using the installmental buying facility. thus the total amount (sn) paid by the buyer will represent the down payment (so) plus the series of the installmental payments which includes the carrying charges (r1 + r2 + …. + rn). sn = so + (r1 + r2 + …. + rn) (34) where sn = total amount paid by purchaser so = down payment r = partial payments plus interest made on installments. direct ratio formula )1()1(3 6   ninb mi r (35) factoring accounts receivables account receivables’ factoring concerns itself with the outright sale of the economic unit’s receivables to a financial institution or consultant referred to as a factor. when this is done, and subsequent transfer made, the receivables no longer appears in the books (statement of affair) of the economic unit, say, a firm. the process of factoring takes off with a contract that clearly specifies the modalities for the agreement including terms of purchase and advance of funds, generated in the factoring exercise. the firm selling the receivables makes available the accounts to the factor for credit checking, appraisal an approval. should the factor agree to take over the debts; the firm would notify its debtors of the sale of their accounts and instruct them to pay the factor directly. in this type of arrangement therefore, a firm may sell its book debts (at a discount, to allow a profit for the buyer). the reason for this may stem from the need to avoid tying down funds, needed for other operations, in the credit it allows to the customers (ezirim, 2005). cost of factoring receivables in factoring receivables, there is usually a service fee that is between 1% to 3% of the factored receivable. annual financing cost before considering cost savings and bad-debt losses afc = )( 365cos maturitydaysfundsusable feestsinterest   (36) afc = maturitytodayssusablefund savingsttotalcostsinterest 365cos   (37) lease financing equipment leasing involves entering into an agreement with a bank, a no-bank financial institution or even the cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 52 manufacturer, for the use of a particular fixed asset at an agreed rental. a lease has been defined as a contract whereby, over the term of the lease, the lessor (owner) allows the lessee (user) the use of an asset in exchange for a promise by the latter to pay a series of lease payments called rentals. the workings of a typical lease arrangement are simple. first, the lessee selects the equipment and the dealer or the manufacturer from whom the equipment will be purchased. the lessee negotiates such aspect of the transaction as the price, specifications, warranties, and delivery date. he approaches the lessor, who in most cases is a bank or other financial institution, which buys the equipment from the dealer or manufacturer and leases it to the lessee for terms ranging from two to ten years or longer, depending on the nature of the equipment. the appropriate discount factor would be the lessor’s weighted cost of capital, which is equal to the applicable rate on debt instruments in the same risk class (ezirim, 2005). thus, the equilibrium lease-rental payment (lrp) is given by: npv lessor = co +   n t tt k tdeptl 1 )1( )1( (38) where: c = cost of the asset n = economic and tax depreciation life of asset k = lessor’s cost of capital from the perspective of the lessee the lessee can make use of the leased asset through leasing or debt financing as earlier stated. this of course implies a simplistic assumption that the two options are perfect substitutes (ezirim, 2005). invariable for a given amount of extra tax shield offered by lease, there is a proportionate or equal amount reduced in the debt tax shield. the net present value of the lease is given by: npvl = co – pv [lt(1-t)] – pv (tdept)] the relevant discount rate is the after-tax cost of debt, since both lease payments and the foregone depreciation tax shields are risk-free and tax deductible (ezirim, 2005). this guarantees the cost of debt to be equal to the cost implicit in the leasing arrangement. npv lesser = 0 = c +       n t t t n t t t k dept k tl 11 )1( )( )1( )1( (39) applying the annuity principle as in chapter 6, we have: npv lessor = 0 – c + lt (1-t) (pvifa; k, n) + dtst (pvifa, k, n) (40) cost of leasing =      9 1 ])1(1[ )1( t b t kt tl (41) sources and cost of long term funds the permanent long-term funds available to the firm constitute the main components of its capital structure. put together, they represent the firm’s capital. on the part of individual households, they are veritable source of investments. the cost of capital for a firm is the charge for the use of funds from various sources. it represents the hurdle or cut off rate above which investment activities of financial agents must show a return in order to cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 53 lend justification for their being carried out. what the efficient financial manager does is to ensure that this cost is reduced to the barest possible minimum so as to help maximize the owners’ wealth. the cost of capital of a typical business firm can be classified into average cost of capital and marginal cost of capital. debentures and bonds long term straight debt capital of business firms is basically defined in terms of debentures and bonds. a debenture has been described as a multiple loan of a company since it is contributed by large numbers of people and not by one person. the holders of debenture do not have claims on specific assets of the company (in most cases) but on the general credit-worthiness of the issuer. being defined as above, a debenture becomes an unsecured bond, otherwise called a debenture bond. in contrast a secured bond or a mortgage bond is one, which possesses right of claims on specific assets of the issuer to real estate mentioned in the case of mortgage bonds (ezirim, 2005). cost of debt debt is used to represent a bond, debenture or loan stock. the cost of debt (kd) is the rate of interest specified at the time of the bond issue. the before tax cost of a bond issued at face value and redeemable after a designated future date, is the coupon or nominal rate of interest (ezirim, 2005). thus, if a debt is issued at par value p i kd  (42) where kd = before tax cost of debt i = interest amount p = principal amount 20 2020 3 3 2 21 )1( ...... )1()1()1( dddd k pi k i k i k i p         (43) this is seen in view of the fact that from example 1, n d n t d t o k p k x p )1()1(1      (44) where po = principal or present value of debt x = the regular interest payment or cash outflow to bond holders pn = terminal amount to be paid to the bond holders kd = cost of debt t = time periods over the years till n maturity date; here final t = n cost of debt issued at a premium or discount in situations where the given debt instrument is issued at a premium or discount, the cost of debt will differ from the coupon rate of interest. considerations are also given when the resulting premium or discount is amortized for tax purpose, over a given period (ezirim, 2005). on the stead, the expression (44) below would be the best formula to apply in such an instance. thus, cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 54 )( 2 1 )]( 1 1)[1( pf pf n t kd    (45) where, f = face value of debt p = price at which the debt is sold n = the number of years to maturity i = fixed interest charge. cost of perpetual debt when a company’s debt is issued in perpetuity, its cost of debt, in that regard, can be calculated by dividing the fixed interest charges i by the price at which the debt is sold, after adjusting for the effect of tax. thus, the cost of a perpetual debt is given by after-tax cost of debt (kd) = )1( 1 t p  (46) where, i, p and t are as defined earlier. notice that this perpetuality can arise in two ways: (a) it may issue perpetual bonds from the onset, in which case this becomes part of the permanent capital (a case of issue of irredeemable bonds). (b) it may maintain a policy of retaining a constant amount of bonds in its capital portfolio. thus, when once old bonds are redeemed, replacement would have been made aforetime by new bonds. preference shares capital preference shares are distinguished from ordinary shares at some inherent preferential right the former possess over the equity holders in terms of profits distribution during the life of a company; and over surplus asset in the event of winding up. in other words, they receive preferred dividend as well as priority claims over ordinary shareholders. the dividend paid to preference shareholders comes out of the profits after tax (pat) of the company. this has been advanced as one of the reasons it attract higher cost than borrowed funds. preferred stock, as it is sometimes called, possess some features of ordinary shares, especially in relation to the theoretical foundations that they are not suppose to be redeem or have maturities, having the element of perpetuity discussion in our introduction to mathematic of finance. like ordinary shares dividends, preferred dividend comes from the pat of the firm. postponement or non payment of dividends on both shares would not necessarily amount to the company being liquidated on grounds of insolvency (ezirim, 2005). on the other hand, they have some features of debentures or bonds especially when we consider that their dividends are limited as is the case with bondholders who receive fixed interest. preferred dividend and interest on debentures are contractually determined, in most cases as a percentage of the par values of the instruments. to the extent to which preference shares have some characteristic of common shares and as well some features of debentures, we can refer to them as hybrid securities. cost of irredeemable preference shares capital preference shareholders receive a type of dividend called preference dividend. the cost of preference capital cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 55 must, therefore, be related to the expected dividend of the holders of this kind of shares. thus, the cost of preference shares in this instant will be given by, o p p p d k  (47) where kp = cost of preference capital dp = preference dividend, usually fixed po = current page per preference share )( 2 1 )]( 1 [ pf pf n d k p p    (48) cost of eternal equity capital using the dividend model, the underlying principle relevant to us here is that the price of the shares of a company is determined by the expected returns by its shareholders. these returns are composed of the expected stream of dividends (ezirim, 2005). given the growth in dividend expectation at a rate g, the value of the shares is given by: n e n ee o k d k d k d p )1( ...... )1()1( 2 21       (49) where po = present value of the share, ke is the cost of equity capital, and d1, d2 ….. dn is the stream of dividends from period 1 to n. applying the growth rate g concept, expression (49) turns to: n e n ee o k gd k gd k gd p )1( )1( ....... )1( )1( )1( )1( 0 2 2 0 1 0          (50) expression (17.10) can be generalized into:       n t t e t o o k gd p 0 )1( )1( (51) where do = dividend at time zero, and g is the growth rate which in this case is considered perpetual. a look at expression of the equations above reveals that the cost of equity, ke, is the rate of return, which equates the two sides of the equation (ezirim, 2005). thus, it has been defined as the required rate of return, which equates the present value of the expected dividends with the market value of the share (pandey, 1979). if we decompose expression (51) we get gk d gk gd p ee o      10 )1( (52) we can further solve for ke in (17.12) to have cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 56 g p d k o e  1 (53) cost of equity under zero growth rate in dividend for a firm that operates dividend policy of 100% pay-out ratio, i.e. an all dividend firm there is no expectations as to growth in both earnings and dividends, such that g = 0, under this situation the cost of equity will be given as ; o e p d k  where g = 0 (54) upon closer observation on expression (54) we see that the r.h.s is the ratio of dividend to the price. thus, the cost of equity under a 100% dividend payout ratio is equal to the dividend-price ratio. floatation cost in equity issue the cost of eternal equity or new issue of ordinary shares is normally adjusted for floatation costs. like we stated earlier, floatation costs are associated with new issue of securities. floatation costs have a way of restricting the company from realizing the full market value per share. thus, the company must relinquish a part of the share price as floatation costs (ezirim, 2005). thus, if we denote this fraction of the share price as f , then the cost of new issue of equity share will be given by g fp d k o e    )1( 1 (55) using the earnings model the cost of equity can be computed using the earnings model. in this model the cost of equity can be derived as the earnings per share to the current market price per share. thus, o e p e k 1 (56) retained earnings the cost of retained earnings is given by the same formula as in expression (56) since it is the expected return by the ordinary shareholders on their investment. thus, g p d k o r  (57) from the above, it seems that ke is equal to kr. this can only be true if there is no withholding tax on dividend, personal tax, brokerage, costs, and floatation costs of new issues. adjusting for all these, we can use expression (57) below to compute cost of retention. kr: kr = ke(1-tp)(1-b) (58) where kr = required rate of return on retained earnings ke = shareholders required rate of return cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 57 tp = personal tax rate of shareholders b = percentage brokerage cost. convertible securities a convertible security is used to describe a bond, debenture or preference share, usually unsecured, that has the element of being converted into equally after an agreed time at a specified price or at the ruling market price at the time of such conversion. it can be termed equity deferred. the expected stream of receipts from a convertible security includes the relevant interest or preference dividend and the expected conversion price (ezirim, 2005). the expected conversion price it has been argued, relates to the expected future market price per equity share at some future date, multiplied by the number of common shares into which the security should be the discount rate that equates the after-tax interest (or preference dividend) plus the expected conversion price with the issue price of the convertible security (pandey, 2005) the cost can be found using expression below. n e n n t t e c k c k ti v )1()1( )1( 1       (59) where vc = issue price of convertible bond at time 0. i = annual interest payments t = corporate tax rate n = time horizon for conversion price at the end of the nth period cn = expected conversion price if the security is preference capital, than our i factor will change to dp and the tax factor (1-t) will disappear to have. vc n e n n t t e p k c k d )1()1(1      (60) the cost of convertible security kc can be calculated from (17.19) and (17-20), as applicable, using the trial and error method. empirical review anyamaobi and lucky (2017) examined corporate characteristics and value creation of quoted manufacturing firms in nigeria. the objective was to examine if factors within the control of management affects corporate value. cross sectional data was sourced from financial statement of twenty quoted manufacturing firms. market value was proxy for dependent variable while asset tangibility, return on investment, risk, liquidity, firm size, debt equity ratio, dividend payout ratio, retention ratio, corporate governance, management efficiency and cost of capital was proxy for independent variables. after cross examination of the validity of the pooled effect, fixed effect and the random effect, the study accepts the fixed effect model. findings reveal that assets tangibility, return on investment, debt equity ratio, retention ratio, management efficiency and cost of capital have positive effect on the market value of the quoted manufacturing firms while risk, liquidity, firm size and corporate governance have negative effect on the market value. bitro and john, (2001) aimed at finding out the effect of growth opportunities on debts risks and cost which will lead to finding a new debt cost and that utilizing the growth opportunities well lead to overcoming investment problem partially. the study also indicated that high risk debts might discourage investment, because cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 58 it was found that the relationship in some companies was negative. braunstein (2002) conducted a study addressing capital cost in communication and facilities sector at california, and studied the relationship between cost of capital invested in local rural areas communication and expected return. the study revealed that return on owner's equity increased during the study period from 11.8% to 13.4% and return on investment for the same period increased from 6.84% to 9.11%. kareem (2006) conducted a study examining and assessing the relationship between capital cost using weighted average capital cost and market returns for shares as well as identifying type and nature of the relationship between financing cost and market returns for shares in addition to and share market return, on a sample of (37) industrial companies for the period 1994 – 2004. the study revealed a significant relationship between weighted average capital cost and stocks market returns, where external (debt) financing has more affection stocks market return compared to internal (owned) financing. abdel (2008) attempted to find out the effect of financing decision on institutions' financial performance and tax and financing cost effects. the study showed that positive financial performance is contingent on the institution ability in forming the optimal mix of financial structure, the extent to which available financing resources are used in a pace equal to its economic assets turnover to assure forming a wealth, and increasing growth rate, which finally results in maximizing the corporation value meanwhile financial structure is considered as basic element in assessing and measuring corporate financial performance as it is difficult to talk about an economic corporation without financial structure. p-eriotis, frangouli and ventoura (2011) found that firms financed with equity are more profitable as compare to those financed by debt. if debt amount is high than a part of its profits is given as interest which ultimately reduces its profits. capital structure choice has vital importance. debt to equity ratio is used in order to examine its impact on firm’s profitability. fixed effect model and random effect model are used. it is analyzed that debt negatively impacts a firm’s profitability because mostly the cost of debt is high than profits of the firm. they also concluded that firms liked to compete with one and another rather than cooperating. 3. research methodology descriptive and longitudinal design was employed with a view to making statistical inferences on factors that determine corporate earnings of the quoted firms. a sampling frame of 20 quoted firms was selected using random sampling techniques. the required cross-sectional data were sourced from annual reports of the firms and stock exchange factbook from 2011-2016. analytical framework and empirical model specification this analysis is carried out within a panel data estimation framework. the preference of this estimation method is not only because it enables a cross-sectional time series analysis which usually makes provision for broader set of data points, but also because of its ability to control for heterogeneity and endogencity issues. hence panel data estimation allows for the control of individual-specific effects usually unobservable which may be correlated with other explanatory variables included in the specification of the relationship between dependent and explanatory variables (hausman and taylor, 1981). the basic framework for panel data regression takes the form: (61) in the equation above, the heterogeneity or individual effect is iz which may represent a constant term and a itiitit zxy   ,, cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 59 set of observable and unobservable variables. when the individual effect iz , contains only a constant term, ols estimation provides a consistent and efficient estimates of the underlying parameters (kyereboah-coleman, 2007); hut if iz , is un-observable and correlated with itx , then emerges the need to use other estimation method because ols will give rise to biased and inconsistent estimates. similarly for endogeneity issues, it is generally assumed that the explanatory variables located on the right hand side of the regression equation are statistically independent of the disturbance it such that the disturbance term it is assumed to be uncorrelated with columns of’ the parameters itx and itz as stated in equation (1), and has zero mean and constant variance  2 (hausman and taylor, 1981). if this assumption is violated, then ols estimation will yield biased estimates of the underlying parameters of  (mayston, 2002).hence, endogeneitv problems arise when the explanatory variables are correlated with the disturbance term it (mayston, 2002; hausman and taylor, 1981). in order to circumvent these problems, panel estimation techniques of fixed and random effects will be adopted in this study, in addition to the traditional pooled regression estimation. decisions will be made between the fixed and random effect models using the hausman specification test. the panel model for the study is specified base on the modified model of lawal, edwin, kiyanjui and kayode (2014). itiitit zxy   '' (62) where: y = dependent variable d = independent variable o = intercept i = coefficient of the explanatory variable e = error term i = cross-sectional variable t = time series variable model i: short term cost of capital pooled regression specification )63(144332211 itititiii cbaccpcblctcoeps   cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 60 fixed effect model specification )64(111 9 544332211 itiiitititiii idumrrcbaccpcblctcoeps    random effect model specification )65(1144332211 ititititiii icbaccpcblctcoeps   where eps = earnings per share ctc = cost of trade credit cbl = cost of short term bank loans ccp = cost of commercial paper cba = cost of bankers acceptance 1 = stochastic or disturbance/error term. t = time dimension of the variables α 0 = constant or intercept. model ii: medium term cost of capital pooled regression specification )66(144332211 itititiii colchpcrcclcoeps   fixed effect model specification )67(111 9 44332211 itiiitititiii idumcolchpcrcclcoeps    random effect model specification ititititiii icolchpcrcclcoeps 1144332211   (68) where eps = earnings per share clc = cost of line of credit crc = cost of revolving credit chp = cost of hire purchase col = cost of operating lease 1 = stochastic or disturbance/error term. t = time dimension of the variables α 0 = constant or intercept. model iii: cost of long term capital pooled regression specification ititiii cecpscdoeps 1332211   (69) fixed effect model specification itiiititiii idumcecpscdoeps 111 9 332211    (70) random effect model specification itititiii icecpscdoeps 11332211   (71) where eps = earnings per share cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 61 cd = cost of debt cps = cost of preference share capital ce = cost of equity 1 = stochastic or disturbance/error term. t = time dimension of the variables α 0 = constant or intercept. 4. presentation and analysis of results table 1: short term cost of fund and corporate earnings the effect of short term cost of capital and corporate earnings of the quoted firms is presented in the table below: effects test statistic d.f. prob. cross-section f 2.610975 (9,45) 0.0162 cross-section chi-square 24.789052 9 0.0032 hausman test cross-section random 2.547784 4 0.0001 source: computed by researcher from e-view 9.0 the hausman test is used in panel data to ascertain the most appropriate model. this test was conducted on the effect of short term cost of capital and corporate earnings of quoted firms in nigeria as reported in the table 1 above. the p-value obtained from hauseman test was significant; therefore the fixed effects model was the most appropriate model. from the table the r-square and the adjusted r-square proved that 43.9% and 39.7 variation on corporate earnings can be explained by the variation on the cost of various component of short term cost of capital. the f-statistic value of 10.56582 and the probability of 0.000002 (p<0.05) shows that the independent variables are jointly statistically significant in explaining changes in the dependent variable. specifically, the results from the table show that all the independent variables have positive impact on corporate earnings. the β coefficient of 0.07ctc, 0.05ccp, 0.59cbl and 1.93cba proved that a unit increase on the variables will lead to 0.7%, 0.5%, variable pooled effect fixed effect random effect coefficient t. stat p. value coefficient t. stat p. value coefficient t. stat p. value ctc 0.148625 1.507153 0.1376 0.078310 0.604458 0.5486 0.113456 1.016388 0.3140 ccp -0.192515 -1.607329 0.1138 0.052741 0.341880 0.7340 -0.062976 -0.470742 0.6397 cbl 0.622104 5.390628 0.0000 0.594419 4.236145 0.0001 0.621364 4.983027 0.0000 cba 1.795160 1.289044 0.2029 1.930450 1.463949 0.1502 1.903991 1.471854 0.1469 c 4.587419 2.231603 0.0298 2.965692 1.204819 0.2346 3.532629 1.590599 0.1175 r2 0.439038 0.631479 0.360257 adjr2 0.397486 0.525017 0.312868 f-stat 10.56582 5.931506 7.602212 fprob 0.000002 0.000003 0.000062 d w 1.094674 2.139366 1.773717 cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 62 5.9% and 19.3% increase on the dependent variables. the t-statistics and the probability value shows that only commercial banks short term cost of capital is statistically significant while others are statistically not significant at 5% level of significance. the insignificant impact of the variables could be traced to the fact that the companies do not utilize some of the credit facilities in nigeria. the positive effect of the variables are contrary to the expectation of the results and could be traced to the fact that the management formulate policies that will hedge against the negative impact of cost of capital on corporate earnings. this findings confirms the findings of osiegbu (2005) on the positive effect of interest rate and commercial bank credit which he blamed unstructured nature of the financial market that does not give borrowers alternative source of funding. table 2: medium term cost of fund and corporate earnings the effect of medium term cost of capital and corporate earnings of the quoted firms is presented in the table below source: computed by researcher from e-view 9.0 the hausman test is used in panel data to ascertain the most appropriate model. this test was conducted on the effect of medium term cost of capital and corporate earnings of quoted firms in nigeria as reported in the table 2 above. the p-value obtained from hauseman test was not significant; therefore the random effects model was the most appropriate model. from the table the r-square and the adjusted r-square proved that 7.1% and 0.2% variation on corporate variable pooled effect fixed effect random effect coefficient t. stat p. value coefficient t. stat p. value coefficient t. stat p. value crc 0.031876 0.455749 0.6504 -0.089468 -1.326536 0.1914 -0.059849 -0.928629 0.3572 clc -0.005308 -0.133859 0.8940 -0.026842 -0.842099 0.4042 -0.021463 -0.679823 0.4995 cl 0.091047 0.603850 0.5485 0.233101 1.787617 0.0806 0.201724 1.579846 0.1200 chp 0.006578 0.177444 0.8598 -0.011139 -0.334829 0.7393 -0.005666 -0.175118 0.8616 c 11.74427 18.79303 0.0000 12.17721 22.19156 0.0000 12.05265 19.07939 0.0000 r2 0.010604 0.515421 0.071086 adjr2 -0.062685 0.375432 0.002277 f-stat 0.144687 3.681857 1.033094 fprob 0.964582 0.000543 0.398680 d w 1.257586 2.296105 1.992811 redundant fixed effects tests effects test statistic d.f. prob. cross-section f 5.208824 (9,45) 0.0001 cross-section chi-square 42.115058 9 0.0000 correlated random effects hausman test cross-section random 2.714876 4 0.6066 cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 63 earnings can be explained by the variation on the cost of various component of medium term cost of capital. the f-statistic value of 1.0398680 and the probability of 0.398680 (p>0.05) shows that the independent variables are jointly statistically not significant in explaining changes in the dependent variable. specifically, the results from the table show that all the independent variables have positive impact on corporate earnings. the β coefficient of -0.59crc, -0.02clc, 0.201cl and -0.006chp proved that a unit increase on the variables will lead to 5.9%, 0.2%, 0.6% decrease on the dependent variables while the positive coefficient of 0.201cl will lead to 2.0% increase on corporate earnings. the t-statistics and the probability value shows that all the medium term cost of capital is statistically not at 5% level of significance. the negative effect of the variables, the littlie explained variation and insignificant impact of the variables could be traced to the fact that the companies do not utilize some of the credit facilities in nigeria. the positive effect of the variable is contrary to the expectation of the results and could be traced to the fact that the management formulate policies that will hedge against the negative impact of cost of capital on corporate earnings while the negative effect confirm the a-priori expectation of the results, this findings confirm the findings of bitro and john, (2001) that high risk debts might discourage investment, because it was found that the relationship in some companies was negative. table 3: long term cost of fund and corporate earnings effects test statistic d.f. prob. cross-section f 3.708518 (9,46) 0.0015 cross-section chi-square 32.188216 9 0.0002 correlated random effects hausman test cross-section random 8.024643 3 0.0055 source: computed by researcher from e-view 9.0 the hausman test is used in panel data to ascertain the most appropriate model. this test was conducted on the effect of long term cost of capital and corporate earnings of quoted firms in nigeria as reported in the table 3 above. the p-value obtained from hauseman test was significant; therefore the fixed effects model was the most appropriate model. from the table the r-square and the adjusted r-square proved that 81.9% and 77% variation on corporate earnings can be explained by the variation on the cost of various component of short term cost of capital. the variable pooled effect fixed effect random effect coefficient t. stat p. value coefficient t. stat p. value coefficient t. stat p. value cd -0.001159 -1.201734 0.2346 -0.000534 -0.615593 0.5412 11.24348 13.53105 0.0000 cps 0.447321 2.412354 0.0192 0.291708 1.664693 0.1028 -0.000534 -0.615593 0.5412 ce -0.126445 -0.964121 0.3392 -0.060452 -0.459210 0.6482 0.291708 1.664693 0.1028 c 10.86029 13.32330 0.0000 11.24348 13.53105 0.0000 -0.060452 -0.459210 0.6482 r2 0.819022 0.489460 0.489460 adjr2 0.770969 0.356275 0.356275 f-statistic 12.47687 3.675052 3.675052 fprob 0.000000 0.000669 0.000669 d w 1.519769 2.266686 2.266686 cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 64 f-statistic value of 12.47687and the probability of 0.000000 (p<0.05) shows that the independent variables are jointly statistically significant in explaining changes in the dependent variable. specifically, the results from the table show that cost of debt and cost of equity have negative effect on corporate earnings while cost of preference share capital have positive effect on the dependent variable. the β coefficient of -0.00cd, 0.29cps, -0.060 proved that a unit increase on the variables will lead to 0.0% and 0.6%, decrease on the dependent variables while the positive coefficient of 0.29cps will lead to 2.9% increase on the corporate earnings of the quoted firms. the t-statistics and the probability value show cost of debt is statistically significant while cost of preference share capital and equity is statistically not significant at 5% level of significance. while the positive effect of the variable is contrary to the expectation of the results, the negative effect confirms the a-priori expectation of the results and validates the findings of anyamaobi and lucky (2017) on the positive effect of cost of capital on the value creation of quoted manufacturing firms in nigeria. 5. conclusion and recommendation this study investigated the relationship between cost of capital and corporate earnings of 20 firms listed on the floor of nigerian stock exchange using time series data from 2011 – 2016. cost of capital was disaggregated by short, medium and long term while corporate earning was proxy by earnings per share. from the findings of the study, we draw the following conclusion:  that the relationship between costs of short term capital is statistically significant with corporate earnings, the model summary shows that the independent variables could only attest 63.1% and 52.5% variation while the f-statistics shows that the model is statistically significant.  that the relationship between costs of medium term capital is statistically not significant with corporate earnings, the model summary shows that the independent variables could only attest 7.1% and 0.2% variation while the f-statistics shows that the model is statistically not significant.  that the relationship between costs of long term capital is statistically significant with corporate earnings, the model summary shows that the independent variables could only attest 81.9% and 77.0% variation while the f-statistics shows that the model is statistically significant. recommendation  management should formulate internal policy that will enhance the realization of optimal capital structure of the firm which determines the combination of equity capital and debt capital as the capital structure of the firm and the business environment should be well diagnosed and tactical measures used to ensure that cost of capital does not affect the investment decision of the firms and the profitability.  the environmental factors should be acknowledged in formulating cost of capital to avoid risk associated with inadequate or wrong capital structure of the firm to enhance profitability and external source of capital such as debt should be properly appraised and integrated with the investment policy of the firms to leverage the high cost of debt and its effect on investment and profitability.  cost of equity should be integrated with the objective of maximizing shareholders’ wealth through investment policies and the regulatory authorities should formulate policies of minimizing the cost of capital on the investment decision of the listed firms. references abdel, d., (2008).financing decision under the influence of taxes and financing cost. al-baheth journal, 6; 17-31. anyamaobi, c., & lucky, a. l., (2017). corporate characteristics and value creation: a panel data evidence cost of capital and corporate earning of nigeria quoted firms: a multi-dimensional analysis of quoted firms in nigeria lucky anyike lucky 65 of nigeria quoted manufacturing firms. world journal of finance and investment research, 2(1), 31-49. braunstein, y., (2002). cost of capital study for telecommunications utilities, working paper, school of information management and systems, university of california at berkeley, pp3. claus, j. & thomas, j. (2001). equity risk premium as low as three percent? evidence from analysts’ earnings forecasts for domestic and international stocks. journal of finance, 56 (5), 1629-1666. easton, p. d. 2003. pe ratios, peg ratios, and estimating the implied expected rate of return on equity capital. the accounting review 79 (1):73-95 ezirim, b.c., (2005). finance dynamics principles, techniques & applications. markowitz centre for research & development port harcourt. gode, d., & mohanram, p. (2003). inferring the cost of capital using the ohlson-juettner model. review of accounting studies, 8(4), 399-431. hausman, j. a., & taylor, w. e., (1981). panel data and unobservable individual effect, econometrical, 49(6), 1377-1398. kareem, a., (2006). testing and assessing the relationship between capital cost and stock market returns, an empirical study on industrial companies listed at amman stock exchange for the period 1994 – 2004. humanities journal, 4(29),1-24. kyereboah-coleman, a., (2007). the impact of capital structure on the performance of microfinance institutions. journal of risk finance, 8 (7),56-71. lawal, b. a, edwin, t. k., kiyanjui, m. w., and adisa, m. k., (2014).effects of capital structure on firm’s performance: empirical study of manufacturing companies in nigeria. journal of finance and investment analysis, 3,(4), 39-57. lee, c., d. ng, and b. swaminathan, 2004. international asset pricing: evidence from cross section of implied cost of capital. cornell university working paper mayston, d. j., (2002). tackling the endogeneity problem when estimating the relationship between school spending and pupils’ outcome, dfee research report 328, department of education and skills, london. modiglinni , franco & miller merton.h.,(1958).the cost of capital, corporation finance and the theory of investment. american economic review, 48, 261-297. ohlson, j., and b. juettner-nauroth, 2004, expected eps and eps growth as determinants of value, working paper, new york university. p-eroitis, frangouli, & ventoura (2011). profit margin and capital structure. the journal of applied research. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. australian finance & banking review; vol. 2, no. 1; 2018 issn 2576-1196 e-issn 2576-120x published by centre for research on islamic banking & finance and business 11 foreign portfolio investment and performance of the nigerian capital market nwonodi daniel ikezam1 1department of banking and finance, rivers state university, port harcourt, nigeria, nigeria. correspondence: department of banking and finance, rivers state university, port harcourt, nigeria, nigeria received: january 20, 2018 accepted: january 26, 2018 online published: february 7, 2018 abstract this study examined the effect of foreign portfolio investment on the performance of nigerian capital market. the specific objectives are to investigate the impact of net foreign portfolio investment, foreign portfolio investment in equity, foreign portfolio investment in bonds, foreign portfolio in government securities and nigerian exchange rate per us dollar on the performance of nigerian capital market. the required data were sourced from central bank of nigeria (cbn) statistical bulletin and stock exchange annual report. the study has all share price index and market capitalization as proxy for capital market performance while net foreign portfolio investment (nfpi), equity investment (pie), bond investment (pib), portfolio investment in government securities (pigs) and exchange rate as predictors variables. the ordinary least square multiple regressions with econometric view were used as data analysis techniques. cointegration test, granger causality test, augmented dickey fuller test and error correction model were used to examine the variables and its relationship to the dependent variables. model one revealed that foreign portfolio investment in bonds and foreign portfolio investment in government securities have negative relationship with all share price index while net foreign portfolio investment, foreign portfolio investment in equities and exchange rate have positive relationship with all share price index. model two revealed that net foreign portfolio investment, portfolio investments in bonds and government securities has negative relationship with market capitalization while equity investment and exchange rate have positive relationship with market capitalization. the study concludes that foreign portfolio investment have significant relationship with nigerian capital market performance. it therefore recommends that policies should be devised to enhance the operational efficiency of the nigerian capital market, to attract foreign investors. keywords: foreign portfolio investment, nigerian capital market, equity investment, net foreign portfolio investment, exchange rate. 1. introduction one of the aims of economic integration, partnership and multi-lateral investment treaties is the inflow and outflow of capital across national borders. the aim is to bridge the financial disequilibrium and savings investment gap that exist among countries. nigerian capital market was established in 1960 to meet investors’ needs through the creation and distribution of long-term financial instruments such as bonds and equities within nigeria and the flow of foreign portfolio investors. portfolio investment is the commitment of resources in foreign securities by foreign nationals, with view to profitable returns (ezirim, 2005). foreign portfolio investment is a component of foreign private capital; it is an aspect of international capital flows, comprising transfer of financial assets, such as cash, stocks or bonds across international border in want of profit (chukwuemeka, 2008). the inflow of foreign portfolio investment is determined by the development of the capital market, the market rate of return and the monetary policy of the country. unlike foreign direct investment, inflow of portfolio investment is sensitive to exchange rate risk and political risk of the country (anayochukwu, 2012). the relationship between foreign portfolio investment and the capital market of the emerging financial market has results in two schools of thought. first yartey (2008) argues that economic activities in a country constitute the key drivers of the growth and development of the stock market. they opined that financing a country’s www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 1; 2018 12 growth through foreign portfolio investment can expose the country to international monetary shocks, for instance the global financial crises, findings in support of this are dellas and martin (2002), chanda (2000), and carlson and hernandez (2002). the second schools of thought argued that greater openness will lead to inflow of foreign portfolio investment that will enable the country to benefit from research and development which can result in positive spillover effect to other sectors of the economy and the development of capital market (chee and stulz, 1999; moreso, 1993; and gould et al., 1993). this view is supported by the nigerian capital market reforms with the objective of attracting foreign investors. the theories dominating the flow of foreign portfolio investment and capital market growth have been the standard neo-classical theory of foreign portfolio inflows which predicts that capital should flow from the capital rich countries to capital scarce countries and the lucas paradox or why capital does not seem to flow from rich to poor countries (francis, 2013).theoretically, numerous body of knowledge, known as portfolio theory, has been propounded to evaluate the behavior of portfolio investment. harry markowitz (1951) noted that portfolio investment is a function of market rate of return. this means that inflow of portfolio investment to nigerian capital will increase if the market rate of return exceeds the cost of the investment. the challenges facing the inflow of foreign portfolio investment determines the value of inflow to nigeria in the past and present. the emerging and underdeveloped status of the nigeria financial market compared with financial markets of the developed nations, nigeria financial market lack some credibility to attract foreign portfolio investment. for instance, prior to the consolidation reform in the banking system, nigerian banks were not considered very healthy to attract foreign portfolio investment as a result of the poor rating. the capital market and other institutional policies also have a negative effect on the inflow of foreign portfolio investment in nigeria (onoh, 2002). other factors may either have a negative or positive effect on net inflow of foreign portfolio investment (fpi). however, despite the growing literature on the performance of the nigerian capital market, none has examined the relationship or effect of the various reforms on the inflow of foreign portfolio investment. similar study by chi-chi and eze, (2013) examined the determinants of foreign portfolio investment in nigeria. this study seeks to examine the effect of the various policy reforms on the inflow of foreign portfolio investment on the growth of the nigerian capital market 2. review of related literature theories of stock market price ▪ efficient market hypothesis efficient market hypothesis (emh) asserts that in an efficient market, prices at all times fully reflect all available information that is relevant to their valuation (fama, 1970). the efficiency of stock markets has been a major area of research in financial economics, particularly as it pertains to stock markets of developing economies (rapuluchukwu, 2010). this is because of the implication of market efficiency to the functioning of the capital market; especially as it concerns investors’ returns and thus stimulation of investor’s interest in market activities. it is believed that the behaviour of stock prices is explained by the behaviour of investors (inegbedion (2009). emh argues that competition between investors seeking abnormal profits drives prices to their ‘fair’ value. this implies that prices should incorporate information in the market. the ability of a stock market to incorporate information into prices determines its level of efficiency. stock market forecasting is marked more by its failure than by its successes since stock prices reflect the judgments and expectations of investors based on information available (aguebor, adewole and maduegbuna, 2010). remarkably, efforts have been made to apply econometric techniques of model building in the prediction of stock prices in a bid to demonstrate that the market fluctuations are essentially unpredictable brummelhuis, 2005). have argued that there are long-term pattern in stock prices with several years of upswing followed by more sluggish periods, according to fama (1965), a stock market where successive price changes in individual securities are independent is by their definition, a random walk market gupta and basu (2007). specifically, stock prices following a random walk imply that the price changes are as independent of one another as the gains and losses. the independence assumption of the random walk hypothesis is valid as long as knowledge of the past behaviour of the series of price changes cannot be used to increase expected gains (aguebor, etal2010). more specifically, if successive price changes for a given security are independent, then there is no problem in timing purchases and sales of the security. a simple policy of buying and holding the security will be as good as any more complicated mechanical procedure for timing purchase and sales (fama, 1965; 1995). fama (1970) stated that the sufficient but not necessary conditions for efficiency are: • there are no transaction costs in trading securities; • all information is costless, and available to all market participants. and www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 1; 2018 13 • all agree on the implication of current information for the current price and distribution of future prices of each security. the emh can be more specifically defined with respect to the information item available to market participants. fama (1970) classified the information items into three levels depending on how quickly the information is impounded into prices: ▪ weakform emh, ▪ semi-strong form emh, and ▪ strong-form emh weak-form efficiency in weak-form efficiency, future prices cannot be predicted by analyzing prices from the past. excess returns cannot be earned in the long run by using investment strategies based on historical share prices or other historical data lulia (2009). technical analysis techniques will not be able to consistently produce excess returns, though some forms of fundamental analysis may still provide excess returns. share prices exhibit no serial dependencies, meaning that there are no patterns to asset prices. this implies that future price movements are determined entirely by information not contained in the price series. hence, prices must follow a random walk. this 'soft' emh does not require that prices remain at or near equilibrium, but only that market participants not be able to systematically profit from market inefficiencies'. however, while emh predicts that all price movement is random, many studies have shown a marked tendency for the stock markets to trend over time periods of weeks or longer and that, moreover, there is a positive correlation between degree of trending and length of time period studied. various explanations for such large and apparently non-random price movements have been promulgated. the problem of algorithmically constructing prices which reflect all available information has been studied extensively in the field of computer science. semi strong form efficiency in semi-strong-form efficiency, it is implied that share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information. semi-strong-form efficiency implies that neither fundamental analysis nor technical analysis techniques will be able to reliably produce excess returns. to test for semi-strong-form efficiency, the adjustments to previously unknown news must be of a reasonable size and must be instantaneous. to test for this, consistent upward or downward adjustments after the initial change must be looked for. if there are any such adjustments it would suggest that investors had interpreted the information in a biased fashion and hence in an inefficient manner (olowe, 2009). strong form efficiency in strong-form efficiency, share prices reflect all information, public and private, and no one can earn excess returns. if there are legal barriers to private information becoming public, as with insider trading laws, strongform efficiency is impossible, except in the case where the laws are universally ignored. to test for strong-form efficiency, a market needs to exist where investors cannot consistently earn excess returns over a long period of time. even if some money managers are consistently observed to beat the market, no refutation even of strongform efficiency follows: with hundreds of thousands of fund managers worldwide, even a normal distribution of returns should be expected to produce a few dozen "star" performers mishra (2009). ▪ testing the efficiency market hypothesis though no stock market is generally believed to be strong-form efficient, most early tests of stock markets in industrialized countries have typically been unable to reject null hypotheses of semi-strong and weak-form efficiency (fama, 1970). some recent studies, however, have tested for the semi-strong and weak-form efficiency in developing countries, focusing primarily on the emerging asian economies, the latin american markets, african and the middle east. chan, gup, and pan (1992), for example, use unit root tests that show weak-form stock market efficiency in hong kong, south korea, singapore, and taiwan. liu, song and romilly (2007) find that both the shanghai and shenzhen chinese stock market indices are characterized by a random walk and are thus weak-form efficient, although cointegration tests indicate joint inefficiency between the two markets, i.e. past returns from one market can be used to predict returns in another. ▪ concept of foreign portfolio investment a portfolio investment is a transaction in which securities are held purely as a financial investment, which can be liquidated depending on the investment horizon of the holder. this has been on the increase of recent due to the internationalization of the capital market, but is seen as the major cause of hot flows that in itself causes capital flight and is currently been blamed for the downturn of the nigerian stock exchange. the recent market bubbles aided the inflow of portfolio funds, which many overseas hedge funds took advantage of to make quick returns. beaker, harvey and lundblad (2005) find that capital inflows benefits equity markets with above average financial development, better legal systems and better quality institutions, which mostly are still www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 1; 2018 14 fledgling and nascent in most of the emerging markets of africa. according to anyanwale (2007) and ezirim (2005) foreign portfolio investment is one of the components of foreign investment (fi). fpi involves the commitment of funds to domestic securities by a foreign nation or the purchase of foreign securities by a resident. foreign portfolio investment may not involve positive transfers, just being a change in ownership. ▪ foreign portfolio inflow in nigerian capital market foreign portfolio inflow was not observed in the nigerian capital market in the early 1980s up to 1985. the first report made by the central bank of nigeria (cbn), recorded foreign portfolio inflow of n151.6 million in 1986. beginning from 1985 when the second-tier securities market was established coupled with the promulgation of the nigerianenterprise promotion decree in 1987, the nigerian capital market continued to register the inflow of foreign portfolio investment. thus, directives that the nigerian capital market must be internationalized to make it more responsive and attractive to both local and foreign investors buttressed government’s appreciation of the importance of the capital market in national development. ideally, internationalization should enhance the market’s competitiveness and attractiveness in the global market place (sec, 1995). the later part of the 1980s particularly between 1987 and 1988 received foreign portfolio inflow of n4,353 million and n2,611.8 million respectively, representing a drastic rise when compared to the 1986’s figure, though it fluctuated downward from 1987 to 1988. according to ekineh (2003) the investment climate in nigeria for the period 1987 to 1998 was unconducive, leading to a spate of divestment even by the nation’s traditional and long standing investors, who perhaps moved to more favourable environments. although the nigerian capital market was completely deregulated in 1993, foreign portfolio inflow continued to be negative up to 1998 and reversed in 1999 with a record of n1,815.7 million (sec, 2008). in 2000, the fpi inflow into the market stood at n51.1 billion compared to n1.82 billion in 1999. since then the market has witnessed a tremendous increase in the inflow of fund from oversea, high records of n311.1 billion in 2006 and n703.6 billion in 2007 respectively. the n391.1 billion increase in fpi inflows in 2007 over 2006 whichrepresents 125% increase. also, there was a sharp increase in fpi inflow between 2005 and 2006, rising from a low inflow of n23.5 billion in 2004 to stand at n116.0 billion in 2005 and n311.7 billion in 2006. the inflow of fpi dropped after the 2000’s figure to n26.0 billion in 2001, slightly dropped again in 2002 to n24.8 billion and stagnated between 2003 and 2004 recording n23.5 billion for the two years. between 2007 and 2008 there was a drastic fall in fpi inflow from a high of n703.6 billion in 2007 to n350.9 billion in 2008 (oluba, 2008). despite this fluctuation or sharp fall in the inflow of fpi, the inflow of foreign portfolio investment rose significantly in 2009 to the tune of n2.15 trillion approximately and further rose in 2010 ton2.73 trillion approximately. according to sec (2008) the high foreign portfolio inflow to the market between 2005 and 2007 could be attributed to high returns, liquidity level and safety of investment in the nigerian stock market. however, the trend of fpi to the capital market over the period under study (1980-2010) represents an unstable and fluctuating inflow between 2011 and 2013, nigeria’s net foreign portfolio investment was positive with n2,789.69, n60,289, and n1,045,628 respectively. ▪ performance trend of the nigerian capital market according to central bank of nigeria (2007), analysis of the major indicators of activity in the capital market shows that the market has experienced remarkable growth since 1980. transactions in equities were hitherto weak due largely to the low level of information dissemination and awareness which resulted sluggish market behavior. however, with the computerization of trading and increased transparency in delivery of corporate information, the market has become relatively more efficient. since the 1980’s, the market indicators including the number of listed companies and securities, market capitalization, new issues, value index and market turnover have recorded significant increases. the relative improvement in the performance of the major key indicators can be attributed to the establishment of second-tier securities market (ssm) in 1985; the deregulation of interest rates in 1987, the continuous privatization of government owned companies, improvement in market infrastructure/innovation; as well as the reform in the nigerian banking industry. these developments have enhanced market liquidity; offered opportunities for price discovery; improved market efficiency in service delivery; and above all resulted in unprecedented growth of both the primary and secondary markets (onyiuke, 2009). the deregulation of interest rates, as well as the massive bank failure in the late 1990’s made many private enterprises/investors to patronize the equity market to source funds, as bank lending became relatively expensive. from 91 in 1980, the number of companies listed on exchange (equities) rose by 114% to 214 in 2005, but declined to 202 in 2006 as some quoted banks were involved in mergers, acquisitions in the www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 1; 2018 15 2005/2006 recapitalization exercise in the banking sector, while those that were unsuccessful were di-listed from the stock exchange. the growth of listed companies coupled with greater awareness on the part of investors resulted in increase in the number of securities issued and traded in the market. this also contributed in the increase in market capitalization, which grew from n5.0 billion in 1981 to n13.3 trillion in 2007, over twenty-fold increase. the phenomenal growth notwithstanding, the market capitalization represents about 56.0 percent of gdp, compared to 167.1 percent for south africa, and 130.0 percent for malaysia. this indicates that the potentials for growth in the nigerian capital market is still very enormous (central bank of nigeria, 2008). the trend in the new issues market was one of fluctuations between 1980 and 2000, and general improvement thereafter. indeed, the entry of some corporate entities into the nigerian capital market after deregulation of the market contributed to the upsurge witnessed in the market between 1986 and 2006. following the banks’ recapitalization exercise in 2004, the tempo of activities in the new issues market was very high in 2005 and 2006, as many banks and insurance companies approached the stock, market to raise additional funds. consequently, the exchange considered and approved 62 applications for new issues, valued at n1.4trillion in 2006, compared with 52 applications for new issues, valued at n703.5 billion in 2005. the non-bank corporate issues accounted for 41 percent with 21 applications valued at n577 billion. the federal government bonds issue amounted to n155.0 billion and accounted for 11.0 percent of the total; while n39.28 billion, n6.94 billion and n140.0 billion were from private placements, debt stocks and federal government bond (in 7 series), respectively. in 2008, the exchange considered and approved 70 applications for new issues and mergers to acquisition in excess of n2.2 million or 9.53% of gdp, as against 65 applications for new issues valued at n779.8 billion. government bond issue accounted for n272 billion or 12.62% of total amount approved during the year. of the non-bank application, foreign listing and insurance subsectors accounted for n295 billion and n150.45 billion or 13.54% and 6.9% respectively of total applications considered (nse, 2009). according to sec (2008) transactions in the secondary segment of the market have been vibrant in recent years as the market has witnessed substantial growth in turnover. this development followed the automation of processes, increased local awareness of opportunities on the nigerian stock market as well as the continued effort at internalization of the market. for instance, the volume of transaction rose by 40.0 percent to 26.7 billion shares in 2005 from 19.2 billion shares in 2004, while the value stood at n262.9 billion, up by 16.4 percent from n225.8 billion in 2004. in 2006 the total turnover was 36.7 billion shares, indicating an increase of 37.5 percent over the preceding year’s level. the year closed with a market turnover value of n470.3 billion. foreign portfolio investment the phenomenon of foreign portfolio investment in emerging market economies has always attracted the attention of writers from the theoretical and empirical perspective. the benefits of foreign portfolio investment (fpi) include transfer of technology, higher productivity, higher incomes, more revenues for government through taxes, enhancement of balance of payment ability, employment generation, diversification of the industrial base and expansion, modernization and development of related industries. according to feldstein (2000), first, international flows of capital reduce the risk faced by owners of capital by allowing them to diversify their lending and investment. second, the global integration of capital market can contribute to the spread of best practices in corporate governance, accounting rules and legal traditions. proponents of foreign portfolio investment picture it as adding new resources/capital to the host economy in a way that improves efficiency and stimulates economic growth. it is thus viewed as a panacea for economic development by providing the capital underdeveloped countries desperately need to fill their savings-investment gap. from the neoclassical theory, growth is achieved by increasing the quantity of factors of production optimally. in a simple world of two factors, labour and capital, it is often presumed that lowincome countries have abundant labour but scarce capital. this situation arises owing to shortage of domestic international journal of economic development research and investment savings in these countries (especially the developing countries), which places constraint on capital formation and hence growth. even where domestic inputs in addition to labour, are readily available, increased production may be limited by scarcity of imported inputs upon which production processes in lowincome countries are based. based on this fact, international capital flows readily as popularized by o'connor and iscariot (2010) become an important means of helping developing countries to overcome their problem of capital shortage. as lebragacio (2010) suggests that capital will move from countries where it is abundant to countries where it is scarce. the resultant capital relocation will boost investment in the recipient country. ▪ macro-economic indicators and foreign portfolio investment in nigeria lee (2007) argued that wide range of factors has been adduced to be responsible for the causal effect on the international flows of foreign investment. nuntila derusia (2012) opined that relative low yields in industrial www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 1; 2018 16 countries together with impressive economic growth and attractive returns in developing countries motivated investors to relocate their funds to direct investments. he posits that the increase in international flow of foreign investment correspondent well with the trend towards trade globalization, international financial linkages and expansion of production bases overseas. macroeconomic variables are indicators or main signposts signaling the current trends in the economy. thus keynes identified some main macroeconomics variables that study the fpi of the economy as a whole: gross domestic product (gdp), exchange rate (exr), interest rate, inflation and money supply. gdp is a measure of the annual improvement in the standard of living of the average citizen/resident of a country and it takes into account all the production inside a country, independent of whose ,domestic or foreign, owns the production site. what is important is that the production takes place inside the territories of the country. exchange rate is the rate in which one nation’s currency is compared with the value of another country’s currency. if one nation’s exchange rate is higher than another one, it affects the purchasing power of the lower exchange rate of a particular country. example, nigeria naira rate is lower as to compare to dollar of america therefore an american will have a higher purchasing power than nigerian. interest rate is the cost of borrowing money, cash, credit, bonds, stocks, mortgage government borrowing. interest rate reaches a peak just before recession and fall through the recession. rising interest rate signal an expanding economy and when already high interest rate begins to rises even further and faster, that is a sure sign of the onset of inflation. inflation is an economy can be the result of an increase in aggregate demand that is accompanied by an increase in aggregate supply. ▪ policy reforms and foreign capital flows in nigeria the federal government indigenization policy of the 1970s contributed in scuttling the growth of foreign capital flows in nigeria. prior to the promulgation of the nigerian enterprises promotion (nep) act of 1972, there were some laws (exchange control act of 1962, section 7 of the act, stipulates that “nobody within nigeria could make any payment to anybody outside nigeria or make such payment on behalf of anybody resident outside nigeria without the permission of the minister of finance, companies act of 1968, banking act of 1969, petroleum act of 1969, patents and design act of 1970 and copy rights act of 1970) laid the relevant legal framework for the eventual take-off of the indigenization policy. however, different policy reforms led to the change in the investment climate in nigeria for both domestic and foreign investors. the abrogation of the nigerian enterprises promotion decree 1989 and the exchange control act of 1962 as well as their subsequent replacements with nigerian investment promotion council decree no 16 of 1995 and foreign exchange (monitoring and miscellaneous provisions) decree 17 of 1995, publication of industrial policy for nigeria in january, 1989 provided foreign investors with enormous opportunity to participate in the economy. the company and allied matters act 1990 and nigerian investment promotion commission (nipc) decree no. 16 of 1995 represented an institutional framework for the formation, management and winding-up of companies as well as registration of business names and incorporated trusteeship in nigeria, while nipc is to encourage, promote and co-ordinate investment in the country. the foreign exchange (monitoring and miscellaneous provision provisions) decree 17 of 1995 was enacted to liberalize transactions involving foreign exchange, thereby; allowing for free flow of foreign capital. in addition, there was the establishment of investment and securities act (isa) of 1999 to further deregulate and enhance the development of the nigerian capital market for greater inflow of foreign capitals. apart from the law reforms, there are also the economic and financial sector policy reforms designed to reduce barriers, increase banking capital base and attract investment as well as tax holidays, easing of import and customs controls, infrastructure investment, and labour law reform. ▪ capital flows nigeria’s foreign private capital flows involve mostly the foreign direct investment (fdi) and foreign portfolio investment (fpi). the foreign portfolio investment is a recent development in nigeria and this was initially attributed to the non-internationalization of the country’s money and capital markets as well as the nondisclosure of information on the portfolio investments of nigerian investors in the foreign capital/money markets (cbn 1997). onosode (1997) stated that between july 1995 and july 1996, about us$6.0 million fpi was made in the nigerian capital market through the nigerian stock exchange (nse) for the first time since 1962, while for the whole of 1996, foreign investment through the nigerian stock exchange totaled us$32.99 million; for 1995, it was us$1.14 million (obadan, 2004). in terms of net investment, the npi in nigeria was n151.6 million in 1986, and it rose to n 51, 079.13 million in 2000. by 2005, there was a tremendous increase in the npi in nigeria. it increased from n23,541.00 million in 2004 to n393,336.41 million in 2005, (indicating growth rate of 1,565 per cent). it, however, dropped to n294,956.59 million in 2006. in 2007, the npi increased to n609,342.81 million before declining to n350,919.40 in 2008. the sudden drop in the npi level in 2008 could www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 1; 2018 17 be attributed to the capital flight witnessed in the country at the heat of the gfc. similarly, the ndi was n 735.8 million in 1986 and rose to n115,952.16 million in 2000. furthermore, it increased from n654,193.18 million in 2005 to n1,779,594.79 million in 2006, indicating a growth rate of 172 per cent. in 2007, it dropped to n759,380.40 million but rose to n802,615.70 million in 2008. within the same period, while the economy was experiencing huge inflows of fdi, it also witnessed some outflows. between 1986-2008, the inflow of fdi was n4,024.00 million in 1986, while the outflow was n1,524.40 million, resulting in a net flow of n2,499.60 million. in 2000, n16,453.60 million was fdi inflow compared to n13,106.60 million outflow. in 2007, the fdi inflow and outflow were n54,254.20 million and n328.80 million, respectively, while the net flow was n53,924.80 million. however, the inflow and outflow dropped to n37,977.70 million and n4,362.50 million in 2008, resulting in a net flow of n33,615.20 million. averagely, the annual fdi inflow and outflow in the economy for the period under review was n18,755.49 million and n4,090.89 million, respectively, thereby, resulting in a net flow of n14,518.59 million. achieving a positive net foreign investment is important in influencing the overall position of a country’s external sector. ▪ empirical review aggarwal, et al, (2003) examined the investment allocation choices of actively-managed u.s. mutual funds in emerging markets after the asian financial crisis. they analyzed both countryand firm-level governance and disclosure policies that influence these investment allocation decisions. at the country-level, they find that u.s. funds invest more in open emerging markets with stronger shareholder rights, legal frameworks and accounting standards. after controlling for country characteristics, u.s. funds are found to invest more in firms that adopt policies resulting in greater transparency and accounting disclosures in addition to characteristics such as size, visibility, and high analyst following. the impact of stronger disclosure and transparency is most pronounced in countries with weaker investor protection rai and bhanumurthy (2007) tried to examine the determinants of foreign institutional investments in india, which have crossed almost 12billionus dollar by the end of 2002. given the huge volume of these flows and its impact on other domestic financial markets, understanding the behavior of these flows becomes very important at the time of liberalizing capital account. in this study, by using monthly data, they found that fpi inflow depends on stock market returns, inflation rate (both domestic and foreign) and ex-ante risk. in terms of magnitude, the impact of stock market returns and the ex-ante risk turned out to be major determinants of fpi inflow. this study did not find any causation running from foreign portfolio investment inflow to stock returns as it was found by some studies. baharumshah and thanoon (2006) provided a quantitative assessment of the effect of various types of capital flows on the growth process of the east asian countries, including china. the empirical analysis was based on dynamic panel data and they found; first, that domestic savings contribute positively to long-term economic growth. second, they confirm that foreign direct investment (fdi) is growth enhancing and that its impact is felt both in the short and long run. additionally, fdi influence on growth is much higher than domestic savings. third, short-term capital inflow has adverse effect on the long-term as well as short-term growth prospects and it appears to be sensitive to long-term capital inflows. fourth, long-term debt has positive effect on growth but its effect does somewhat disappear in the long-term. by and large, the observed positive contribution of fdi in the growth process of east asian economies is a robust finding. durham (2003) focused on the effects of foreign portfolio investment (fpi) and other foreign investment (ofi) on economic growth using data on 88 countries from 1977 through 2000. most measures suggest that fpi has no effect and some results indicates that ofi has a negative impact on growth that is somewhat mitigated by initial financial and or legal development. jenkins and thomas (2002) examined the determinants of foreign portfolio investment (fpi) and its impact on the national economy in six developing asian countries. regression results show that inflation rate, index of economic activity and the share of domestic capital market in the world stock market capitalization are four statistically significant determinants of fpi. the first variable has a negative coefficient while the last three variables possess positive coefficients. foreign direct investment, total foreign trade and current account deficit variables are found to be statistically insignificant. lee (2007) posits that in the last several years there has been a substantial theoretical advancement in our understanding of the factors determining international portfolio capital movements. from the mechanic flow theory, progress has been made to the portfolio-adjustment theory which rests on a firmer microeconomic foundation. chukwuemeka (2008) examined the determinant of foreign portfolio investment. anayochukwu (2012) examined the impact of stock market returns on foreign portfolio investment. chi-chi and eze (2013) examined the impact of macroeconomic indicators on the performance of foreign portfolio investment. there www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 1; 2018 18 are however, few empirical studies on the macroeconomic variables that determine the inflow of foreign portfolio investments. 3. research methodology the study uses quasi experimental research design approach for the data analysis. the approach combines theoretical consideration with the empirical observation and extract maximum information from the available data. the study used time series data sourced fromthe publications of central bank of nigeria statistical bulletins, annual report and economic reviews. 3.1 model specification the model specified below is based on empirical studies and theories. model 1 aspi = f(nfpi, pie, pib, pigs, exr)………………………..1 aspi = β0 + β1nfpi+ β2pie+ β3pib + β4pigs+β5 exr + µ ………….2 model 2 mkct = f(nfpi, pie, pib, pigs, exr)……………………......3 mkct = β0 + β1nfpi+ β2pie+ β3pib + β4 pigs+β5 exr + µ….4 where aspi = nigerian stock market all share price index mkct = nigerian stock market capitalization nfpi = net foreign portfolio investment in nigeria pie = portfolio investment in equity pib = portfolio investment in bonds pigs = portfolio investment in government securities exr = nigerian naira exchange rate per us dollar β0 = intercept β1 – β5 = coefficientof the explanatory variable µ = error term theoretical functional relationship between the dependent and independent variables in the models are explained below: ▪ net foreign portfolio investment: this refers to the difference between the inflow and outflow of foreign portfolio in the financial market. an increasing inflow signifies that the capital market is functioning well. the general assumption based on the portfolio investment theory, is that outflow of portfolio investment is a mechanism for risk diversification. therefore an increase in net foreign portfolio investment is expected to add on the capital market of the recipient country, which can be measured in market capitalization or all share price index. ▪ portfolio investment in equity: the nigerian capital market trades on equity of corporate organizations which are multinational firms. for instance equity of nigerian bottling company is traded on the floor of nigeria stock exchange. the inflow of foreign investors wills not only increase the equity value of the firm, but will also enhance market capitalization and all share price index of the nigerian stock exchange. ▪ portfolio investment in bonds: the diversification theory of portfolio investment spreads among the various capital market instruments is a mechanism for management risk. but also have the potentials of increasing the performance indicators of the recipient country. ▪ investment in government securities: apart from corporate securities, government securities also attract foreign investors, because it is assumed to be risk-free. increase in inflow can enhance the performance indices of the recipient country. ▪ portfolio investment in exchange rate: this is a monetary policy instrument that regulates the external sector of the economy. the inflow and outflow of investment across national borders is determined by exchange rate of the foreign investors and recipient country, just as rate of return or interest rate determined domestic investment. the depreciating nigerian naira exchange rate will attract foreign portfolio investors, which enhances the performance of the capital market. 3.2 data analysis method in analyzing the data, and results of this study, the multiple regressions with the econometric view. this is used to test the hypotheses and the variables in the study. estimation procedure 3.2.1 unit root dickey and fuller looked at the distribution of this kind of test statistic and found that ols estimates are biased down (towards stationary) and ols standard errors. thus, it is possible that many series that would have thought were stationary based on ols regression were infact generated by random walks (cochrane, 2005) the www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 1; 2018 19 study will therefore subject all the variables to unit root test, using the augmented dickey fuller (adf) test specified in gujarati (2004) as follows. 3...........................................................................1 1 121 etyiyy t m i tt ++++= − − −  where: ty = change time t 1− ty = the lagged value of the dependent variables t = white noise error term if in the above  =0, then we conclude that there is a unit root. otherwise there is no unit root, meaning that it is stationary. the choice of lag will be determined by akaike information criteria. 3.2.2 coint egration test in order to avoid spurious estimates, we intend to establish long-run relationship between the variable included in the model and engle-granger approach to co integration will be adopted. this approach is based on conducting unit root test on residual obtained from the estimated regression equation. if the residual is found to be stationary at level, we conclude that the variables are cointegrated and as such as long-run relationship exists among them. tijt j i iit i i tot tatawta 1 11  +++= − = − =  ………………………………………………4 in the equation above, aspi/mkctis thestrength of nigerian capital market. the regression will determine whether or not nigerian foreign portfolio inflow affects nigerian capital market performance positively or negatively. 3.2.3 granger causality test the main objective of this study is to investigate the causality between the independent and the dependent variables. granger (1996) proposed the concept of causality and erogeneity: a variable yt is said to cause xt, if the predicted value of xtis ameliorated when information related to ytis incorporated in the analysis. 4. data presentation and analysis of results presentation of results table 1: results of static ols regression of model model variable coefficient standard error t-statistics probability 1. aspi intercept 143.4465 750.5467 0.191123 0.8503 nfpi 0.190868 0.029193 6.538103 0.000 pie 0.086646 0.029193 1.548630 0.1364 pib -0.520684 0.468963 -1.110288 0.2794 pigs -0.371395 1.486963 -0.249862 0.8051 exr 0.007304 0.021552 0.338898 0.7381 r2 0.803279 adjr2 0.756441 2. mkcp intercept 1614781. 1227974 1.314995 0.2015 nfpi -12.17253 25.45797 -0.478142 0.6371 pie 212.6990 85.79699 2.479096 0.0209 pib -1202.984 830.7092 -1.448141 0.1611 pigs -2786.872 2513.737 -1.108657 0.2790 exr 4.992292 42.06899 0.118669 0.9066 r2 0.239032 adjr2 0.073604 source: author’s computation from the table above, model oneshow an r2 and adjusted r2 of 0.803 and 0.756 which means that 80.3% and 75.6% variation in nigerian capital market all share index can be explained by variation in the independent variables formulated in the model, model 2shows that 23.9% and 7.3% variation in nigerian capital market capitalization can be explained by the explanatory variables. model 1 shows that pib and pigs have negative www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 1; 2018 20 relationship with all share price index, while model 2 shows that nfpi, pib and pigs have negative relationship with market capitalization. table 2: autocorrelation and overall significance of regression model autocorrelation model durbin watson statistics autocorrelation presence type test 1 2.089151 presence positive 2 2.054879 presence positive model f-statistics probability remark model overall significant f-test 1 17.15006 0.000001 very high 2 1.444934 0.246081 very low source: author’s computation the result presented in the above table, shows the positive presence of serial auto correlation in the models, the overall significance shows that the model 1 is significant while model 2 is not significant. table 3:unit root test variable critical 1% 5% 10% adf statistics lag remark at level aspi -3.681914 -2.19183 -2.625121 0.44851 2 non-stationary mkcp -3.681914 -2.19183 -2.625121 -5.085272 2 non-stationary nfpi -3.681914 -2.19183 -2.625121 -7.452394 2 non-stationary pie -3.681914 -2.19183 -2.625121 -6.28197 2 non-stationary pib -3.681914 -2.19183 -2.625121 -6.907999 2 non-stationary pigs -3.681914 -2.19183 -2.625121 -11.28601 2 non-stationary exr -3.681914 -2.19183 -2.625121 -8.660356 2 non-stationary at difference aspi -3.681914 -2.19183 -2.625121 5.389412 2 stationary mkcp -3.681914 -2.19183 -2.625121 -2.288303 2 stationary nfpi -3.681914 -2.19183 -2.625121 0.565253 2 stationary pie -3.681914 -2.19183 -2.625121 -6.285197 2 stationary pib -3.681914 -2.19183 -2.625121 -6.468982 2 stationary pigs -3.681914 -2.19183 -2.625121 -7.220513 2 stationary exr -3.681914 -2.19183 -2.625121 -10.95431 2 stationary source: author’s computation as extracted the table above shows the analysis of the augmented dickey fuller test statistics. it shows that all variables are not stationary at level but stationary at difference. table 4: johensen cointegration test (trace test) model hypothized null eigen value trace statistics critical value at 5% probability remark 1. aspi r ≤ 0 0.954082 156.0382 95.75366 0.0000 significant r ≤ 1 0.674119 79.01559 69.81889 0.0077 significant r ≤ 2 0.644179 50.98502 47.85613 0.0247 significant r ≤ 3 0.506230 25.15182 29.79707 0.1561 not significant r ≤ 4 0.241908 7.509662 15.49471 0.5192 not significant r ≤ 5 0.023164 0.585902 3.841466 0.4440 not significant 2. mkcp r ≤ 0 0.945733 1666350 95.75366 103.18 significant r ≤ 1 0.707007 87.96130 69.81889 0.0000 significant r ≤ 2 0.588251 54.81592 47.85613 0.0009 significant r ≤ 3 0.453504 30.85769 29.79707 0.0097 significant r ≤ 4 0.292913 14.54355 15.49471 0.0376 significant r ≤ 5 0.174734 5.185322 3.841466 0.0629 not significant source: author’s computation the results presented in the above table choose the stable and long run relationship between the independent and the dependent variables in the models. www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 1; 2018 21 table 5: johensen cointegration test (maximum eigen) model hypotheses null eigen value maximum eigen critical value at 5% probability remark 1. aspi r ≤ 0 0.954082 77.02264 40.07757 0.0000 significant r ≤ 1 0.674119 28.03057 33.87687 0.2121 not significant r ≤ 2 0.644179 25.83320 27.58434 0.0823 not significant r ≤ 3 0.506230 17.64215 21.13162 0.1438 not significant r ≤ 4 0.241908 6.923760 14.26460 0.4982 not significant r ≤ 5 0.023164 0.585902 3.841466 0.4440 not significant 2. mkcp r ≤ 0 0.945733 78.67368 40.07057 0.000 significant r ≤ 1 0.707007 33.14538 33.87687 0.069 not significant r ≤ 2 0.588251 23.95823 27.58434 0.1362 not significant r ≤ 3 0.453504 16.31414 21.13162 0.2070 not significant r ≤ 4 0.292913 9.358228 14.26460 0.2576 not significant r ≤ 5 0.174734 5.185322 3.841466 0.0228 not significant source: author’s computation the results presented in the above table choose the stable and long run relationship between the independent and the dependent variables in the models. table 6: normalized co integration results source: author’s computation the table above reveals the long run relationship between the dependent and the independent variables in the models. table 7: pair wise granger causality test: model i pairwise granger causality tests null hypothesis: obs f-statistic prob. exr does not granger cause aspi 27 0.03881 0.9620 aspi does not granger cause exr 0.29521 0.7473 nfpi does not granger cause aspi 27 3.39259 0.0520 aspi does not granger cause nfpi 6.40120 0.0064 pib does not granger cause aspi 26 0.90906 0.4182 aspi does not granger cause pib 0.04577 0.9554 pie does not granger cause aspi 27 6.64787 0.0055 aspi does not granger cause pie 8.87283 0.0015 pigs does not granger cause aspi 25 0.00071 0.9993 aspi does not granger cause pigs 0.48612 0.6221 the objective of granger causality is to examine the casual relationship running from the dependent to the independent variables and from the dependent variables. from the above, the probability value shows a bivariable coefficient standard error type remark aspi 1.000000 nfpi 2.638675 0.16356 negative expected pie -7.008705 0.3966 negative not expected pib 4.752103 1.44059 negative not expected pigs 56.73859 4.88216 positive expected exr -0.209000 0.07347 negative not expected log likelihood mkcp 0.0000 nfpi 4.753615 1.25885 pie -8.178754 3.03862 negative not expected pib 43.23362 16.8056 positive expected pigs 31.63909 58.4390 positive expected exr 1.0000 0.000 negative not expected www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 1; 2018 22 directional relationship running through nfpi to aspito nfpi,it also run from pie to aspi and aspi to pie while others are independent showing no causal relationship between the variables. table 8: pairwise granger causality tests model ii: pairwise granger causality tests null hypothesis: obs f-statistic prob. mkcp does not granger cause exr 27 0.06025 0.9417 exr does not granger cause mkcp 0.06183 0.9402 nfpi does not granger cause mkcp 27 2.47591 0.1072 mkcp does not granger cause nfpi 0.33641 0.7179 pie does not granger cause mkcp 27 3.54421 0.0463 mkcp does not granger cause pie 8.88733 0.0015 pib does not granger cause mkcp 27 0.09087 0.9135 mkcp does not granger cause pib 0.09359 0.9110 pigs does not granger cause mkcp 27 0.57749 0.5696 mkcp does not granger cause pigs 2.32293 0.1215 5. discussion of findings the nigerian capital market over the three decades attracts attention of the government and the regulatory authorities that result in reforms, for instance, the internationalization of the nigerian capital market have the objective of attracting of foreign portfolio investors. the deregulation of stock price in 1993 was also aimed at attracting foreign investors (onoh, 2002). the objective of this study is to examine the extent to which foreign investment has affected the performance of nigerian capital market. from model one; the result found that 80.3% variation in all share price index can be traced to the independent variables examined in the study. this means that foreign portfolio have significant effect on the performance of nigerian capital market measured by all share price index. the finding confirms the objective of the capital market reform and the a-piriori expectation of the result. however, foreign bond investment and foreign government security investment have negative relationship with all share price index which is contrary to the expectation of the result. the negative relationship can be traced to liquidity challenges in the international monetary system such as the global financial crises. the negative relationship of the variables invalidates the capital market reforms. model two reveals that 23.9% variation in the market capitalization can be traced to the predictor variables in the model. it shows that net foreign portfolio investment, portfolio investment in bonds and portfolio investment in government securitieshave negative relationship with market capitalization which is contrary to the expectation of the results. however, foreign investment in equities and exchange rate haspositive relationship on nigerian capital market capitalization. the overall findings of this study confirm that there is relationship between foreign portfolio investment and the performance of nigerian capital market. 6. conclusion to recall that the objectives of this study is to examine the relationship between nigerian capital market indicators and inflow of foreign portfolio investment in nigeria capital market, the data was sourced from central bank of nigeria statistical bulletin. the study adopts the multiple regression using econometric view and descriptive analysis to examine the relationship between the dependent and the independent variables. from the findings of the study, fromthe findings of the study, foreign portfolio has more significant effect on all share price index than the market capitalization. from the above the study concludes that the independent variables examined in the study have significant relationship with the performance of nigerian capital market. 7. recommendations • monetary and macroeconomic policies should be reformed and re-structured to achieve the macroeconomic policy targets for better inflow of foreign portfolio investments and the monetary authorities should engage on drastic measures to overhaul the investment climate to attract foreign portfolio investors into nigeria. www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 1; 2018 23 • the financial sector should further be reformed and re-structured to enhance the inflow of foreign portfolio investors and interest rate should be deregulated fully to allow for the market force of demand and supply determines the market rate of return. • the nigerian capital market should further be reformed and deepened to international standard to enhance the inflow of foreign investors and the exchange rate market should properly be managed, consistent exchange rate policies should be used and flexible exchange rate regime should be introduced for effective management of nigerian external sector. • the monetary policy should make policies that will avert financial sector crisis in nigeria and policies should properly be device to manage the negative effect of international monetary crisis on the inflow of foreign portfolio investment. • the international liquidity system and the international monetary policy should be well examined; the existing policies should be reviewed to avert the negative effect of global liquidity crisis that can negatively affect the inflow of foreign investors and capital market performance. • the nigerian investment climate should be reviewed, an international investment treaties be revisited to enhance the inflow of foreign portfolio investors. 8. contribution to knowledge this study examined foreign portfolio and the performance of nigerian capital market using time series data. from the findings of the study, the following is contributed to the existing body of knowledge in finance. ▪ the inflow of foreign portfolio 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imf working paper wp/08/32. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). copyright © cc-by-nc 2020, cribfb | afbr australian finance & banking review; vol. 4, no. 1; 2020 issn 2576-1196 e-issn 2576-120x published by centre for research on islamic banking & finance and business, usa 45 finance, islamic fiancé: theoretical analysis mahbuba zaman independent researcher abstract the paper discusses the steps to be taken to strengthen the efficiency and transparency of the board and management. increasing shareholders and depositors to play a more important role in protecting their own interests. the article then describes some of the popular resources available to enhance the effectiveness and responsibility of the board and the executive. keywords: finance, islamic finance. 1. introduction islamic finance means that debt creation by direct lending and borrowing from money or other financial assets is not permitted. the debts can only be created by selling or leasing real assets through leasing-based financing (such as murabaha, ijara, and sukuk). the assets rented or sold have to be real (construction, real estate or other physical infrastructure), and the transactions must be genuine (approved by government regulators as well as shariah board religious experts) with full intent to give and take charge; the associated debt (risk) cannot be sold and transferred to another person. 2. theoretical analysis financial services that meet the requirements of the shariah, or islamic law are called islamic finance. while designed to meet the specific religious requirements of muslim customers, islamic banking is not restricted to muslims: both the financial services provider and the customer can be non-muslim, as well as muslim. shariah-compliant financing (scf) constitutes financial practices that conform to islamic law. major principles of shariah law that are applicable to finance and that differ from conventional finance are: in conventional forms of finance, a distinction is made between acceptable interest and usurious interest (i.e., excessive rates of interest). in contrast, under islamic law, any level of interest is considered to be usurious and is prohibited. some question how lenders can profit from financial transactions under islamic law. take for instance, in a real estate setting; scf takes the form of leasing, as opposed to loans. instead of borrowing money, the bank obtains the property and leases it to the shariah-compliant investor, who pays rent instead of interest. ban on uncertainty in contractual terms and conditions is not allowed, unless all of the terms and conditions of the risks are clearly understood by all parties of a financial transaction. this condition may help eliminate most of the speculative transactions which involve gharar (excessive uncertainty).parties involved in a financial transaction must share both the associated risks and profits. earnings from profits or returns from assets are permitted, so long as the business risks are shared by the lender and the borrower. 3. conclusion this will help ensure that the seller (or lessor) also shares a part of the risks in order to be able to get a share of the returns. once the seller (financier) acquires ownership and possession of the goods for sale or lease, he/she bears the risks. investment in industries that are prohibited by the qur’an, such as alcohol, pornography, gambling, and pork based products, are discouraged. each financial transaction must be tied to a “tangible, identifiable underlying asset.”9the debt cannot be sold, and thus the risk associated with it cannot be transferred to someone else; it must be borne by the creditor himself. according to this condition a transaction must be a genuine trade transaction, and the fact that the creditor cannot transfer the risk to someone else by selling off the debt, will also help eliminate speculative and derivative transactions, as well as prevent the debt from rising far above the size of the real economy references alam, i., islam, k. a., & al-amin, d. m. 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https://doi.org/10.46281/ijscgr.v3i2.838 https://doi.org/10.46281/ijibm.v4i2.840 https://doi.org/10.46281/aijmsr.v6i3.823 https://doi.org/10.46281/ijbmf.v4i2.785 australian finance & banking review; vol. 2, no. 2; 2018 issn 2576-1196 e-issn 2576-120x impact factor: 2.7 published by centre for research on islamic banking & finance and business, usa 7 micro determinants of dividend policy in quoted manufacturing companies in nigeria ngozi g. iheduru 1 & charles u. okoro 2 1 assocaite professor, department of accountancy, faculty of business administration, imo state university, owerri, nigeria 2 m.sc,department of accountancy, school of management sciences, ken saro-wiwa polytechnic, bori, rivers state, nigeria correspondence: ngozi g. iheduru,fca, associate professor, department of accountancy, faculty of business administration, imo state university, owerri, nigeria received: october 10, 2018 accepted: october 20, 2018 online published: november 7, 2018 abstract this study examined the factors that determine dividend policy of quoted manufacturing firms in nigeria. the general purpose is to examine factors that affect dividend policy of the quoted firms. after exhaustive literature review, cross sectional data was sourced from financial statement of twenty quoted manufacturing firms. dividend payout rate was proxy for dividend policy while growth opportunities, liquidity, management efficiency, profit level, cost of capital, company size and debt equity ratio were proxy for independent variables. the study applied the pooled ordinary least square (ols), fixed effect, and random effect regression models using the e-view statistical package. findings reveal that growth opportunities, profit level, management efficiency and debt equity ratio have negative effect on dividend payout ratio while liquidity, cost of capital and company size have positive effect on dividend payout ratio of the manufacturing firms. we conclude that liquidity cost of capital and company size significantly determine dividend policy while growth opportunities, management efficiency, profit level and debt equity ratio have no significant effect on dividend policy. the study recommends among others, that managers/consultants should carefully examine the economic factors within a firm’s operating environment when carrying out the functions of developing or designing dividend policy for the firm. keywords: dividend policy, quoted manufacturing companies, dividend payout ratio, management efficiency. 1. introduction the primary goal of every corporate organization is to maximize shareholders wealth. this motivates management to formulate policies and make decisions that facilitates the achievement of the objectives. the policies and decisions will include (amongst others) investment, financing and dividend policy decisions. dividend policy is a finance management function that determines the proportion of company’s earnings that is to be distributed to the shareholders and the proportion that is to be retained for further investment. as in bartlomej and jack (2015), it is determined by micro factors of the firm such as profitability, liquidity, company size, capital structure, growth of the firm, and corporate governance. dividend – which is a reward for investment in equity can be made in the form of cash dividend, bond dividend, scrip dividend and or property dividend. it can also be in a combination of any of the listed forms. in the past some scholars such as gordons (1959) as in amidu and abor (2006) opined that micro forces such as profitability level of a firm are the indicators that the firm is capable of declaring dividend. this is not entirely www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 8 true today as there are many objectives which an organization may pursue such as the growth opportunities of the firm –which could determine the dividend payout regime of a firm. understanding the behavioral aspect of dividend policy was first accredited to lintner (1956), as in brigham and daves (2010), who split the reasons for dividend policy into two: management sought to avoid making changes in their dividend rate that might reverse within a year which led to consistency of dividend policy and that dividend policy is based on earnings capacity of the firm. the finance profession has long struggled to develop a simple satisfactory model of dividend determination without much success. according to eugene and kenneth (2011), modigliani and miller (1961) show that in perfect capital market with no information asymmetry and predetermined investment decision, the value of the firms is independent of the financing decisions. hence, a firm’s financing decision including dividends, have no effect on the value of the firm, or the distribution of wealth between classes of security holders. however, in imperfect settings, dividend can influence shareholders wealth by providing information to investors or through wealth redistribution among claimants. it can be argued that dividends provide information about the firm’s future cash flow and as such decision bothering on dividend can effect a change on a firm’s value. knowledge of factors that determine dividend policy is crucial to the investors in the equity market as well as to the policy makers. for investors, discovering the economic variables could help them to appropriately forecast fluctuations in stock prices. dividend policy was just concerned with selecting between payments of earnings to shareholder as cash dividend or retaining the profit in the firm. it only determined the incidence of dividend payments and the amount of dividends payable. however, in today’s corporate finance, dividend policy addresses other issues such as how firms can attract investors in different tax brackets; how the firm’s market value can be increased by this policy and share repurchases so as to reduce the incidence of paying out cash dividends. despite the various reforms, the performance of the corporate organizations remains abysmal and affects the dividend policy of listed firms in nigerian stock exchange. as in urhoghide and ojeme (2016), there have been fluctuations in the dividend paid in the last three years and they also observed the drops in dividend payments, and that some have not declared dividend over the past three decades. as mentioned earlier, dividend policy administration has metamorphose with the intent to attract investors, reduce further incidence of paying out cash, etc. urhoghide and ojeme (2016) also opined that most quoted firms in the nigerian stock exchange have no consistent dividend policy over the past three decades. this observed inconsistency could be attributed to ignorance and or improper understanding of the dynamics in dividend policy administration and this may lead to loss of opportunities to the corporate managers, investors, governments, and the general public. the factors that determinant corporate dividend policy in nigeria has well been examined in literature as in (abubakar, 2015; urhoghide and ojeme, 2016; dada, 2015) to mention but a few; but the studies were on the banking industry. the only attempt by oyinlola, oyinlola and adeniran (2014) on the manufacturing industry was limited in scope as it centered on the breweries. this creates a knowledge gap on factors that determine dividend policies in the manufacturing industry. from the above, this study intends to examine factors that determine dividend policy of quoted manufacturing firms in nigeria. it has been observed that while some organizations pay dividend when they declare profit but some others do not consider profit as a necessary and sufficient indication for declaring dividend. this has kept a lot of investors wondering what really determines when an organization is likely to declare dividend. 1.1 research questions this study is provoked by the following questions.  to what extent does profit level determine dividend policy of quoted manufacturing firms in nigeria?  to what extent does liquidity determine dividend policy of quoted manufacturing firms in nigeria?  to what extent does company size determine dividend policy of quoted manufacturing firms in nigeria?  to what extent do growth opportunities determine dividend policy of quoted manufacturing firms in nigeria?  to what extent does management efficiency determine dividend policy of quoted manufacturing firms in nigeria?  to what extent does cost of external financing determine dividend policy of quoted manufacturing firms in nigeria?  to what extent does debt equity ratio determine dividend policy of quoted manufacturing firms in nigeria? www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 9 1.2 research hypotheses  h01: there is no significant relationship between profit level and the dividend policy of quoted manufacturing firms in nigeria  h02: liquidity does not affect the dividend policy of quoted manufacturing firms in nigeria.  h03: there is no significant relationship between company size and the dividend policy of quoted manufacturing firms in nigeria.  h04: growth opportunities have no significant impact on the dividend policy of quoted manufacturing firms in nigeria.  h05: here is no significant relationship between management efficiency and the dividend policy of quoted manufacturing firms in nigeria.  h06: cost of external financing do not affect the dividend policy of quoted manufacturing firms in nigeria.  h07: debt equity ratio does not affect the dividend policy of quoted manufacturing firms in nigeria. 2. literature review dividend policy refers to a company’s policy which determines the amount of dividend payments and the amounts of retained earnings for reinvesting in new projects. this policy is related to dividing the firm’s earning between payment to shareholders and reinvestment in new opportunities. dividend policy involves the determination of the payout, method of payment and the aggregate retention of earnings policy that management follows in determining the size and pattern of cash distributions to shareholders over time. profit level has long been regarded as the primary indicator for a company’s capacity to pay dividends. lintner (1956) surveyed corporate chief executive officers and chief financial officers and found out that dividends are a function of current and past profit levels. a firm’s current and previous year’s profit are an important factor in influencing the dividend policy. dividends are a function of current and past profit levels and the future earnings and expected future earnings. liquidity and cash flow position of the firm is also a vital consideration. this arises from the fact that dividend payout entails huge cash flows. hence, a firm encountering liquidity challenges would find it difficult to pay higher dividend. empirical evidence from ahmed, imran, and ali (2014) reveal that dividend payout depends more on cash flow, which reflect the company’s ability to pay dividend rather than on earnings which are often influence by accounting practices. liu and hu (2005) in their study found out that cash dividend payment was higher than accounting profit. however they found out that fifty (50%) percent of the sampled companies had dividend cash payments higher than free cash flow. company size is one of the major determinants of cash dividend payout. larger sized firms have easier access to capital market. this reduces their rate of dependency on internally generated revenue and hence, fosters prompt payment of higher rate of dividend. fama and french (2000) found out that payers and no payers differ in terms of profitability, investment opportunities and size. three fundamentals were evident profitability, investment opportunity and size as the key factors in decision to pay dividends. dividend players tend to be large, profitable firms with earnings on order of investment outlays. small firms have no easy access to additional capital hence they retain a higher proportion of their earnings, while big firms pay high dividend to their shareholder than small firms. young firms prefer to retain all internal resources and do not pay dividends. growth opportunities of a firm determine the dividend payout ratio of a firm. rapidly growing firms have a substantial need for funds to finance the abundance attractive investment opportunity instead of paying large amount as dividend and stand a chance of issuing new shares for investment capital. firms with higher dividend payout ratios tend to have low growth rates all things being equal. management efficiency is an important aspect of corporate strategy. it refers to the manager ability to reduce cost. corporate efficiency signifies a level of performance that describes a process that uses the lowest amount of inputs to create the greatest amount of output. in finance, the concept relates how well the naira invested in alternative produces revenue to the firm. it is a measure that determines the present value of an investment. management efficiency is determined by the quality of manpower, risk management and corporate strategy. management efficiency encourages cost effectiveness and by extension increase in profitability and this can affect positively dividend policy of a quoted firm. transaction costs of external financing: a firm with a higher leverage has higher dependency on external finances. the smaller percentage of the company is held by outsiders, the higher the company’s dividend payout. dividend payout ratio is dependent on transactions of external financing, financial constraints created by the financial leverage and the agency cost of outside ownership. a highly leveraged firm pays low dividend to their shareholder due to cash flow obligations to their financiers. www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 10 debttoequity ratio is a financial ratio that indicates the relative proportion of equity and debt used to finance a company's assets. this ratio is also known as risk, gearing or leverage. some scholars have opined that risk affects firms' dividend policy. firms with high growth rates and high dividend payout ratios utilize debt financing and firms with high leverage compared to their respective industry. however, conflicting evidence on the relationship between dividend payout ratios and leverage abound. in some industries payout and leverage ratios are positively related while in other industries the relationship is negative. there exist statistically significant and negative relationship between firm’s risk and the dividend payout ratios. it is evident that firms having a higher level of risk will pay out dividends at lower rate. in summary, the literature review points out to the fact that corporate profitability, cash flow, tax, sales growth, market-to-book ratio, and debt-to-equity ratio may impact upon the dividend payout ratio. previous researchers concentrated on the determinants of 'standard ratio of dividend to earnings, or the standard dividend payout ratio. theoretical framework relevance theory gordon (1962) stated that investors may prefer present dividend instead of future capital gains because the future situation is uncertain even if in perfect capital market. this theory further postulates that many investors may prefer dividend in hand in order to avoid risk related to future capital gain. also in his work, he opined that there is a direct relationship between dividend policy and market value of share even if the internal rate of return and the required rate of return will be the same and that the share price of a firm is subordinate of discounted flow of future dividends. however, this theory may not be universally applicable as diamond in 1967 selected 255 us based firms as a sample and studied the association of firm’s value with dividends and retained earnings in 1961 and 1962; and reported that there is only weak evidence that investors prefer dividends to future capital gain. his findings also showed a negative association between growth of company and preference of dividend. bird in hand theory the gordon and lintner (1959) bird-in-the-hand theory states that dividends are relevant. those investors have a preference for a certain level of income now rather than the prospect of a higher, but less certain, income at some time in the future. the bird-in-the-hand may sound familiar as it is taken from an old saying; a bird in the hand is worth two in the bush. in this theory the bird in the hand' is referring to dividends and the bush is referring to capital gains. they argued that investors value dividends more than capital gains when making decisions related to stocks. as a company increases its payout ratio, investors become concerned that the company's future capital gains will dissipate since the retained earnings that the company reinvests into the business will be less. the essence of the bird-in-the-hand theory of dividend policy is that shareholders are riskaverse and prefer to receive dividend payments rather than future capital gains. shareholders consider dividend payments to be more certain that future capital gains thus a bird in the hand is worth more than two in the bush". gordon contended that the payment of current dividends resolves investor uncertainty. investors’ value a naira expected dividend more highly than a naira expected capital gain because the dividend yields component is less risky than the expected return hence; it is believed that investors require and prefer high dividends to capital gains resulting to a generous dividend policy by a firm. tax preference theory taxes are important considerations for investors. this is because capital gains are taxed at a lower rate than dividends. this theory states that the reason why investors prefer low dividend payout to high payout as:  long term capital gained are less taxed as compared to dividend and  those taxes on capital gains are not paid unless the stock is sold. signaling hypothesis dividends are information signals about the performance of a company which are necessary for the investors’ decision making. it has been observed that the price of a firms stock generally rises when its dividend is increased and the price will fall when the dividend drops. thus, firms are expected to raise dividends when the future earnings are expected to rise. this lead to the smoothening hypothesis of dividends by management which predicts that dividends are maintained at a constant rate and any increase are carried out rather cautiously by the firm to avoid significant dividend cuts even when the corporate earnings falls. this is because managers have better information of the firm’s performance than the investors. however, some scholars argue that not all investors are the same as some regard dividend changes as a signal of management earnings forecasting. therefore dividends act as a signal to investors on the current and future performance of the firm. generally a rise in dividend payment is viewed as a positive signal, conveying positive information about a firm's future earnings prospects resulting in an increase in share price. conversely a reduction in dividend payment is viewed as negative signal about future earnings prospects, resulting in a decrease in share price. www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 11 information asymmetry and dividend signaling this model was developed by bhattacharya in 1979. the dividend signaling theory states that, a firm that increases its dividend payouts is signaling that it has expected future cash flows sufficient to meet expenses without increasing the probability of bankruptcy. given information asymmetry as a market imperfection, the signaling concept of financial capital structure can be readily applied to dividend policy. managers signal investors because financial managers have privileged information about the firm’s expected cash flows that outside investors cannot know. this theory explains why firms pay dividends despite the apparent tax disadvantage. in bhattacharya’s (1979) dividend signaling model, investors believe that an unexpected dividend increase is a favorable signal. this assumes that the dividend contains information regarding firm value not conveyed in other public information, and that the dividend is a valid signal since it is expensive for less valuable firms to mimic. then the signaling value of dividends is positive and can be traded off against the tax costs. the implication of such a dividend signaling model is that it suggests an optimal dividend policy where the signaling benefits of paying dividends offsets the tax disadvantages of paying dividends. dividend policy and agency costs a wealth-maximizing firm will seek monitoring policies that minimize costs, and it is likely that dividend payments serve as a means of monitoring management performance. a greater dividend payment implies that the firm will need some costly external financing. thus the fact that the firm must obtain external financing introduces outside suppliers of capital that help monitor management for the equity owners. some rational firm would however propose an optimal dividend policy that is a trade-off between the flotation costs of raising external capital and the benefit of reduced agency costs. several studies have shown that firms with higher growth potential have lower dividend payouts, while firms with diffuse outsider holdings have higher dividend payouts. clearly, dividend policy is one way to reduce excessive cash from the firm, although kahle (2002) indicates that share repurchases do not eliminate all agency costs. dividend relevance theory the modigliani and miller (1961) dividend-irrelevance theory says that investors can affect their return on a stock regardless of the stock's dividend. investor could then buy more stock with the dividend that is over the investor's expectations. as such, the dividend is irrelevant to investors, and it can be further interpreted that investors care little about a company's dividend policy since they can simulate their own. their theory was built on a range of key assumptions, similar to those on which they based their theory of capital structure irrelevancy. modigliani and miller (1961) argue that the value of the firm in a perfect capital market depends only on the income produced by its assets not on how this income is split between dividends and the retained earnings. it is worthy of note here that in a perfect capital markets, there are no taxes both corporate and personal taxes; no transaction costs on securities; investors are rational; information is symmetrical hence all investors have access to the same information and share the same expectations about the firm's future as its managers. empirical review kinfe (2011) investigated the factors determining dividend payout policy of banks in ethiopia from 20062010 using panel data set of their audited financial statement as a source of data and ordinary least square as a technique for data analysis. the finding reveal that the main characteristic of firm dividend payout policy were that dividend payment related strongly and directly to firm size and lagged dividend per share but negatively to liquidity ratio. however, the result further revealed that there is no relationship between profitability, leverage and growth with dividend payout. the study validates the use of panel data technique and the ordinary least square regression model as a tool appropriate to engage this study. the time scope is small and was conducted using the ethiopia banking industry. hussainey, mgbame and mgbame (2011) examined the relationship between dividend policy and share price changes in the uk stock market. multiple regression analyses were used to explore the association between share price changes and both dividend yield and dividend payout ratio. a positive relationship is found between dividend yield and dividend policy changes and a negative relation between dividend payout ratio and dividend policy changes. in addition, it is shown that a firm’s growth rate, debt level, size and earnings explain dividend policy changes. the result of this study may not apply completely to the nigerian environment. maniagi, ondiek, musiega, maokomba, and egessa (2013) examined the determinants among dividend payout of non-financial firms listed on nairobi securities exchange. dividend payout ratio was dependent variable while independent variables were profitability, growth, current earnings, and liquidity. size and business risk was taken as moderating variables. return on equity current earnings and firms‘ growth activities were found to be positively correlated to dividend payout business risk and size, both the two taken as moderating variables www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 12 increase the precision of significant variables from 95% to 99% hence among major determinants of dividend payout. here again the result of this study may not fit properly to the nigerian environment. dada (2015) evaluated the determinants of dividend policy of nigerian banks. the study was based on panel data of selected banks that are listed on the nigerian stock exchange (nse) having financial data for 2008 to 2013 that was covered in the study. the study revealed that dividend payment is positively related with leverage, performance, corporate governance and last year dividend while it is negatively related with firm's liquidity. most empirical studies on this subject in nigeria bordered greatly on the nigerian banks. just like others, this study was limited to the banking industry and its findings may not completely define what happens in other sectors of the economy such as the manufacturing industry. king’wara (2015) investigated the determinants of dividend payout ratios in kenya. he examined the effect of six factors including earnings of the firm, ratio of retained earnings to total assets, firm size, growth opportunities, leverage and market value on dividend policy. it was observed that dividend payout ratio is impacted negatively by the growth rate, debt ratios and firm size and positively by earnings, market-to-book ratio and retained earnings to total assets ratio. this study was done outside nigeria and as such may not apply in the nigerian situation. urhoghide and ojeme (2016) examined the determinants of dividend payout by nigerian quoted banks. they stated that they observed that dividend payout in the banking industry witnessed widespread drop during the 2008 financial melt-down and the 2011 bank reforms in nigeria motivated this research. the study covered a period of seven years (2007 -2013) and the variables measured were liquidity, growth, leverage, profitability, firm size, and previous year’s dividend with data collated from the final account of all the quoted banks in nigeria. panel data regression technique was used for the analysis of data and they reported that liquidity, firm size, profitability and the dividend paid in the previous year affected dividend payout positively, while growth and leverage in the capital structure affected it negatively. they recommended that firms and investors should consider the determinants of dividend payout in their dividend policy decision. this study like many others on this subject in nigeria concentrated on the banking industry. 3. literature gap existing literature on the subject (using the nigerian business environment) has focused more on the banking industry, with limited studies of citable significance that incorporate other industries such as the manufacturing industry. therefore this study examines the economic variables that affect dividend policy in the context of the nigerian manufacturing industry. the literature examined in this study did not investigate direction of causality between the independent and dependent variables that determine dividend policy. studies that attempt to do so failed to establish exact and causal relationship between the variables (anil and kapoor, 2008; king’wara, 2015; kinfe, 2011; maniagiet at., 2013; manigagi and el-khoury, 2014, ahmed et at, 2014).for this purpose, this study will enhance the analysis by establishing the causal dynamic relationship that exists between the independent and dependent variables and the extent to which it affect dividend policy of nigeria quoted manufacturing firms. the existing studies also did not address the case of the developing financial market like nigeria but dealt with the financial market of the developed countries where it is considered more perfect than in developing countries. in this study, we will examine the economic variables that determine dividend policy of nigeria manufacturing firms.it is however note-worthy that this study will apply the gordon relevance theory. gordon found that dividend policy affects stocks even in the perfect capital market as opposed to irrelevance theory of miller and modigliani. he noted that investors may prefer present dividend instead of future capital gains because the future situation is uncertain even if in perfect capital market. empirical evidence on dividend policy and capital structure has validated the relevance theory than the irrelevance. this is based on the fact that the assumptions of irrelevance theory such as the perfect market are not attainable most especially in the developing markets and the emerging financial markets like nigeria. 4. research methodology this study used quasi experimental research design approach and descriptive survey. the quasi experimental research design approach combines theoretical consideration (a prior criterion) with the empirical observation to extract maximum information from the available data. this study used published data for the 10 years period beginning from 2007 2016. the secondary data was obtained from the stock exchange fact-book, the central bank of nigeria statistical bulletin (and other publications) and financial statement of the quoted firms. the population is the manufacturing concerns quoted in the nigerian stock exchange. as at december 31, 2006; there were twenty five (25) publicly listed manufacturing concerns in nigeria. there is however sixty three (63) publicly listed manufacturing concerns as at the end of october 2017 in nigeria. www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 13 apparently, 20 manufacturing firms that are listed on nigeria stock exchange were used as our sample size. panel data structure allows us to take into account the unobservable and constant heterogeneity, that is, the specific features of each quoted firm. the researcher also employed pooled ordinary least square (ols), fixed effects and random effects regression models to test the various hypotheses. in addition, ols method has been employed in a wide range of economic relationships with fairly satisfactory results. fixed effects and random effects models will aid to observe variations among cross-sectional units simultaneously with variations within individual units over time. it assumes that variables are strictly time disparity or time invariant. this undermines an exploration of the effect of slow change within individual firms’ factors. hence, the rationale for adopting fixed effects and random effects models estimator as additional test was to enable the researcher control time contrast and time invariant variables, and thereby controls the effect of the unobserved heterogeneity in the dataset. it is worthy of note that, coefficient of estimations are reliable when regression parameters do not change over time and do not differ between various cross-sectional units, therefore, because the regression estimation differ widely between the two models (fixed and random effects models), the hausman test was adopted and the result formed the basis of the researcher’s findings and recommendations. panel data over the period from 2007 2016 was used. these analytical techniques enabled the researcher attain justifiable and robust results.   xity 10 1 where y = dependent variable xit1 = independent variable 0 = regression intercept  = error term disaggregating equation 3.1 to form the multiple regression models, we have model specification pooled regression specification ititititititititit dercccsplmeliqgopodpr 177665544332211   2 fixed effect model specification itiiitititititititit idumdercccsplmeliqgopodpr 119 77665544332211    3 random effect model specification ititititititititit idercccsplmeliqgopodpr 177665544332211   4 where dpr = dividend payout rate gop = growth opportunities measured by the percentage increase in stock turnover loq = liquidity measured by current asset less current liabilities me = management efficiency measured by total revenue to total expenditure pl = profit level measured by return on investment cs = company size measured by total asset divided by total liabilities cc = cost of capital using weighted average cost of capital der = debt equity ratio measured by total equity divided by total debt et = stochastic or disturbance/error term. t = time dimension of the variables α 0 = constant or intercept. table showing the proxy variables definition and expected result proxy variable definition expected sign dividend payout ratio dps/eps dependent variable debt equity ratio td/te + company size lta/ta return on investment (profitability) pat/ti + growth opportunity % st liquidity ca/cl + cost of capital wacc management efficiency tr/te + www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 14 estimation techniques panel unit root test result the data were checked for the presence of unit root using the adf fisher chi-square and philiperon fisher chi-square, which is based on the well-known dickey–fuller procedure. the null hypothesis for these tests is that there is a presence of non-stationary series against the alternative hypothesis of stationary series. the unit root test is important because non-stationary series regression estimation leads to spurious regression estimations with the wrong magnitude and sign of the parameter of the regressors, with wrongly inferred implications. the study assumes an absence of a time trend; hence it is tested for stationarity allowing for constant only. stationarity denotes the non existence of unit root. we shall therefore subject all the variables to unit root test using the augmented dickey fuller (adf) test specified in gujarati (2004) as follows. etyiyy t m i tt     1 1 121  5 where: ty = change time t 1 ty = the lagged value of the dependent variables t = white noise error term if in the above  =0, then we conclude that there is a unit root. otherwise, there is no unit root, which means that it is stationary. the choice of lag will be determined by akaike information criteria. decision rule t-adf (absolute value) > t-adf (critical value) : reject ho (otherwise accept h1) note that each variable will have its own adf test value. if the variables are stationary at level, then they are integrates of order zero i.e 1(0). the unit root problem earlier mentioned can be explained using the model: y= yt-1 + i 6 where yt is the variable in question; i is stochastic error term. equation (a) is termed first order regression because we regress the value y at time “t” on its value at time (t1). if the coefficient of yt-i is equal to 1, then we have a unit root problem (non stationary situation). this means that if the regression. y= yt-1 + i 7 is run and l is found to be equal to 1 then the variable yt has a unit root (random work in time series econometrics).if a time series has a unit root, the first difference of such time series are usually stationary. therefore to salve the problem, take the first difference of the time series. the first difference operation is shown in the following model: y= (l-1) yt-1 + i 8 yt-1 + i 9 (note:  =1-1= 0; where l =1; yt = yt yt-i) integrated of order 1 or i(i) given that the original (random walk) series is differenced once and the differenced series becomes stationary, then the original series is said to be integrated of order i or i (1). integrated of order 2 or i (2) given that the original series is differenced twice before it becomes stationary (the first difference of the first difference), then the original series is integrated of order 2 or 1(2).therefore, given a time series has to be differenced q times before becoming stationary it said to be integrated of order q or i (q). hence, non stationary time series are those that are integrated of order 1 or greater.the null hypothesis for the unit root is: ho: a = 1; the alternative hypothesis is hi: a <1. we shall test the stationarity of our data using the adf test. granger causality test thus, granger causality test helps in adequate specification of model. in granger causality, test, the null hypothesis is that no causality between two variables. the null hypotheses is rejected if the probability of f* statistics given in the granger causality result is less than 0.05. the pair-wise granger causality test is mathematically expressed as: www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 15 111 1 11 1 uxyxy t x n i t y n i ot        10 and 1 v 1y xxdp1 n 1i 1yt y 1 dp n 1i o dp t x        11 where xt and yt are the variables to be tested white ut and vt are the white noise disturbance terms. the null hypothesis 011  yy dp , for all i’s is tested against the alternative hypothesis 01 x and .01 ydp if the co-efficient of x 1 are statistically significant but that of ydp1 are not, then x causes y. if the reverse is true then y causes x. however, where both co-efficient of x 1 and ydp1 are significant then causality is bi– directional. 5. data presentation, analyses and interpretations presentation of results below are tables showing the results of the level series result, significance of the model (hausman test), stability test, causality test, and the hypothesis test. table 1: presentation of level series result variable pooled effect fixed effect random effect coefficient t. stat p. value coefficient t. stat p. value coefficient t. stat p. value gop -0.030499 0.182884 0.8551 -0.009773 0.043160 0.9656 -0.117053 0.569806 0.8550 liq 0.796832 3.299509 0.0004 1.544558 4.972520 0.0002 0.408731 1.117045 0.0050 me 0.278481 4.802463 0.0000 0.113972 0.284487 0.7764 0.590341 0.631148 0.4229 pl -0.238385 0.683799 0.4950 -0.080018 0.207835 0.8356 -0.116753 0.008359 0.4946 cs 1.029037 4.526383 0.0000 2.301552 2.683141 0.0080 1.375980 2.551107 0.0003 cc -0.366100 3.490270 0.0079 -0.364344 3.399826 0.0034 -0.654290 2.094724 0.0075 der -0.046870 0.537981 0.5912 -0.021320 0.224931 0.8223 -0.453289 0.692466 0.5909 c 44.10257 4.198639 0.0000 23.80438 1.886767 0.0609 34.76437 3.432767 0.0000 r 2 0.443356 0.743071 0.343468 adjr 2 0.307158 0.408853 0.117158 fstatistic 3.197754 5.065960 1.568924 fprob 0.006071 0.000804 0.006071 d w 1.844330 2.000017 1.844330 source: extract from e-view 9.0 from the table, the pooled effect model found that 44.33% and 30.7% variation on the dependent variable which is dividend payout ratio can be explained by variation on the independent variables. the f-statistics and the f-probability proved that the model is significant; the durbin watson statistics of 1.84 is less than 2.50 but greater than 2.00 which implies the absence of serial autocorrelation within the time series. the beta coefficient of the variables found that growth opportunities, profit level, cost of capital and debt equity ratio have negative effect on dividend policy while liquidity, management efficiency and cost of capital have positive effect on the dependent payout. the t-statistics and probability coefficient found that liquidity, management efficiency company size and cost of capital have significant impact on the dependent variable while growth opportunities, profit level and debt equity ratio have no significant impact on dividend payout rate of the manufacturing firms. www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 16 the fixed effect model found that the independent variables can explain 74.3% and 40.8% variation on the dependent variable. the f-statistics and the probability found that the model is statistically significant. the durbin watson statistics of 2.007 is greater than 2.00 but less than 2.00 which imply the absence of serial autocorrelation within the time series. while the beta coefficient also showed that liquidity, management efficiency, company size and cost of capital have significant impact on the dependent variable while growth opportunities, profit level and debt equity ratio have no significant impact on dividend payout rate of the manufacturing firms. the results of the cross sectional random effect found that the independent variables can explain 34.3% and 11.7% variation on the dependent variable which is the dividend payout ratio, while the f-statistics and the fprobability found that the model is statistically not significant. the durbin watson statistics of 1.84 is less than 2.00 but greater than 1.50; this means the absence of serial autocorrelation within the time series. it shows that liquidity, management efficiency of the manufacturing firms. table 2: testing the significance of the models test: redundant chi–sq stat df prob cross-section f 1.016650 (19,166) 0.4447 cross-section chi-square 21.244787 19 0.3234 test: hausman chi–sq stat df prob cross-section random 12.815882 7 0.0467 source: extract from e-view (9.0) in testing the validity of the models, the fixed effects on the cross section redundant fixed effectlikelihood ratio, the pvalue is 0.000 indicating that the effects are significant. select the random effect and perform the correlated random effectshausman test, testing the random effects model against the fixed effects model. the null hypothesis in that case is that both tests are consistent estimators and the random effects model is efficient. under the alternative hypothesis, only the fixed effect is consistent. since the pvalue is 0.000, the null hypothesis is rejected and, therefore, the fixed effects model is to be preferred. table 3: test for stability variables adf fisher chi-square/ pp fisher chi-square statistics probability remark decision dpr adf fisher chi-square 75.2451 0.0006 stationary reject h0 pp fisher chi-square 90.5138 0.0000 stationary reject h0 der adf fisher chi-square 73.4426 0.0010 stationary reject h0 pp fisher chi-square 178.549 0.0000 stationary reject h0 cs adf fisher chi-square 62.9022 0.0119 stationary reject h0 pp fisher chi-square 88.9974 0.0000 stationary reject h0 cc adf fisher chi-square 76.1090 0.0005 stationary reject h0 pp fisher chi-square 149.272 0.0000 stationary reject h0 gop adf fisher chi-square 52.0136 0.0066 stationary reject h0 pp fisher chi-square 70.7596 0.0019 stationary reject h0 liq adf fisher chi-square 72.9358 0.0011 stationary reject h0 pp fisher chi-square 192.340 0.0000 stationary reject h0 me adf fisher chi-square 85.9849 0.0000 stationary reject h0 pp fisher chi-square 237.332 0.0000 stationary reject h0 pl adf fisher chi-square 78.0410 0.0003 stationary reject h0 pp fisher chi-square 132.574 0.0000 stationary reject h0 source: extract from e-view 9.0 the table above presents the summary results of the adf and pp panel unit root tests. the results show that the null hypotheses of a unit root test for first difference series for all the variables can be rejected at all the critical values indicating that the level series which is largely time-dependent and non-stationary can be made stationary at the first difference and maximum lag of one. thus, the reduced form model follows an integrating www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 17 order of 1(1) process and is therefore a stationary process. it also reveals that the test of stability in the residuals from the level series regression is significant at all lags. furthermore, this indicates that the regression is no more spurious but real. that is to say, all the variables are individually stationary and stable. table 4: test for causality hypotheses obs f. stat prob. decision gop does not granger cause dpr 154 3.99117 0.0002 reject h0 dpr does not granger cause gop 1.88558 0.1553 accept h0 liq does not granger cause dpr 160 0.10405 0.9012 accept h0 dpr does not granger cause liq 2.74547 0.0373 reject h0 me does not granger cause dpr 160 1.29596 0.2766 accept h0 dpr does not granger cause me 2.28507 0.0052 reject h0 pl does not granger cause dpr 146 0.52234 0.5943 accept h0 dpr does not granger cause pl 1.33544 0.2663 accept h0 cs does not granger cause dpr 160 1.29760 0.2761 accept h0 cc does not granger cause dpr 160 4.67673 0.0004 reject h0 dpr does not granger cause cc 0.79315 0.4542 accept h0 der does not granger cause dpr 160 0.41274 0.6626 accept h0 dpr does not granger cause der 3.61125 0.0293 reject h0 source: extract from e-view 9.0 the objective of causality test is to examine if past variation on the variables can affect significantly the present condition. the study found that there is one way relationship between growth opportunity and dividend payout ratio but no causality between dividend payout ratio and growth opportunity. liquidity granger cause dividend payout ratio but dividend payout ratio does not granger cause liquidity this implies acceptance of null hypotheses. management efficiency does not granger cause dividend payout ratio but dividend payout ratio granger cause management efficiency. profit level does not granger cause dividend payout ratio and dividend payout ratio does not granger cause profit level. company size granger cause dividend payout ratio but dividend payout ratio does not granger cause company size. cost of capital does not granger cause dividend payout ratio and dividend payout ratio does not granger cause cost of capital. debt equity ratio grangers cause dividend payout ratio and dividend payout ratio granger cause debt equity ratio. test of hypotheses table 5 :showing the test of hypotheses and results variables t-test p-value critical value decision gop -0.043160 0.9656 0.965>0.05 accept h0 liq 4.972520 0.0002 0.0002<0.05 reject h0 me 0.284487 0.7764 0.7764>0.05 accept h0 pl -0.207835 0.8356 0.8356>0.05 accept h0 cs 2.683141 0.0080 0.0080<0.05 reject h0 cc -3.399826 0.0034 0.0034<0.05 reject h0 der -0.224931 0.8223 0.8223> 0.05 accept h0 source: computed by researcher from e-view 9.0 table 6: cross-sectional fixed effect for individual firm s/n company coefficient 1 champion breweries 7.638369 2 seven up bottling company 2.885348 3 ashaka cement 2.806344 4 cadbury -3.388142 5 uac 3.275649 6 evans medical 4.668036 www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 18 source: extract from e-view 9.0 coefficient from the individual companies shows that, champion breweries, seven up bottling company, ashaka cement, uac, evans medical, glaxo, lafarage, nestle, nigerian ropes and nigerian breweries and pz cushion have positive coefficient while cadbury, pabod breweries, flour mills, guinness, may and baker nigerian bags, unilever, university press and vita foam have negative effect. this implies that an increase in the independent variables on champion breweries, seven up bottling company, ashaka cement, uac, evans medical, glaxo, lafarage, nestle, nigerian ropes and nigerian breweries and pz cushion will have positive effect on their dividend payout ratio; while such increase will have a negative effect on the dividend payout ratio of cadbury, pabod breweries, flour mills, guinness, may and baker nigerian bags, unilever, university press and vita foam 6. discussion of findings the objective of this study was to investigate economic variables that determine dividend policy of selected quoted manufacturing firms in nigeria. after a cross examination of the validity of the models, the fixed effect model was adopted therefore discussion of this result is based on the fixed effect result. findings reveal that growth opportunities have negative and insignificant effect on the dividend policy of the manufacturing firms. this is not too surprising, as a company that has opportunity for growth is expected to retain more of its earnings for reinvestment on the growth areas rather than engaging in such growth venture with external funding. the negative effect of growth opportunity on dividend payout rate confirms the a priori expectation of the result. growth companies have little incentive for dividend payout as the policy is geared toward reinvestment of the profits for better growth opportunity and greater future yield. the study found that liquidity has positive and significant impact on dividend policy of the selected manufacturing firms. this finding confirms the expectation of the results and implies that management of the manufacturing firm has optimum liquidity management policy that increases the investment of the firms and also made the company meet its short term liabilities. it confirms the findings of jensen et al. (1992), rozeff (1982) and easterbrook (1984). these scholars argued that companies liquidity have to pay higher dividends in order to reduce the agency conflict between managers and shareholders. the result shows that liquidity is a major determinant of dividend payout rate. management efficiency has positive but insignificant effect on dividend policy of the manufacturing firms. it implies that increase in management efficiency will increase dividend payment but not to a large extent. management efficiency which measures the percentage of total costs to total revenue is expected to have a positive impact on dividend policy. the positive impact of management efficiency on dividend payout rate confirm and validates the empirical findings of anyamaobi and lucky (2017).the positive impact implies that management of the manufacturing firms are cost efficient, however the insignificant impact of the variables can be traced to high cost of operation and high operating leverage. company size have positive and significant impact on the profitability of the quoted manufacturing firms, this implies that increase in corporate size will significantly lead to increase on dividend policy of the quoted manufacturing firms. again it can be understood that the bigger companies would want to operate a consistent dividend policy so as to maintain their goodwill and reputation. this decision also could assist them in wooing investors and stabilize the company share price at the capital market. the positive impact of corporate size implies a major determinant of dividend policy which is consistent with the findings of fama and french (2001) that the probability of paying dividends increases with the firm size. larger firms pay higher cash dividends for several reasons. first, large firms face high agency cost as a result of ownership dispersion. secondly, large 7 pabod breweries -0.239920 8 floor mills -5.071780 9 guinness -1.018345 10 glaxo 0.716166 11 lafarage 1.240728 12 may and baker -2.405355 13 nestle 1.744464 14 nigeria bag -0.822705 15 nigeria ropes 1.113366 16 nigeria breweries 0.442032 17 pz cushion 1.543388 18 unilever -7.485542 19 university press -4.962050 20 vita foam -3.027725 www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 2018 19 firms have easier access to capital markets, and they are able to raise funds with lower issuance costs for external financing. consequently, large firms are better able to pay dividend than small firms. cost of capital was found to have a negative impact on dividend payout ratio of the manufacturing firms. the negative impact of costs of capital confirms the expected result as cost of capital normally will bring the profit level down. the negative impact of cost of capital confirms the a-priori expectation of the result but invalidates the trade-off theory and market timing theory of capital structure. according to pandey (2005), increase cost of capital exposes corporate organizations to financial risk such as leverage risk and credit risk. the negative impact on dividend payout rate implies that the companies are highly levered or have more debt than equity in the capital structure. it also implies that significant proportion of the company profits is used to settle external creditors than dividend payout rate. profit level was found to have a negative impact on dividend payout ratio of the manufacturing firms. the negative impact of profitability on dividend payout rate is contrary to the expectation of the result as profitability is expected to have a positive impact on dividend payout rate. the negative impact validates the findings of okpara (2010), which concluded that when firms experience surplus earnings, they allocate most of them into retention for the plugging back and growth of the firm. furthermore, ferris, et al., (2013) found that firms in the united kingdom pay dividends while they had negative earnings. the studies of baker and powell (2000), aivizian et al., (2003) and amindu and abor (2006) also confirm this finding. the study found that corporate size and management efficiency have positive but insignificant impact on dividend payout rate. debt equity ratio has significant impact on dividend payout rate. the positive impact of debt equity ratio on dividend payout rate implies that debt equity ratio have significant impact in determining dividend policy of the firm. the finding confirms and validates corporate strategies for optimal capital combination. the coefficient shows that company like champion breweries can add 7.6%, seven up can add 2.8% while ashaka cement will add 2.8% to achieve a positive impact on their dividend payout regime; while cadbury will reduce the pooled coefficient by 3.38% to achieve same. this is contrary to expectation and can be blamed on dividend policy of the companies. 7. conclusion dividend policy has been one of the areas of corporate finance that has attracted more works of empirical and theoretical research. this study was based on identifying the determinants of dividend policy of selected quoted manufacturing firms in nigeria and applied ordinary least square regression model, where the dependent variable was dividend payout ratio. in the researcher’s opinion, distribution of profit in the form of dividends may have a mediating function of conflicts between investors and managers; it is a way of signaling the market and attracts investors. 8. recommendation in view of the findings of this research, the following recommendations are advanced.  the manufacturing firms should formulate policies and device strategies of increasing profit level and the structure of corporate assets should be integrated with the objective of dividend policy and liquid asset of the firm should be optimal; this implies that the companies should not be too liquid because liquid assets such as cash do not add any profit to the firm and corporate tax should be integrated with the objective of dividend policy.  management of the manufacturing firms should ensure that adequate policies are formulated for the growth of the firms and the company size should be properly managed to achieve the objective of shareholders wealth maximization through dividend policy and all strategies should be devised to increase management efficiency by reducing operating cost as this will enhance profitability and dividend policy. this can be achieved by engaging the services of cost management accountants to study the operating system and develop strategies necessary to bring cost below the budget.  the finance manager should ensure optimal capital combination and ensure lower cost of capital to enhance dividend policy and there is need to reduce risk both internal and external within the company’s operating environment, all corporate governance codes should be properly articulated and adhered to and management should ensure that corporate governance is integrated as corporate philosophy of the manufacturing firms.  government should ensure hitch free environment for the manufacturing firms to operate that will encourage them to be more favourably disposed to dividend growth of their firm and managers/consultants should carefully examine the economic factors within a firm’s operating environment in carrying out the function of developing or designing dividend policy for the firm or client. www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 2, no. 2; 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(2004); corporate finance: principles & practice (3rded.) essex: copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) copyright © cc-by-nc 2020, cribfb | afbr australian finance & banking review; vol. 4, no. 1; 2020 issn 2576-1196 e-issn 2576-120x published by centre for research on islamic banking & finance and business, usa 1 the effect of monetary policy on foreign trade in nigeria ashamu sikiru o. phd department of banking and finance faculty of management sciences lagos state university, ojo, nigeria e-mail: soyerinde2012@gmail.com abstract this research work investigated the impact of monetary policy on foreign trade in nigeria during the period 1981 to 2017. the research made use of secondary data which are collected from the central bank of nigeria, statistical bulletin (2017). the model obtained from the result represents a error correction model (ecm) which relates the dependent variable (net import) to several predictor variables money supply, interest rate, exchange rate, foreign direct investment and trade openness. from the findings of the study, the error correction term (speed of adjustment towards equilibrium) value of -0.53581 is significant at 5% and implies that there is a long run causality running from monetary policy activities measures of foreign trade. however, only all the variable was used in the study was significant at 5% level of significance. this implies that monetary policy in nigeria has a positive influence on foreign trade within the period, except for interest rate that has a negative coefficient and not significant. in conclusion, these intermediate variables of monetary, the exchange rate arguably have a huge impact on the economy because of its effect on the value of local currency, domestic inflation, macroeconomic credibility, capital flows and financial stability. increased exchange rate directly affects the prices of imported commodities and an increase in the price of imported goods and services contributes directly to increase in inflation. based on the analysis, the study concluded that there is significance relationship between money supply and net import in nigeria and also that there is relationship between foreign direct investment and net import in nigeria. the study also shows that there is relationship between trade openness and net import in nigeria. keywords: monetary policy, money supply, exchange rate, foreign direct investment, error correction model and foreign trade. 1. introduction monetary policy refers to the combination of measures designed to regulate the value, supply and cost of money in an economy in consonance with the level of economic activities. it can be described as the art of controlling the direction and movement of monetary and credit facilities in pursuance of stable price and economic growth in the economy (ashamu, 2007) nigeria has over the years been controlling her economy through various macroeconomic policies of which monetary policy is among using some monetary policy instruments in efforts to drive along the desired path. the unique economic structures of developing countries require active macroeconomic policies to stabilize their economies. the monetary policy in this regard is highly important, it not only maintain the internal targets of the economy but it also monitors the external balance. because due to being small economies these countries are considered as price takers in the international arena, which leaves them exposed to supply shocks in particular and trade vulnerability in general. therefore, monetary policy performs dual goals of stabilizing interest rate and exchange rate, to firstly maintain output and price level and later to maintain competitiveness in international trade. countries trade with each other to obtain things that are of better quality or less expensive or simply different from the goods and services produced at home (gonnelli, 1993). the changes in the exchange rate assist monetary authorities to steer external balance to the desired level. if the country experiences the deficit in the trade balance, the devaluation in exchange rates is often followed to mitigate this deficit. such a relationship is explained by the theoretical understandings of marshall-lerner (ml) condition, which states that the devaluation is needed for the long-term gains in the international trade for developing countries. however, the improvement in the trade balance is not readily observable. it requires some adjustments before it shows improvement, these adjustments come initially by worsening of trade balance during currency depreciation. it is due to the fact that initially there are trade contracts that have been fixed over previous exchange rates, which show the delayed response of trade balance towards the improvement and it is known as j-curve effects. foreign trade as pointed by frankel & romer (1999) has been identified as an instrument and driver of economic growth. this is so because trade enhances the efficient production of goods and services through allocation of resources to countries that have comparative advantage in their production. in addition, its impact on a country’s economy is not limited to the quantitative gains, but also structural changes in the economy and facilitates the international capital flow. copyright © cc-by-nc 2020, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 2 1.2 statement of the problem monetary policy as a technique of economic management is to bring about sustainable economic growth and development through foreign trade, has been the pursuit of nations and formal articulation of how money affects economic aggregates, and dates back the adams smith and water, championed by the monetary economists. since the expositions of the role of monetary policy in influencing macroeconomic objectives like economic growth price stability, equilibrium in balance of payments and host of other objectives, monetary authorities are saddled the responsibility of using monetary policy to develop the growth of their economy. in nigeria, monetary policy has been used, since central bank of nigeria was saddling the responsibility of formulating and implementing monetary policy by central bank act of 1958. this role has facilitated the emergence of active money market where treasury bills, a financial instrument used for open market operations and raising debt for government has grown in volume and valued becoming a prominent earning asset for investors and source of balancing liquidity in the market. there have been various regimes of monetary in nigeria sometimes, monetary policy is tight and at other times it is loose mostly use to stabilize price. the economy has also witnessed times of expansion and contraction but evidently, the reported growth in foreign trade has not been a sustainable one as there is evidence of growing poverty among the populaces. the question is, could the periods of economic down term be blamed on factors on other than monetary policy ineffective? what measures are to be considered if monetary policy would be effective in financing foreign trade and bring about sustainable economic growth and development? 1.3 objectives of the study the main objective of the study is to x-ray the effect of monetary policy on foreign trade. in other words, the specific objectives of the study are: ▪ to examine the effect of money supply on foreign trade in nigeria. ▪ to examine the effect of trade openness on foreign trade in nigeria. ▪ to examine the effect of foreign direct investment on foreign trade in nigeria. 2. literature review 2.1 introduction for decades of years now, the geometric acceleration of a long term sustainable economic growth and development especially, through increase in export as one of the major macroeconomic objectives has been the desired aim of every economy in the world. the realization of this goal, undoubtedly, is not automatic. however, it requires policy guidance which involves manipulation of policy instruments (atuma & eze, 2017). such macroeconomic policies that could be used to actualize the above aim encompass mutually monetary and fiscal policies. these policies are inextricable, apart from instruments and implementing authorities. however, monetary policy appears more effective in correcting short term macroeconomic maladjustments due to its frequency in applying and altering policy tools, relative ease of its decision process and sheer nature of the sector which propagates its effect to the real economy. hence, economists see monetary policy as an essential instrument that every nation can install for the accurate maintenance of domestic price and exchange rate stability, as a significant condition for the attainment of a sustainable economic growth and development (ulbogu, 1985; starr, 2005; balogun, 2007). nigeria being an import dependent economy is faced with stagnated growth, unstable business cycles and economic fluctuation. this usually results to unemployment, inflation, unproductivity and balance of payment disequilibrium. government has in one way or the other regulated and controlled the economy to maximize the welfare of the citizens by way of ensuring that the resources are efficiently allocated and used. like any other developing country, nigerian government adopts three types of public policies to carry out the objective of income distribution and allocation of resources. these tools of public policy include: monetary policy, fiscal policy and income policy tools. in nigeria, government has always relied on monetary policy as a way of achieving certain economic objective in the economy such macroeconomic objectives include; employment, economic growth and development, balance of payment equilibrium and relatively stable general price level. the reason for choosing monetary policy is the fact that monetary policy has very serious implications for both fiscal and income policy measures. there is no consensus among economist as to whether government intervention through the use of monetary policy will bring about economic stabilization. this disagreement divided the economy into different schools of thought. they are, the classical school, the keynesian school, and the monetarist school. each of them has it view on how variation in monetary aggregates could affect the economic stabilization. the classicists believe that given the equation of exchange and stability in the velocity of money plus the assumption that economy operates at full employment, the change in money supply will only affect price without any effect on real demand, investment and output. copyright © cc-by-nc 2020, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 3 the keynesians on the other hand believe that variations in money supply could lead to an increase or decrease in interest rate. a decrease in interest rate will affect aggregate investment and enhance aggregate income and output. this is based on the belief that interest rate is the key determinant of investment in the market economy. the investment process involves the employment of factors such as labor and capital which lead to increase in total employment. the monetarists base their views on money supply as the key factor affecting the wellbeing of the economy. they believe that an increase in money supply will lead to an increase in nominal demand, and where there is excess capacity, they believe that output will be increased. in the long-run, the monetarist position is that the increase in money supply will be inflationary without any effect on investment, employment and aggregate demand. government adopts various economic policies, which are implemented in the economy in order to influence economic activities. in doing this, the aim of the government is to achieve some target considered desirable for the economy. conceptually, monetary policy is one of the macro-economic policies which every nation whether developed or not, adopts in managing their economies. it implies actions or measures initiated by the monetary authorities so as to sway the national economic objectives by controlling the volume and direction of money supply, cost and availability of credits (asogu, 1998). it covers variety of measures, intended to power or regulate the volume price as well as direction of money in the economy. particularly, it pervades all the deliberate effort by the monetary authorities to direct supply of money and credits conditions for the intention of achieving warrant macroeconomic objectives (chukwu, 2009). on the other hand, net export refers to the value of a country's total exports minus the value of its total imports. it is used to calculate a country's aggregate expenditures, or gdp, in an open economy. in other words, net export equals the amount by which foreign spending on a home country's goods and services exceeds the home country's spending on foreign goods and services. another term for net export is balance of trade; hence, positive net export means a trade surplus, while negative net export means a trade deficit. in nigeria, the primary goal of this monetary policy is to maintain domestic price and exchange rate stability, since it is critical for the attainment of sustainable growth and external sector viability (cbn, 1996). this is mainly achieved by causing savers to avail investors of surplus funds for investment through appropriate interest rate structures; stemming wide fluctuations in the exchange rate, and as well proper supervision of banks and other related institutions, so as to ensure financial sector soundness, maintenance of efficient payments system, applying deliberate policies to expand the scope of the financial system so that interior economies which are largely informal, are financially included. economists have long been interested in factors which cause different countries to grow at different rates and achieve different levels of wealth. one of such factors is foreign trade in relation to positive net export. nigeria is basically an open economy with international dealings comprising a considerable proportion of her collective output. hence, nigeria’s economic development depends on the prospects of her export trade with other countries. this is because; foreign trade provides both foreign exchange earnings and market incentives for the geometric acceleration of economic expansion (chimobi & uche, 2010). however, the economy of nigeria is faced with high rate of unemployment due to low productive investment, inadequate technological advancement and high inflationary pressure. these factors are highly conjectured as being able to militate against the growth of the economy by limiting the ability to transform raw materials into finished product. thus, adopting monetary policy instruments in manipulating the fluctuations experienced in the economy, the central bank of nigeria (cbn) since its establishment in 1959 has continued to play its traditional role by undertaking both contractionary and expansionary measures in tackling the problems that are observed above. therefore, the need to investigate the significant effect of monetary policy instruments on the net export is felt. 3. model specification the model, which is proposed to be used in this study, will be based on the work of ariyo & bakare (2015). in their study, they made use of error correction model technique, to estimate the effect of monetary policy on the finance of foreign trade. niit = ƒ (ms, intr, excr, fdi, to)..................................................(3.1) ni = β0 β1ms β2 intr + β3 exch + β4fdi + β5 to + μt……..............(3.2) with the variables defined as follows: ni= net import (n’ billion) ms= money supply (n’ billion) intr= interest rate exgr= exchange rate ($1 to naira) fdi= foreign direct investment (n’ billion) to = trade openness u = stochastic or disturbance term. β0 = constant or intercept. copyright © cc-by-nc 2020, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 4 4. result presentation and analysis 4.1 descriptive statistics it contains the estimation of industrial level common sample statistics such as the mean, median, standard deviation and jarguebera for the specified variables in the first model. the summary of these statistics is presented in table 1 below. table 1. descriptive statistics for selected variables ni exgr fdi intr ms to mean 1587.621 82.78625 901.0275 17.77027 4732.998 1.648378 median 382.7500 92.69340 111.3000 17.60000 628.9500 1.610000 maximum 6634.110 305.7900 3924.100 31.70000 23854.68 2.780000 minimum -1266.750 0.610000 0.264000 8.900000 14.47000 0.790000 std. dev. 2210.523 80.40632 1315.068 4.906790 7121.084 0.492801 skewness 0.920079 0.713607 1.133736 0.205522 1.418402 0.311851 kurtosis 2.355123 2.868116 2.648415 3.635058 3.658612 2.719688 jarque-bera 5.861492 3.167101 8.116933 0.882228 13.07523 0.720852 probability 0.053357 0.205245 0.017275 0.643319 0.001448 0.697379 sum 58741.98 3063.091 33338.02 657.5000 175120.9 60.99000 sum sq. dev. 1.76e+08 232746.3 62258524 866.7573 1.83e+09 8.742703 observatio ns 37 37 37 37 37 37 source: author’s computation (2019) table 1 reveals that the average net import within the period #1,587.621 billion with the maximum net import value of #6,634.110 which was observed in 2013 while the minimum net import value #-1,266.750 was observed in 2015. the average exchange rate was #82.78, with a maximum exchange rate of #305.7 in 2017 and a minimum exchange rate of #0.610 at the end of 1981. similarly, the average foreign direct investment during the period was #901.0275billion with a maximum foreign direct investment of #3,924.100 billion reported in 2013 and a minimum of #0.2640 billion was reported in 1983. similarly, the average foreign direct investment was #7,519 billion, with a maximum value of #34593 reported in 2017 while the minimum value of #19,477 billion was reported in 1981. the interest rate of 31.70 percent was observed in 2013 while a minimum interest rate of 8.90 percent was reported in 1981. similarly, the average money supply was #4732.998 billion, with a maximum value of #23854.68b reported in 2017 while the minimum value of #14.470billion was reported in 1981. the trade openness of #2,.780000 billion was observed in 1990 while a minimum trade openness of #0.790 billion was reported in 1982. in the same vein, the jarque-bera statistics shows that all the selected variables are normally distributed but require further diagnostic test before further analysis table 2. correlation matrix ni exgr fdi intr ms to ni 1.000000 0.592405 0.758361 -0.052546 0.507303 0.370988 exgr 0.592405 1.000000 0.780684 0.113848 0.869681 -0.005670 fdi 0.758361 0.780684 1.000000 -0.098604 0.905323 -0.065840 intr -0.052546 0.113848 -0.098604 1.000000 -0.080587 0.310477 ms 0.507303 0.869681 0.905323 -0.080587 1.000000 -0.205509 to 0.370988 -0.005670 -0.065840 0.310477 -0.205509 1.000000 source: author’s computation (2019). copyright © cc-by-nc 2020, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 5 from the correlation matrix presented in table 4.2, it is observed that all the specified variables as moderate positive relationship with the net import. except interest rate with negative sign while exchange rate, foreign direct investment, money supply and trade openness has 0.592, 0.758, 0.507 and 0.370 respectively. and interest rate has negative sign with 0.06. the implication of this result is that ni measure does not exhibit any form of multicolllinearity with other data sets in the model. 4.2 unit root test a test of stationary or non-stationarity in time series data that has become widely popular over the past several years is the unit root test. this is to find out if the relationship between economic variables is spurious. this study used the augmented dickeyfuller (adf) techniques to test and verify the unit root property of the series and stationarity of the model, seeing that it is very crucial to have a stationary time series. table 3. augmented dickey-fuller (adf) unit root test results variables level prob. critical values first difference prob. critical values ni -1.5657 0.7654 -2.8453 -5.4575 0.0000 -2.9511 ms -0.3246 0.6442 -2.8442 -4.8765 0.0000 -2.9484 intr -2.7324 0.2356 -2.8655 -3.0945 0.0267 -2.9763 excr 2.3446 0.4786 -2.8775 -5.8986 0.0000 -2.9484 fdi 1.3432 0.4465 -2.87742 -4.7887 0.0017 -2.9484 to 2.5436 0.2371 -2.87742 -5.7843 0.0216 -2.9484 source: author’s computation (2019) table 3 shows that all the specified variables adf statistic at level are less than the corresponding critical values. this is confirmed by the corresponding p-values which are greater than 5% and compelled the need for the test at first difference which yield stationary values at 5% and 1% significant level. this implies that all the specified series are of i (i) or stationary at first difference. table 4. unrestricted co-integration trace test hypothesized no. of ce(s) eigen value trace statistic 0.05 critical value prob.** none* at most 1* at most 2* at most 3* at most 4 at most 5 0.763452 0.789655 0.654642 0.523378 0.394554 0.188886 153.6574 103.7864 76.25572 47.95684 24.21368 7.152837 101.3457 93.34575 63.81889 32.85613 29.79707 15.49471 0.0000 0.0000 0.0172 0.0036 0.1916 0.5600 trace test indicates 4 cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **mackinnon-haug-michelis (1999) p-values the results from the trace test and it rejects the null hypothesis if the trace statistics exceeds the critical value generated by the statistical packages. the table shows that the trace statistics value of 153.6 exceeds the critical value of 101.3 at 95 percent confidence level. this implies that the null hypothesis of no co-integrating relationships is rejected. instead, there are four possible cointegrating equations among the variables as indicated by the trace statistics at 5% level of significance. below showed the result of the maximum eigen value co-integration test: copyright © cc-by-nc 2020, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 6 table 5. unrestricted co-integration rank test (maximum eigen value) hypothesized no. of ce(s) eigen value max-eigen statistic 0.05 critical value prob.** none* at most 1* at most 2 at most 3 at most 4 at most 5 0.763452 0.789655 0.654642 0.523378 0.394554 0.188886 145.7567 67.09702 32.29888 18.74316 17.06084 7.117802 67.23142 40.07757 33.87687 27.58434 21.13162 14.26460 0.0000 0.0002 0.0762 0.4346 0.1691 0.4753 max-eigen value test indicates 2 co-integrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **mackinnon-haug-michelis (1999) p-values the results from this test as the eigen value test statistics value of 145.75 exceeds the critical value 67.23 at 95 percent coincidence level. this suggests that the null hypothesis be rejected. instead, there are two possible co-integration equations among the variables as indicated by the max-eigen value at 5% level of significance. also, the results confirmed the presence of a long-run relationship between and explanatory variables. based on the trace unit root test and co-integration test results, the study proceed to the adoption of the error correction as specified for the study and the result is presented in table 4.6. table 6. error-correction model results dependent variable: ni sample (adjusted): 1981 – 2016 variable coefficient std. error t-statistic prob. c 22.96523 134210-0 -1.12563 0.0079 ms 1.45213 5.63392 -0.21389 0.0362 intr -0.90467 0.01220 0.69071 0.0647 exgr -1.76999 0.82028 -0.30361 0.0317 fdi -0.45356 1.03246 -0.20127 0.0002 t0 -1.56091 0.17684 -0.22674 0.0317 ecm-1 -0.53581 0.13421 -0.21021 0.0037 r-squared 0.751150 mean dependent var 36321.67 adjusted r-squared 0.719995 s.d. dependent var 53184.39 s.e. of regression 4519.968 akaike info criterion 34.05634 sum squared resid 1.96e+09 schwarz criterion 28.08585 log likelihood -536.9291 hannan-quinn criter. 30.09570 f-statistic 20.57736 durbin-watson stat 1.951878 prob(f-statistic) 0.000000 source: researcher’s compilation from eviews 9 5. interpretation the error correction term (speed of adjustment towards equilibrium) value of -0.53581 is significant at 5% and implies that there is a long run causality running from monetary policy activities measures and finance of foreign trade. however, only all the variable was used in the study was significant at 5% level of significance. this implies that monetary policy in nigeria has a positive influence on finance of foreign trade within the period, except for interest rate that has a negative coefficient and not significant. the coefficient of determination (r2) value of 0.75 implies that all the specified independent variables account for about 75% of the total variation in the net import within the period under review while the remaining 25% of the variations are copyright © cc-by-nc 2020, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 7 due changes in the behavioural patterns of other variables outside the scope of this study. this connotes that there are few other factors that influence the ni in nigeria aside the specified independent variables. this aspect of study comprises summary of findings, conclusion and recommendations. the findings are drawn from the data analyzed. based on the findings, conclusion and appropriate recommendations are provided to all concerned parties. 6. summary of findings this study investigated the impact of monetary policy on foreign trade in nigeria during the period 1981 to 2017. the model obtained from the result represents a ecm model which relates the dependent variable (net import) to several predictor variables money supply, interest rate, exchange rate, foreign direct investment and trade openness. from the findings of the study, the error correction term (speed of adjustment towards equilibrium) value of -0.53581 is significant at 5% and implies that there is a long run causality running from monetary policy activities measures and finance of foreign trade. however, only all the variable was used in the study was significant at 5% level of significance. this implies that monetary policy in nigeria has a positive influence on finance of foreign trade within the period, except for interest rate that has a negative coefficient and not significant. the coefficient of determination (r2) value of 0.75 implies that all the specified independent variables account for about 75% of the total variation in the net import within the period under review while the remaining 25% of the variations are due changes in the behavioral patterns of other variables outside the scope of this study. this connotes that there are few other factors that influence the ni in nigeria aside the specified independent variables. 7. conclusions monetary policy has is an important tool for the attainment of macroeconomic stability, usually seen as a step to achieving economic growth and economic sustainability. thus, in the pursuit of macroeconomic stability, the managers of monetary policy have often set targets on intermediate variables which include the short-term interest rate, growth of money supply and exchange rate. based on the analysis, the study concluded that there is significance relationship between money supply and net import in nigeria and also that there is relationship between foreign direct investment and net import in nigeria. the study also shows that there is relationship between trade openness and net import in nigeria. 8. recommendations based on the findings of this study, the following recommendations are essential. ▪ there should be effective monetary policy management to achieve the objective of price stability by government. ▪ the nigerian authorities should carry out reforms that would enhance the role of interest rate in order to mobilize funds for trade purpose. this may be done by a complete regulation of the interest rate. this is for a long-term economic performance. ▪ adopt tight trade openness by keeping trade openness rate below or at ceiling level in order to ensure economic growth. ▪ government should ensure political and macroeconomic stability so as encourage investment, both local and foreign and guarantee business survival. references aja, akpuru aja. 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(1979). trade liberalization, protectionism and interdependence: gatt s studies in international trade, no. 5 by richard blockhurst, nicholas marian and jan tumlir and trade negotiations in the tokyo round: a quantitative assessment by william cline, noboru kawanabe, t.o.m. kronsjo and thomas williams, 3 b.c. int'l & comp. l. rev. 269 (1979), http://lawdigitalcommons.bc.edu/iclr/vol3/iss1/11. wikipedia (2015). monetary policy. retrieved 10/02/15. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/). australian finance & banking review vol. 4, no. 2; 2020 issn 2576-1196 e-issn 2576-120x published by cribfb, usa 1 loan moratorium 2020its impact on indian banks dr. meera mehta assistant professor, dept. of commerce sbs college, delhi university, india e-mail: meeramehta17@gmail.com rishab kaul student, school of electronics engineering vellore institute of technology, vellore, india e-mail: rishabkaul2012@gmail.com abstract moratoriums area period of temporary suspension of an activity or law till a decision to lift the suspension is made, as in the case of the issues that led to the moratorium are resolved. moratoriums may be imposed by regulators, by a business, or by the government. a moratorium is often ordered in response to situations of crisis. moratoriums are not new to the indian banking sector and have been granted and imposed in multiple instances in the last 20 years. since 1999 moratoriums have been imposed on 9 banks for various reasons. recently, a sixmonth moratorium was offered by the reserve bank of india (rbi) between march 1, 2020, and august 31, 2020, on all loan equated monthly instalments, to help lessen the troubles faced by the borrowers due to the covid-19 pandemic. this paper aims to study the recently granted moratorium by the rbi to assess and predict its impact on the banking sector. the study will also reflect on similar instances of moratoriums that have been granted in the united states, greece, and thailand in the last 20 years. keywords: moratorium, suspension, rbi, borrowers, pandemic. jel classification codes: e5, e58, e59 introduction on 27th march 2020, the rbi announced a moratorium on loans by financial institutions in response to the countrywide lockdown declared on 23rd march 2020 which had a triggering effect on the financial condition of the people of the country. a moratorium is a temporary suspension or deferring of activity until further consideration calls for a lift on the suspension, or till the time the issues that led to the moratorium are resolved. moratoriums may be imposed by regulators, by a business, or by the government. a moratorium is often ordered in response to situations of crisis. for example, in the aftermath of floods, earthquakes, droughts, disease outbreaks, a moratorium may be granted on some financial activities by the central bank or the government. a moratorium period is a time during a loan term when the borrower does not need to make any payments towards the loan. a moratorium is only a deferment of payment and is different from a waiver. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 2 moratoriums are not new to the indian banking sector and have been granted in multiple instances in the last 20 years. since 1999, moratoriums have also been imposed on yes bank, global trust bank, united western bank ltd., sikkim bank ltd., bareilly corporation bank ltd., south gujarat local area bank ltd., benares state bank ltd., nedungadi bank, and ganesh bank of kurundwad ltd. for numerous reasons. the focus of this paper is the six-month moratorium offered by the reserve bank of india (rbi) between march 1, 2020, and august 31, 2020, on all loan equated monthly instalments (emis) to help lessen the troubles faced by borrowers due to the covid-19 pandemic. for this purpose, all co-operative banks, commercial banks, all-india financial institutions, and nbfcs were allowed to grant a moratorium of three months for all term loans on payment of all the instalments that fell between the period. the period was however extended by three additional months, up to august 31, 2020. objectives this paper focuses on assessing and predicting the impact of the past and recent (moratorium 2020) rbi moratorium on the banking sector in india, with the objectives: ● understanding the 2020 moratorium announced by rbi ● evaluating and predicting the impact of the moratorium on the banking sector in india (in terms of npas, crar, bank credit, and the profitability ratios). ● analysing the implications of the interest on interest waiver granted and the effects of a complete waiver of interest. ● understanding the instances of moratoriums around the world, in particular, the usa, greece, and thailand literature survey imai (2016) stated that, technically, the japanese debt moratorium legislation could have mitigated the credit crisis for small and medium-sized businesses, but it became more difficult to determine the extent of the financial troubles in small banks. it undermined market discipline and encouraged moral hazard problems. further, it set up a financial system in which zombie companies appear to flourish, much as the strategy of forbearance did in the 1990s. this has also contributed to slow productivity growth in japan. also, it indicated to financial markets that the political pressures to bail out zombie businesses remained strong in japan. as a result, japan's response to the financial crisis in the form of the debt moratorium was generally viewed as a failure. arito (2017) examined the effect of japan's debt forbearance policies on small and medium-sized enterprises (smes) as set out by the "act on temporary steps to promote funding for small and medium-sized enterprises." using specific japanese company survey results, that had received "financing" (e.g. by deferring repayments) and firms that had received "debt forgiveness" (e.g. through reduced interest and/or principal), the paper analysed the determinants and effects of debt forbearance. they found that banks prefer debt redemption for companies that are more profitable and creditworthy, which was found to be consistent with the debt overhang theory. mukherjee, subramanian, and tantri (2014) offered proof of both the drawbacks and benefits of the debt moratorium under the 2008 indian debt waiver program. they use data of the loan account of agricultural borrowers and exploit the exogenous rainfall fluctuations for dividing beneficiaries into non-distressed and distressed borrowers. by alleviating debt-overhang https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 3 issues, the waiver leads to significant changes in the loan performers of creditors in distress. however, in keeping with the moral hazard, the waiver had little bearing on the performance of loans by non-distressed creditors but non-distressed borrowers suffered from credit rationing after the waiver. although banks' over-all non-performing assets declined after the waiver, agricultural non-performing assets rose. arslanalp and henry (2005) asserted that as developing countries had announced debt reduction negotiations through the brady scheme, the stock markets of those countries rose by 60% on average in real dollars terms which was an increase in shareholder value of $42 billion. there was no significant increase in the stock markets of the countries within the group that did not sign the agreement. inflation of the stock market had projected a higher potential flow of capital, spending, and development. as the market capitalization of commercial banks in the us with exposure to developing-country loans had increased by $13 billion, their findings indicated that both lenders and borrowers benefit from debt relief in a situation where the borrowers were affected by debt overhang. somasundaram (2020) observed that covid-19 has had a significant effect on india and most of the industries in india. banks and non-banking financial firms, in particular, have been more severely impacted. they play a key role in the development of the indian economy as most of the self-employed people rely on banks or financial institutions to borrow for their business growth. the moratorium facility granted to borrowers of banks and non-banking financial companies by the reserve bank of india came with a set of merits and demerits which has been discussed in the paper. rbi moratorium 2020 the rbi offered a six-month moratorium between march 1, 2020, and august 31, 2020, on all loan equated monthly instalments. features of moratorium 2020 are (rbi circular dated march 27, 2020): ● it was applicable on all loans including education loans, credit card dues, personal loans, home loans etc. ● borrowers did not have to make the emi payments on their loans during this period. individuals whose emis on loans were outstanding as of march 1, 2020, could opt for the moratorium. ● it was offered as a means to lessen the burden of debt servicing by the covid-19 disruptions and ensure the operation of businesses. ● the repayment schedule would be shifted to a period after the moratorium. ● during the moratorium period, interest would continue to accrue on the term loan’s outstanding amount. ● all co-operative banks, commercial banks, national financial institutions, and nbfcs were allowed to grant a moratorium of three months. the period stated in the initial circular was then extended up to august 31, 2020. this would apply to all term loans including retail, crop and agricultural term loans. ● the rescheduling of payments and interest would not count as a default for reporting to credit information companies (cics) by the lending institutions. the cics would ensure that any action taken by a lending institution would not negatively affect the credit history of a borrower who has opted for the moratorium. additionally, the rbi permitted https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 4 the lenders to allow one-time restructuring for personal loans while maintaining standard asset classification and corporate loans without a change in ownership. impact and predicted impact of the rbi moratorium the state of the indian banking sector (pre-covid-19 period) the performance of the banking sector had improved in fy20 with several banks reporting growth in earnings. as per rbi data on sectoral asset quality given in figure 1 (chapter ii rbi circular dated july 24, 2020), ● in july 2020, credit growth of non-food banks at 6.7 % was the same as in june 2020, but lower than the 11.4 % growth in july 2019. ● credit growth for agriculture and services produces an annual gnpa of 9% and 13%. in july 2020, credit growth for agriculture increased by 5.4 %, compared to a growth of 6.8 % in july 2019. ● service sector credit continued to rise at a high rate of 10.1 % in july 2020, compared to 15.2 % in july 2019. within the services sector, credit to tourism, computer software, and hotel and restaurants resisted the downtrend with higher growth in july 2020 compared to july 2019. the credit growth to the corporate sector constitutes 37% of the total bank assets and forms 73% of npas. ● the credit growth to the industrial sector was at 0.8% in july 2020 which was lower as compared to 6.1% in july 2019. within the industrial sector, credit growth for food manufacturing, mining & quarrying, petroleum, coal products & nuclear fuels, cloth & cloth products, timber, building, and paper & paper products increased in july 2020 compared to growth in the previous year’s corresponding month. ● tourism, transportation, sports, hospitality, petroleum, real estate, and food industries have been affected severely due to the pandemic. pharmaceuticals, fmcg, e-commerce, services, and it businesses have performed relatively well despite the pandemic. hence, loans to these sectors are unlikely to turn bad. ● retail credit accounts for 22% of overall bank lending and produces 3.7% of npas. personal loans, home loans and car loans have low delinquency rates.personal loans have continued to do well, rising by 11.2% in july 2020, compared to 17% in july 2019. ● the gross outstanding bank credit was at rs.91.36 lakh crore in june 2020 compared to rs.85.47 lakh crore in june 2019. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 5 figure 1. sectoral asset quality indicators source: chapter ii rbi circular dated july 24, 2020 overview of bank performance (during covid-19) year-on-year credit growth of scheduled commercial banks, which declined dramatically during the first half of 2019-20, plummeted to 5.9% by march 2020. it then remained at a standstill until the beginning of june 2020 which can be seen in figure 2. this moderation was prevalent in all banking classes. deposit development (y-o-y) also declined during 2019-20 second half, primarily due to pvbs (private sector banks), while a recovery occurred in the first few months of 2020-21, indicating the precautionary saving actions of covid-19. earnings of commercial banks before taxes and provision (ebpt) were aided by an increase in other operating income (ooi) and moderation in operating expenditure growth. net interest income (nii) declined slightly, lowering the net interest margin (nim) to the amount of september 2019. profitability rates, i.e., the return on equity (roe) and the return on assets (roa), decreased in the fy 2019-20 second half for all the different banking classes. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 6 figure 2. performance indicators for scbs source: chapter ii rbi circular dated july 24, 2020 predicted impact of the moratorium moratorium-2020 was announced by the rbi as a relief measure during the pandemic. however, the six-month moratorium coupled with the one-time loan restructuring program may put stress on the indian banking system. the measures may have avoided a spike in npas for now but this may not be true for the near future. ● npas (non-performing assets) as per the macro stress tests reported by the rbi in the july 2020 financial stability report, the npas may surge to one and a half times above https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 7 the level in march 2020 under the baseline scenario and in a very stressed scenario, the surge could be 1.7 times above the march 2020 levels as shown in figure 4. according to care ratings’ analysis of npa movement published on october 13, 2020, gross npas ratios of indian banks are predicted to be around 11 to 11.5 % by the end of fy21. the banks are likely to restructure 4% to 5% of the overall bank credit outstanding. the gross npa of scbs was 8.2% in q1 fy21 as compared to 9.5% in q1 fy20 shown in figure 3. by the end of fy21, the numbers are expected to increase much beyond the 8.5% level which was seen at the end of fy20 while being moderated by the current write-offs and one-time restructuring scheme. the banks may also face severe stress due to low-rated corporate as personal loans can’t be registered under the restructuring scheme. figure 3. movement in gross npa in rs. lakh crore source: analysis of npa movement, care ratings dated october 12, 2020 figure 4. gnpa ratio projections for scbs source: chapter ii rbi circular dated july 24, 2020 https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 8 ● crar (capital to risk-weighted assets ratio) –under the baseline scenario, the rbi predicts the system level crar to drop to 13.3% in march 2021 from the march 2020 level. in the case of a severe stress scenario, the levels could drop to 11.8 % as shown in figure 5. ―although gross and net non-performing asset ratios had come down in march 2020 along with receding slippage ratios, the economic fallout of the pandemic is likely to test this resilience, especially since the regulatory accommodations announced in the wake of the outbreak have masked the consequent build-up of stress,‖ stated by the rbi in its annual 2019-20 report. figure 5. crar projections for scbs source: chapter ii rbi circular dated july 24, 2020  economic activity and bank credit -the indian economy has steadily reopened in june 2020 after a national lockdown declared by the government to avoid the curb the number of covid-19 cases. during this time, the slowdown in the disbursement of new credit was attributed by bankers to difficulties in conducting origination activities, lack of clarification in the extension of the moratorium, and risk aversion amid tell-tale signs of stress throughout sectors. the banks are hopeful with regards to the number of loans that will turn into npa’s as borrowers begin repayments after the end of the moratorium. economic recovery is expected to be slow which along with the subdued credit growth could lead to the bank’s interest income becoming limited. the effects of the extended moratorium could be reflected on the bank’s balance sheets for a prolonged period. additionally, if the rate of growth of deposits becomes roughly twice the rate of growth of credit, the banks may face stress on their balance sheets. if the banks slip into the ―pretend and extend‖ mode, where loans are not recognized as bad assets and the companies, are not taken to bankruptcy courts, the result could be similar as in the pasta https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 9 series of mistakes in which the borrowers with the capacity to repay their loans don’t feel the pressure to do so. as per moody's, retail and hotels, oil & gas, transportation, and aviation are the industries where the credit shock is most significant. once the lockdown restrictions have been lifted in economies across asia including india, the consumer trust would remain, thereby leading to a continued burden on credit quality for those industries. however, the long-term shock of far slower inflation that policy support can’t offset would accelerate the debt burden from already high levels. ● recapitalization -banks need capital to cope with stress in their books or to expand their ability to lend. if stress levels will be noticeable in the second half of 2020, the need for growth resources will not be much as economic activity will take some time to recover to pre-covid-19 levels. the government has infused rs 3.5 trillion in psbs (public sector banks) over the recent years, with the last round of recapitalization taking place in september 2019, when the government agreed to front-load rs 70,000 into banks. a majority of the capital infusion has taken place through the issuing of bonds, which do not have an immediate effect on the finances of the government but will become the government's responsibility for interest payments in the years to come. as the government needs to borrow an extra rs 4.2 trillion against rs 7.8 trillion currently assigned in the budget, the government's interest burden will also rise as these bonds are up for redemption. the recapitalization of public sector banks is going to be crucial in the situation of likely asset quality pressures on indian banks. ―recapitalisation plans for public and private sector banks assume critical importance. the minimum capital requirements, which are calibrated based on historical loss events, may no longer suffice to absorb post-pandemic losses,‖ as per a statement made by the rbi. additionally, the rbi governor has asked banks to be prepared for a bad loan shock due to covid by enhancing their capital strength. ● lending ability of banks -fundamentally, the health of every lending institution depends primarily on its liquidity and income-both of which affect its lending ability. if the moratorium results in high bad loans and low incomes, the stability of the financial institutions would be adversely affected and may lead to a ban on lending in compliance with existing regulatory requirements. with this aspect in mind, the rbi has now authorized a one-time restructuring of loans without classifying them as bad loans, subject to certain criteria (which are yet to be notified). also, if the borrower is under actual financial hardship, the banks can opt to restructure the loan on more reasonable terms (increased tenure, decreased interest, etc.) against a general deferral of repayments. ● the profitability of banks the loan moratorium could continue to shift the credit environment of the banking sector. similar changes by different countries across asia would only help to alleviate credit-negative strains on banks, businesses, and the wider economy. these measures will not completely compensate for credit and economic disruption. the moratorium period would put the payment deadline back by six months for accounts that take the option. despite the chance of improved credit quality for larger companies through policy support, the profitability of the indian banking sector will decline. this is mainly due to the lower net interest margins and weakening asset quality. financial authorities in several asian economies such as india, china, and malaysia have https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 10 introduced debt moratoriums to relieve the cash crisis for individuals and companies. a delay in redemption will bring immediate relief to borrowers but these measures will also limit the ability of banks to take constructive recovery and turnaround steps. due to this, an even larger accumulation of credit-defaults could take place until the moratoriums are lifted. interest waiver and its implications for banks on 23 october 2020, the government declared an ex-gratia scheme for the exemption from interest-on-interest to offer some relief and financial assistance to borrowers who may face financial difficulty due to covid-19. under this, the government would pay for interest incurred on interest levied during the moratorium and not the complete outstanding interest during the period. the incentive applies to all borrowers with any unpaid debt, including credit card fees and housing, school, auto, personal, and consumer loans up to a limit of ₹2 crores as of 29 february 2020. the advantage would be open to those who have not opted for a moratorium. according to the guidelines provided by the government, the relief would be proportional to the difference between compound interest and basic interest over six months. the calculation would be the same for all borrowers — those who did not apply for a moratorium, those who opted for a six-month moratorium, and those who opted for a moratorium of fewer than six months. it is, however, not eligible on fixed deposit loans and loans that were defaulted on, on or before 29 february. after crediting the amount, lending institutions will claim the reimbursement from the central governments thereby diminishing the likelihood of any adverse effects on the banking sector. however, for indian lending institutions with over $120 billion of bad loans and the covid-19 induced collapse in the demand, the waiver will further stress the already severely stressed balance sheets of the banks. further, the lending institutions will have to recalculate the millions of loans and may also have to wait nine to 24 months to get the funds from the government, increasing the burden on the institutions. india’s supreme court is in the process of hearing a pil (public interest litigation) dispute for the non-waiver of complete interest outstanding during the loan moratorium period. it was observed that in such times, banks should not only offer moratoriums but also waive the interest. if a judgment of a complete interest waiver is made, there could be a severe impact on the banking sector. if the government overburdens the offer of subsidies to the borrower, and if the result is further weakening the credit system and potential inflation as the government's debt bloats, the price will be paid by all the taxpayers. banks borrow depositors and lend to businesses and individuals. in any instance, there will be more depositors than creditors. so, any decision to benefit creditors would eventually come from paying less to the depositors which would prioritize the handful over the vast majority of the bank's clients. it may be a good banking principle to give borrowers a reprieve when they are in desperate need, but it is a moral liability if it is presumed that the borrower must always be accommodated. the financial system as a whole would be at risk where there is an implicit or overt presumption that borrowers need not care about repayment. in this scenario, the borrowers would borrow recklessly. when a bank goes under, the depositors are placed in a precarious position and are sometimes forced to wait for a government bailout to get their deposits back. it creates a structural problem where both depositors and borrowers believe that their decisions of depositing money in or borrowing from a specific bank, are not at risk. there is a stronger https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 11 argument for maintaining the confidence of depositors than the confidence of borrowers, since not only do more of them exist, but they are also vital to the lending industry as a whole. instances of moratoriums around the world united states of america from march 2012 to june 2013, the national mortgage settlement extended relief to more than 300,000 homeowners who had lost possession of their houses without due process. new jersey introduced a moratorium in the first half of 2011 when the courts implemented an eight-month moratorium on foreclosures aimed at six mortgage servicers. the lending industry responded to the moratorium proposals with moral hazard projections, concluding that a moratorium would raise the number of delinquencies (collins& urban, 2017). greece in response to the economic crisis in greece, the legislature adopted a package of measures to provide relief to over-indebted households in 2010. specifically, the government enacted a new law on personal bankruptcy that removed primary residences from liquidation. around the same time, the government had imposed an almost universal moratorium on the foreclosure of primary homes. this new regulatory environment presented homeowners with two choices to secure their primary residence in the event of delinquency; default and apply for debt relief under the new personal insolvency act, or default passively and protect the primary home through a foreclosure moratorium (artavanis & spyridopoulos, 2017). thailand the cabinet had approved increased debt relief plans such as suspending monthly loan repayments and interest for three years for farmers impacted by the 2011 floods. the moratorium applied to farmers who had borrowed before the deluge and counted from the first day on which their farmland was struck. the government compensated for the interest on the loans subject to the moratorium and also approved a budget of 715 million baht for the 2014 fiscal year to reimburse farmers for interest under the moratorium program (nuansoi, 2013). conclusion the six-month moratorium offered by the reserve bank of india was granted as a relief measure for the borrowers during the covid-19 pandemic. the use of moratoriums is not new to the indian banking sector as moratoriums have been granted in multiple instances in the past. moratoriums have also been used across the world in the form of debt or foreclosure moratoriums in countries such as greece, thailand, and the usa. in particular, japan had offered a moratorium for smes after the 2008 housing crisis but the effects of the prolonged moratorium period were largely negative and the scheme offering the moratorium was widely considered as a failure. the indian banking industry had amassed bad loans of around rs 9 lakh crores before the impact of covid-19. the moratorium is expected to cause a surge in the npas by the end of the current fiscal year and the rbi predicts the system level crar to drop to levels lower than the same period last year. the slow recovery of the economic activity could lead to a decrease in the interest income of banks and a prolonged moratorium period could create additional stress on the banks’ balance sheets. to cope with the stress on their books and expand their ability to lend, https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 12 recapitalization is going to be crucial for the banks. if the moratorium results in a large number of bad loans, it will adversely affect the stability and thus the lending ability of the banks. additionally, india’s banking sector’s profitability is expected to decline due to weakening asset quality and lower interest margins. the government declared an interest-on-interest waiver for the interest incurred on interest levied during the moratorium period. the reimbursement for the amount can be claimed by the lending institutions after it is credited by them, but the scheme is likely to add further stress to the already stressed balance sheets of the banks. due to the scheme, the banks will have to recalculate millions of loans and may also have to wait up to 24 months to get the funds from the government, thereby increasing their burden. a complete waiver of interest is being disputed in the supreme court of india and if permitted, it would lead to severe consequences for the indian banking sector. the moratorium offered is going to present numerous challenges to the indian banking sector in the coming months. based on the predictions it is evident that the effects on the indian banking sector are mostly adverse and the performance of the sector will decline as compared to the previous year. references arito, o. (2017). forgiveness versus financing: the determinants and impact of sme debt forbearance in japan1. rieti discussion paper series 17-e-086. retrieved october 10, 2020, from https://www.rieti.go.jp/jp/publications/dp/17e086.pdf artavanis, n., & spyridopoulos, i. (2017). foreclosure moratorium and strategic default. efma. retrieved october 14, 2020, from https://www.frbatlanta.org/-/media/docum ents/news/conferences/2017/1201-real-estate-industryforum/papers/artavanis_foreclosure_moratorium _and_stategic_default.pdf arslanalp, s., & henry, p. (2005). is debt relief efficient?. the journal of finance, 60(2), 1017-1051. bhargava, k. (2020, april 21). loan moratorium may haunt banks even after getting lifted; moody’s explains post moratorium credit landscape. financial express. retrieved october 22, 2020, fromhttps://www.financialexpress.com/industry/banking-finance/l oanmoratorium-may-haunt-banks-even-after-getting-lifted-moodys-explains-post-mo ratorium-credit-landscape/1935473/ bfsi research care ratings. (2020, october 13). analysis of npa movement [circular]. retrieved october 15, 2020, from https://www.careratings.com/upload/newsfiles/splanalysis/analysis%20of%20npa%2 0movement.pdf collins, j.m., & urban, c. (2017). the effects of a foreclosure moratorium on loan repayment behaviors. regional science and urban economics, 68(1), 73-83. https://doi.org/10.1016/j.regsciurbeco.2017.10.010 https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 13 dhanorkar, s. (2020). how taking loan moratorium will impact your future emis. the economic times. retrieved october 7, 2020, from https://economictimes.indiatim es.com/wealth/borrow/how-taking-loan-moratorium-will-impact-your-future-emis imai, m. (2016). japan’s regulatory response to banking problems. research gate. retrieved october 12, 2020, from https://www.researchgate.net/publication/322893135 mukherjee, s., subramanian, k., & tantri, p. (2014). costs and benefits of debt moratoria: evidence from a natural experiment in india. indian school of business working paper. retrieved october 10, 2020, from https://cdn.auckland.ac.nz/assets/facultycon ferences/faculty-of-law/ownership%20and%20control%20conference/costs%20and %20benefits%20of%20debt%20moratoria%20evidence%20from%20a%20natural%20 experiment%20in%20india,%20subramanian.pdf nuansoi, w. (2013). the study on farmers’ debt, loan repayment, and guideline for debt settlement in the south of thailand. international journal of agriculture and food science technology, 4(8), 835-840. reserve bank of india. (2020, march 27). covid-19 – regulatory package [circular]. retrieved october 7, 2020, from https://www.rbi.org.in/scripts/notificationuser.a spx?id=11835&mode=0 reserve bank of india. (2020, august 6). resolution framework for covid-19-related stress [circular].retrieved october 19, 2020, fromhttps://www.rbi.org.in/scripts/notificationuser.aspx?id=11941&mode=0#:~:text=4. ,laid%20out%20in%20this%20annex reserve bank of india. (2020, july 24). chapter ii: financial institutions: soundness and resilience [circular].retrieved october 15, 2020, from https://m.rbi.org.in/scripts/publicationreportdetails.aspx?id=1148 sikdar, a. (2020, september 5). loan moratorium impact on indian banks. the times of india. retrieved october 7, 2020, from https://timesofindia.indiatimes.com/readersblog/anichh-economics/loan-moratoriumimpact-on-indian-banks-25556/ somasundaram, m. (2020). merits and demerits of moratorium offered by banks and non banking financial companies in india. asia pacific journal of research, 1(1), 23474793. sood, j. (2020, march 6). before yes bank, moratorium was imposed on these 8 banks since 1999. outlook india. retrieved october 15, 2020, fromhttps://www.outlookindia.com/website/story/business-news-before-yes-bankmoratorium-was-imposed-on-these-8-banks-since-1999/34 8350 https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 14 sinha, s. (2019). as moratorium ends, npas may rise in january. the economic times. retrieved october 15, 2020, fromhttps://economictimes.indiatimes.com/industry/ban king/finance/banking/as-moratorium-ends-npas-may-rise-in-january/articleshow/730 39048.cms? unnikrishnan, d. (2020, august 26). rbi's annual report: moratorium, loan restructuring may impact banks’ health. money control. retrieved october 20, 2020, fromhttps://www.moneycontrol.com/news/business/economy/rbis-annual-report-moratori um-loan-restructuring-may-impact-banks-health-5752121.html copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) australian finance & banking review vol. 5, no. 1; 2021 issn 2576-1196 e-issn 2576-120x published by cribfb, usa https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 trend, direction and performance of afghanistan’s international trade sayed ahmad rashid ashrafi phd scholar department of pg studies and research in economics mangalore university, karnataka, india e-mail: r.ashraffi@gmail.com dr. vishwanatha kalaiah professor & chairman department of pg studies and research in economics mangalore university, karnataka, india e-mail: vishwanathak@yahoo.com, vishwanathakalaiah@gmail.com abstract afghanistan is at a strategic location which acts as an important corridor in asia and connects powerful industrial economies such as india and china to northern asia and to europe via dry and seaways and vice versa through the lapis lazuli corridor, chabahar port and other corridors. the study asses to perceive the performance and trend of afghanistan’s export and import. moreover, the study points out to the destinations of afghanistan's exports by regions and origin of afghanistan’s imports by regions. the paper descriptively concentrates on direction, trend, and performance of the afghanistan trade. the data is retrieved from numerous secondary sources encompass national statistic and information authority and ministry of trade and industry of afghanistan. the period selected is from 2002 to 2018. moreover, the research is based on quantitative data and descriptive statistics have been used to analyze the trend and direction of the afghanistan trade. the study shows that there is an ascending direction of afghanistan's export to emerging and developing asian economies majorly includes pakistan, india and bangladesh, while it indicates adescending export direction to advanced economies, commonwealth independent states, middle east, and european nations. furthermore, afghanistan's import shared with the regions is in an unstable form. keywords: international trade, trends, direction, trade performance, afghanistan. jel classification codes: f1, f10, f19. introduction afghanistan is at a strategic location which acts as an important corridor in asia and connects powerful industrial economies such as india and china to northern asia and to europe via dry and seaways and vice versa through the lapis lazuli corridor, chabahar port and other corridors. afghanistan is the world’s 150th considerable export economy in the world. (the observatory of economic complexity, 2017). in 2018, afghanistan exported (875.18) million usd and imported (7,406.56) million usd, resulting in a negative trade balance of (-6,531.38) million usd.(international financial statistics, international monetary fund (imf) data, 2018). the gdp of afghanistan was 20.9 billion dollars with 705 dollars gdp per capita.(national statistic and information authority, 2017). the opening of new transit routes has boosted trade; the growth of trades between afghanistan and central asian countries has more than doubled in recent years, and economic indicators show that the numbers of trade exchanges between afghanistan and the countries of central asia and india are growing rapidly and steadily. the figures from afghanistan's exports indicate that in the year 2017, the country's exports grew by approximately 40 percent (national statistic and information authority, 2017). besides, the monetary policy directly influence trade (ashamu, 2020) in the past, afghanistan suffered heavy pressure because of taking advantage of only one commercial corridor. unfortunately, these pressures have always been increasing due to afghanistan's growing political problems with the neighboring countries, even though in recent years it has imposed more stringent rules and regulations on afghan businessmen and trades. continued pressure on afghanistan's economy and trade has further boosted other business corridors, including chabahar port, the air corridor with india, and boosting the routes and ports of the middle east. the volume of afghanistan's exports to the near and far-flung countries shows that transit policies have effectively resulted, and no country can now force afghanistan on transit and import of goods. methodology this is a descriptive paper on direction, trend, and performance of the afghanistan trade. the data is retrieved from numerous secondary sources, such as international financial statistics (ifs) of international monetary fund (imf), the observatory of economic complexity (oec) and national statistics and information authority (nsia) of afghanistan. the period selected is from 2002 to 2018. moreover, the research is based on quantitative data and descriptive statistics such as ratios and percentages have been used to analyze the trend and direction of the afghanistan trade. objectives · this research paper attempted to emphasize the trend and performance of afghanistan international trade. · to understand the direction of imports and exports with major export destinations and import origins. afghanistan’s trade afghanistan located in the heart of asia has 156 products with 62 export partners exporting (875.18) million usd and imports 331 products (7,406.56 million usd value) from 104 import partners.(world integrated trade solution, 2018). afghan president mohammad ashraf ghani addresses a joint meeting of the u.s. congress, “we are an old country with a proud heritage and a history of trade with our neighbors. we have had a bill of exchanges for at least 2,000 years. and our women could write two and a half thousand years ago. for at least three millennia, we have been a hub for the caravans and trade networks that spread across asia bringing chinese silk and indian textiles to ancient rome and renaissance italy. the 19th century disrupted this world as it did in so many other places. afghanistan became an isolated buffer, caught between two expanding empires. the emergence of the soviet union further isolated our country, culminating in the 1979 invasion and the subsequent war of resistance. today, however, the isolation is over. first, awareness is growing; afghanistan is quite literally the heart of asia. asia cannot become a continental economy without us. asia in the next 25 years will have its 1869 moment, the year that east and west coast of the united states were joined through the transcontinental but this completion of the new interconnected asia cannot happen without us. we are in the midst of 3.5 billion people and we should be able to export something and not just import. our fragmented geography can once again become the opportunity for integrating central, west, east and south asia into a network that supports stability and prosperity over a vast swath of service. diplomatic efforts to advance integration and free hub cross-border trade and support, multicounty investments in energy, transport, and water. we envision afghanistan that within 20 years become a hub of trade in gas pipelines, power transmission lines, railways, modern telecom and banking services. we are engaging people across asia for trade. a vast region that extends from india to beyond. we are making headway in the corridor that will link us to georgia, turkey, and europe into reality. we are determined to become the asian development roundabout in the platform for the peaceful cooperation of our civilization.” (ghani, united states congress, 2015). further, he declared, “as we look to our neighbors in the south and central asia, we are simultaneously strengthening national, global and regional connectivity. afghans will again become a multi-faceted hub in the 21st century (ghani, 72nd session of united nations general assembly , 2017). table1. afghanistan’s trade (usd in millions) year export import balance of trade export share (%) import share (%) 2002 111.84 901.54 -789.70 11.04 88.96 2003 182.06 1,267.63 -1,085.57 12.56 87.44 2004 144.63 1,730.72 -1,586.09 7.71 92.29 2005 147.19 2,169.22 -2,022.03 6.35 93.65 2006 156.05 2,437.56 -2,281.51 6.02 93.98 2007 161.33 2,630.88 -2,469.55 5.78 94.22 2008 540.07 3,025.83 -2,485.76 15.15 84.85 2009 403.44 3,343.58 -2,940.14 10.77 89.23 2010 388.48 5,162.11 -4,773.62 7.00 93.00 2011 375.85 6,399.61 -6,023.77 5.55 94.45 2012 305.80 6,214.63 -5,908.84 4.69 95.31 2013 373.96 8,561.76 -8,187.80 4.18 95.82 2014 414.76 7,703.38 -7,288.63 5.11 94.89 2015 571.40 7,728.02 -7,156.61 6.88 93.12 2016 436.18 7,048.01 -6,611.83 5.83 94.17 2017 526.55 8,314.92 -7,788.37 5.96 94.04 2018 875.18 7,406.56 -6,531.38 10.57 89.43 source: international financial statistics (ifs) of the international monetary fund the above table of afghanistan’s trade during the period from 2002 to 2018 highlights the following statements: · imports have increased over the era, as have exports. · imports have surpassed exports continuously. · the level of trade deficit increased from usd 789.7 million to usd 6531.38 million. first, the study will focus on export performance and exports’ growth and later the imports of afghanistan will be studied to understand the trends and performance of afghanistan trade. export performance and growth afghanistan export sector draws a fluctuated and unstable graph from 2002 to 2018. in fy 2003, afghanistan export achieved a growth rate of (38.57 percent). furthermore, the export sector gained growth (1.74 percent) in fy 2005, (5.68 percent) in fy 2006 and (3.27 percent) in fy 2007. afghanistan witnessed negative export growth (-25.88 percent) in fy 2004. moreover, afghanistan experienced its peak in fy 2008 during the first decade of the 21st century with export growth (70.13 percent). after 2008, the sector growth declined for 4 consecutive years from 2009 to 2012 respectively (-33.86 percent), (-3.85 percent), (-3.36 percent) and (-22.91 percent). the sector slightly increased from 2013 to 2015. in fy 2016, the export fell by (-31 percent). finally, the export sector boomed in fy 2017 with export growth (17.16 percent) and (39.83 percent) in fy 2018. figure1. afghanistan’s export import performance and growth afghans and the afghan economy were in the shadow of war for almost 30 years. these continues war, isolated afghanistan and people lost their hopes. a large number of afghans immigrated to different countries. as a result, we left as a consumer and importer country. despite the exports, imports in afghanistan increased from 2001 onward. afghanistan import sector experienced a positive growth for a decade from 2002-2011 respectively by (48.91 percent), (40.61 percent), (36.53 percent), (25.34 percent), (12.37 percent), (7.93 percent), (15.01 percent), (10.50 percent), (54.39 percent), and (23.97 percent). in fy 2012, 2014 and 2016 the import amount declined and in fy 2017 the percentage rose again by (17.98 percent) while in fy 2018 imports decreased by (-10.92 percent). figure 2. afghanistan’s import balance of trade the balance of trade in afghanistan was always in deficit and there is a huge gap between export and import. and the reason is clear "the 19th century disrupted this world as it did in so many other places. afghanistan became an isolated buffer, caught between two expanding empires. the emergence of the soviet union further isolated our country, culminating in the 1979 invasion and the subsequent war of resistance.” (ghani, united states congress, 2015). moreover, war, fragile governments, geopolitics location, being landlocked, higher cost of production, lack of publicity and advertisement, low production, unstable economy, speed-less industrial development put more pressure on afghanistan’s trade deficit. figure 3. afghanistan’s balance of trade direction of afghanistan’s trade afghanistan’s exports direction by region afghanistan is engaged with 62 partners from different regions and continents of the world and in this study the regions classified as advance economies, emerging and developing asian countries, commonwealth of the independent states, african countries, european union and the middle east. advanced economies: austria, belgium, finland, france, germany, greece, italy, latvia, lithuania, netherland, portugal, slovak republic, spain, australia, canada, hong kong (china), denmark, japan, korea, new zealand, norway, singapore, sweden, switzerland, united kingdom, and united states. furthermore, emerging & developing asian countries: bangladesh, china, india, indonesia, malaysia, myanmar, sri lanka, thailand, and vietnam, commonwealth of independent states (cis): azerbaijan, belarus, georgia, kazakhstan, kyrgyz republic, russian federation, tajikistan, ukraine, and uzbekistan. moreover, africa: all countries located in the africa continent and middle east: bahrain, iraq, jordan, kuwait, lebanon, oman, qatar, saudi arabia, united arab emirates, and yemen. figure 4. afghanistan’s export direction by region source: international financial statistics (ifs) of the international monetary fund after the civil war and taliban regime, the new government gets into power and the interaction with the world rehabilitated once again. commonwealth states were 43 percent holders of afghanistan export shares in 2002, while in 2010 the share of cis states declined four times and decreased to 12 percent and in 2018, the amount reached to surface of the graph with approximately 1 percent share. the export of afghanistan with advance economieswere only 8 percent in fy 2002, declined to 6 percent in fy 2010 and reached to 2 percent in fy 2018. in the same case with middle east countries, afghanistan exports with the middle east were 16 percent in fy 2002, decreased to 14 percent in fy 2010 and decreased twice and shows only 7 percent share in fy 2018. european union formed an 8 percent share of afghanistan exports in fy 2002. but in 2010 and 2018 the share of eu falls into 5 percent and 1 percent. afghanistan could not contribute to african markets during the period from 2002 to 2018 and export share with african nations was below 1 percent from 2002 to 2018. this small share of afghanistan export to african countries is due to distance, language problems, unfamiliarity to the african market and low demand to afghan commodities. emerging & developing asian countries (bangladesh, china, india, indonesia, malaysia, myanmar, sri lanka, thailand, and vietnam) export share doubled from 10 percent in fy 2002 to 20 percent in fy 2010. due to afghanistan's geo-strategic location, the export interaction with emerging and developing asian countries are growing day by day and in fy 2018 this amount reached (389.72) million usd which shows the contribution of 44 percent. this amount again boomed two times than in fy 2010. other remain countries and regions made 15 percent contribution to afghanistan export in fy 2002. the contribution increased to 43 percent in fy 2010 and 45 percent in fy 2018. these numbers show that afghan traders found new markets during the period from 2002 to 2018. furthermore, the new transit routes have also opened for afghan exporters such as lapis lazuli (an international transit route opened in 2018 linking afghanistan to europe and turkey via turkmenistan, azerbaijan, and georgia), chabahar port (a seaport located in iran, on the gulf of oman and connects afghanistan to india and india to afghanistan and northern and central asia) and air corridors to india and china. these routes made afghanistan export its commodities to different regions and countries. afghanistan’s import direction by region afghanistan imports 331 products (7,406.56 million usd value) from 104 countries.(world integrated trade solution, 2018). in fy 2002, afghanistan imported from different countries and regions but in 2018, these places compressed to few regions which are advance economies, emerging and developing asian countries, commonwealth of the independent states, african countries, european union and the middle east. figure 5. afghanistan’s import direction by region source: international financial statistics (ifs) of the international monetary fund imports from advance economies increased from 9 percent share in fy 2002 to 23 percent share in fy 2010 while the share decreased to 10 percent in fy 2018. emerging and developing asian countries were only 8 percent contributor to afghanistan's imports and further this number increased to 19 percent in fy 2010 and 26 percent in fy 2018. commonwealth independent states (cis) showed that these countries are the most important import origin for the afghanistan trade. in fy 2002, cis states attained only 6 percent but during the period from 2002 to 2018, the states' share increased to 33 percent in fy 2010 and 27 percent in fy 2018. due to distance, language problem, cultural and environmental differences, unfamiliarity to the african market and low demand to african commodities, the import from african countries were less than 1 percent during the period from 2002 to 2010 and reached to 1 percent in fy 2018. afghanistan and middle east countries are bond with each other. culture, clothing, dishes make this bond closer but the import of afghanistan from the middle east is not stable. afghanistan's imports from middle east countries draw 23 percent share in fy 2002 and this piece compress to 11 percent in fy 2010 while the share-piece decompressed to 19 percent in fy 2018. european union share heightened from 1 percent in fy 2002 to 10 percent in fy 2010 but dropped to 2 percent in fy 2018 and this graph shows that import interaction with eu is unstable as well. afghan traders imported 53 percent of all commodities from regions and countries other than the above-mentioned regions in fy 2002. while this performance limited by 4 percent in fy 2010 and the share raised to 15 percent in fy 2018. conclusion afghanistan is facing the challenge of a rapidly increasing trade deficit and the reasons behind low export performance are consequent war, fragile governments, geopolitics location, being landlocked, higher cost of production, lack of publicity and advertisement, low production, unstable economy and speed-less industrial development. the numbers indicated that the export and import are increasing as well the trade balance deficit, despite growth in export of the country, still, it is slower than import in the country which different obstacles trigger the situation. afghanistan’s trade with emerging and developing asian countries (bangladesh, china, india, indonesia, malaysia, myanmar, sri lanka, thailand, and vietnam) have revealed an upward trend. emerging and developing asian countries were only 8 percent contributor to afghanistan's imports in fy 2002 and further, this number increased to 19 percent in fy 2010 and 26 percent in fy 2018. emerging & developing asian countries export share doubled from 10 percent in fy 2002 to 20 percent in fy 2010. due to afghanistan's geo-strategic location, trade interaction with emerging and developing asian countries are growing day by day and in fy 2018 the export amount reached (389.72) million usd which shows the contribution of 44 percent. this amount again boomed two times than in fy 2010. afghanistan’s exports with advanced countries were only 8 percent in fy 2002, declined to 6 percent in fy 2010 and reached 2 percent in fy 2018. moreover, imports from advance economies increased from 9 percent share in fy 2002 to 23 percent share in fy 2010 while the share decreased to 10 percent in fy 2018. commonwealth states were 43 percent holders of afghanistan export shares in 2002, while in 2010 the share of cis states declined four times and decreased to 12 percent and in 2018, the amount reached to surface of the graph with approximately 1 percent share. on the other hand, the commonwealth independent states (cis) showed that commonwealth countries are the most important import origin for the afghanistan trade. in fy 2002, cis states attained only 6 percent of import but during the period from 2002 to 2018, the states' share increased to 33 percent in fy 2010 and 27 percent in fy 2018. afghanistan exports with the middle east were 16 percent in fy 2002, decreased to 14 percent in fy 2010 and decreased twice and showed only 7 percent share in fy 2018. while imports of afghanistan from the middle east are not stable. afghanistan's imports from middle east countries draw 23 percent share in fy 2002 and this piece compress to 11 percent in fy 2010 while the share-piece decompressed to 19 percent in fy 2018. european union formed an 8 percent share of afghanistan exports in fy 2002. but in 2010 and 2018 the share of eu falls into 5 percent and 1 percent. notwithstanding, european union share heightened from 1 percent in fy 2002 to 10 percent in fy 2010 but dropped to 2 percent in fy 2018 and this graph shows that import interaction with the eu is unstable as well. afghanistan could not contribute to african markets during the period from 2002 to 2018 and export share with african nations was below 1 percent from 2002 to 2018. this small share of afghanistan export to african countries is due to distance, language problems, unfamiliarity to the african market and low demand to afghan commodities. at the same time, the import from african countries was less than 1 percent during the period from 2002 to 2010 and reached 1 percent in fy 2018. although the trade balance of the country so far reflects a significant impedance in terms of imports relative to exports, with the implementation of good industrial, commercial and transit policies, over time, it is possible to establish a reasonable balance between these two important factors "balance and economic stability". import substitution and export promotion are two vital strategies that narrow the gap between export and import deficit. moreover, the afghan government should encourage businessmen to invest inside afghanistan and produce those commodities that we import. further, afghan authorities should organize training workshop to promote unskilled to skilled labor. nevertheless, unnecessary products should be limited or the tariffs should increase. finally, chabahar port, lapis lazuli routes and other air corridors should be used practically and regularly. references ashamu, s. o. (2019). the effect of monetary policy on foreign trade in nigeria. australian finance and banking review, 1-8. ghani, m. a. (2015, march 23). united states congress. retrieved from rs.nato.int: https://rs.nato.int/news-center/transcripts/afghan-president-ashraf-ghani-addresses-us-congress.aspx ghani, m. a. (2017, september 19). 72nd session of united nations general assembly . retrieved from afghanistan-un.org: https://afghanistan-un.org/2017/09/statement-by-h-e-mohammad-ashraf-ghani-president-of-the-islamic-republic-of-afghanistan-at-the-72nd-session-of-united-nations-general-assembly/ international financial statistics. (2002-2015). afghanistan trade data. international financial statistics of international monetary fund. international financial statistics. (2017). international monetary fund. international financial statistics. (2018). international monetary fund (imf) data. retrieved from international monetary fund (imf): imf data ministry of commerce and industry of afghanistan. (2017). trade annual report. kabul: ministry of commerce and industry. national statistic and information authority. (2017). anaual report of export and import. kabul, afghanistan: national statistic and information authority. national statistics and information authority. (2016). anaual report of export and import of afghanistan. kabul, afghanistan: national statistics and information authority. national statistics and information authority. (2018). anaual report of export and import of afghanistan. kabul, afghanistan: national statistics and information authority. the observatory of economic complexity. (2017). oec.world. retrieved from www.oec.world world integrated trade solution. (2018). world integrated trade solution. retrieved from wits.worldbank.org: https://wits.worldbank.org/countrysnapshot/en/afg copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) 40 49 image2.png image3.png image4.emf image5.emf image6.emf image7.emf image8.emf image9.emf image1.png 8% 10% 43% 16% 8% 15% 2002 advanced economies emerging & dev. asia cis africa middle east european union other regions/countries 8% 10% 43% 16% 8% 15% 2002 advanced economiesemerging & dev. asia cis africa middle easteuropean union other regions/countries 6% 20% 12% 14%5% 43% 2010 advanced economies emerging & dev. asia cis africa middle east european union other regions/countries 6% 20% 12% 14%5% 43% 2010 advanced economiesemerging & dev. asia cis africa middle easteuropean union other regions/countries 2% 44% 1% 7% 1% 45% 2018 advanced economies emerging & dev. asia cis africa middle east european union other regions/countries 2% 44% 1% 7% 1% 45% 2018 advanced economiesemerging & dev. asia cis africa middle easteuropean union other regions/countries 9% 8% 6% 23% 1% 53% 2002 advanced economies emerging & dev. asia cis africa middle east european union other regions/countries 9% 8% 6% 23% 1% 53% 2002 advanced economies emerging & dev. asia cis africa middle east european union other regions/countries 23% 19% 33% 11% 10% 4% 2010 advanced economies emerging & dev. asia cis africa middle east european union other regions/countries 23% 19% 33% 11% 10% 4% 2010 advanced economies emerging & dev. asia cis africa middle east european union other regions/countries 10% 26% 27% 1% 19% 2% 15% 2018 advanced economies emerging & dev. asia cis africa middle east european union other regions/countries 10% 26% 27% 1% 19% 2% 15% 2018 advanced economies emerging & dev. asia cis africa middle east european union other regions/countries australian finance & banking review vol. 5, no. 1; 2021 issn 2576-1196 e-issn 2576-120x published by cribfb, usa 50 satisfaction of individual taxpayers’ in bangladesh dr. shameem ahmed associate professor in marketing visiting & part-time at university level dhaka, bangladesh e-mail: shameem.ahmed.phd.jnu@gmail.com md. mahadi masud faisal deputy commissioner of tax national board of revenue dhaka, bangladesh abstract as a developing country revenue is necessary to accelerate the economic growth of bangladesh. besides, implementation of the tax law, individual taxpayers’ satisfaction will accelerate the collection of tax. the main objective of the study is to find out the impact of some determinants or factors which influence the overall satisfaction of the individual taxpayers’ of bangladesh. in this study, quantitative data was gathered by taking personal interviews among 450 respondents and the response rate was 93.33%. empirical tests using factor analysis and tests of hypothesis were performed in the study. the study incorporated three factors: tax rate, taxpaying system, and the behavior of tax employees. these three factors are considered to play a significant role in individual taxpayer satisfaction in bangladesh. all the variables showed a significant and positive relationship between the independent variables and the dependent variable, taxpayers’ satisfaction. the study suggests some recommendations in order to increase the effectiveness of the tax collection rate by satisfying individual taxpayers’. keywords: tax, individual taxpayers’, satisfaction, bangladesh. jel classification codes: h24. introduction taxation is necessary to fund public amenities and move a country's economy forward. the primary source of government revenue is taxation. taxation plays a significant role in shaping the state-citizen relationship (carnahan, 2015). someone even claims that the state-taxpayer connection is a fiduciary relationship (mahmood, 2018). while affluent countries have been able to raise much-needed cash for citizen welfare and development projects, developing countries such as bangladesh have made remarkable progress in recent years. besley and persson (2013) state, as states activities expands, it not only increasing taxation amounts but also undergo significant changes in taxation patterns, with a greater emphasis on broader tax bases. some taxes, particularly trade taxes, are becoming less important. thus, in the industrialized world, https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 51 income and value-added taxes do the heavy lifting in terms of producing enough revenue to finance the state's productive and redistributive functions. in most low and lower-middle-income nations, tax collection has increased during the last decade, both in raw numbers and as a percentage of gdp. the economy of bangladesh is very attractive for foreign investment because of its depth and diversity, which has turned its market into a frontier market. bangladesh is the 8th most populous country in the world and in 2019 it had a growth rate of 8% more than india and china. its economic growth rate is on average 6% over the last decade. hsbc predicted it would be the biggest mover in the global gdp ranking by 2030, moving from 42th to 26th. considering all the circumstances, bangladesh has to make substantial progress in tax collection, overcoming all of its challenges, and formulating new policies for developing all of its sectors. statement of problem bangladesh is a developing country and its sustainable economic growth helps it to become a middle-income country in the world due to various policy implications by the current government. economic growth is ensured by proper government expenditure and satisfactory revenue policy. most of the revenue of the country generates from taxes. the national board of revenue (nbr) is the sole organization to collect taxes on behalf of the government from citizens of the country. to collect taxes, nbr formulates different policies, rules, and regulations. the performance of nbr is vital for the development of this country. to perform accurately, nbr has to focus on taxpayer satisfaction. in this study, the researchers incorporated the concept of individual taxpayers’ satisfaction. different policies, rules and regulations can be imposed regarding taxes, but most citizens are not interested in obeying them. in this situation, it would be beneficial and fruitful for nbr if it focuses on those factors properly which lead to individual taxpayers’ satisfaction. in this study, attempts have been made to formulate a model of individual taxpayers’ satisfaction by considering four factors in this regard. research questions in light of the problem statement, some specific questions have been raised and the researchers will try to answer the following questions throughout the research.  does the relationship between some independent variables and their consequences demonstrate strong outcomes, such as individual taxpayers’ satisfaction in bangladesh?  is it a positive or negative relationship? objectives of the study the specific objective of the study is:  to test a previously developed model including new construct in the context of bangladesh.  to identify the impact of relevant constructs related to tax on individual taxpayer satisfaction.  to identify whether there is a positive or negative relationship between variables.  to recommend suggestions to overcome any problems that may exist in individual taxpayers’ satisfaction. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 52 literature review over the past few years, taxation has been an important topic of discussion among practitioners and academicians. to accelerate and formulate the study’s model, relevant literature has been link up bellow. tax rate-individual taxpayers’ satisfaction the tax rate is a vital factor in bringing motivation to individual taxpayers’ (padovano & galli, 2001). human needs, wants, and demands are always high compared to their income, and excess money is not available to pay income tax for some taxpayers’ (deyganto, 2018). so, he suggested a lower tax rate for developing countries. the tax rebate encourages taxpayers’ to pay tax in time (ibrahim et al., 2015). taxpaying systemindividual taxpayers’ satisfaction a better taxpaying system encourages taxpayers’ to pay tax (ibrahim et al., 2015). on the other hand, (adeyemi, 2013) showed, people are so busy in this modern age and don’t like to face a time-consuming system or any other problems with paying tax. except for a few taxpayers’, most people are psychologically dissatisfied because taxes reduce their monetary income (palil, 2010). so, psychological motivation is necessary in the taxpaying system. behavior of tax employeeindividual taxpayers’ satisfaction organizational behavior teaches to respect their clients (luthans, 2002). sales of every business increases by good behavior with clients, collection of income tax is no exception in this case (ibrahim et al., 2015). in this regard all tax employee can behave positively with personal income taxpayers’ (wright, 2003). research gap the above discussion regarding individual taxpayers’ satisfaction enables the researcher to write the research gap for the study. the gap in this study is as follows. gap 1: since the previous research does not show behavioral factors of tax employees, it could be another factor of individual taxpayers’ satisfaction. behavioral factors will fulfill the theoretical or knowledge gap in the study. findings of this research will differ from those of previous research due to the inclusion of new factors. gap 2: no model-based research has yet been found in bangladesh. so, this research will cover the context gap. hypothesis of the study in order to give effect to the objectives of the study, based on the introduction and literature review, some hypotheses have been constructed. hypotheses have been constructed to determine whether relationships exist between independent and dependent variables, which have been shown below. h1: tax rates have a positive and significant impact on individual taxpayers’ satisfaction in bangladesh. h2: the taxpaying system has a positive and significant impact on individual taxpayers’ satisfaction in bangladesh. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 53 h3: the behavior of tax employees has a positive and significant impact on individual taxpayers’ satisfaction in bangladesh. conceptual framework a conceptual framework has been designed in the study in order to define the factors that influence individual taxpayers’ satisfaction. the primary purpose of the framework is to analyze the effect of tax rate, taxpaying system and behavior of employee on taxpayers’ satisfaction. the conceptual framework of the study is as follows: figure 1. research framework source: developed by researcher, 2021 methodology the strategy for this research is based on a survey. a structured questionnaire was prepared for data collection. the researchers collected primary data through a survey of individual taxpayers’ in dhaka city in bangladesh. in this regard, a simple random sampling technique was adopted in this study. the target population for this study would be all individual taxpayers’ in dhaka, bangladesh. a pilot study was conducted with a sample of 50 respondents. based on the pilot study, a minor alternation was made in the questionnaire. a total of 450 taxpayers’ have been taken as a sample for this study. data has been collected from 1st february 2021 to 30th may 2021 (four months). the exogenous variables of this study are the tax rate (txr), the taxpaying system (tps), and the behavior of tax employees (bte). the indigenous variable is individual taxpayers’ satisfaction. the questionnaire includes the respondent's demographic background, 14 preliminary measures for the construct. minor alternations were made to the estimation scales to guarantee reasonableness for the setting. the designated constructs were rated on the 7-point likert scale. empirical tests using factor analysis and tests of hypothesis were performed. in this regard, spss (version-25) was used to analyze the data collected from field-level interviews. data analysis the sample size of the survey was 450 and an error-free questionnaire was finally selected for 420 through face-to-face data collection. four hundred twenty respondent’s data was entered into spss version-25 for analysis. after data entry, missing values were checked and no missing values were found, but 20 respondents were excluded from the study due to outlier problems which prevented further processing of the data into spss. finally, (420-20) = 400 respondents' data has been considered for analysis of the study. the analysis section of the study consists of the demographic profile of the respondents, factor analysis, and multiple regression analysis. tax rate taxpaying system individual taxpayers’ satisfaction behavior of tax employee https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 54 demographic profile the demographic profile of the study is presented in the table below. table 1. respondent demographic profile. variables frequency percentage gender male female total 315 85 400 78.75 21.25 100 age 21-30 31-40 41-50 51-60 61-above total 38 84 128 114 36 400 9.5 21 32 28.5 9 100 education under-graduate graduate post graduate total 83 206 111 400 20.75 51.50 27.75 100 source: field data 2021 the respondents were 78.75% male and 21.25% female. male respondents are higher than females because more male in involve in jobs and business than females. the age group of participants shows that 9.5% aged between 21-30, 21% aged between 31-40, 32% aged between 41-50, 28.5% aged between 51-60, and 9% aged between 61-above. the result shows that the majority of the respondents lie in the age group between 41-50 years old. the education level of respondents showed that 20.75% are at the undergraduate level, 51.50% of the respondents completed graduate level, whereas only 27.75% completed the post-graduate level. exploratory factor analysis exploratory factor analysis of the study has been provided in the following tables and necessary explanation also presented. table 2. kmo and bartlett’s test kaiser-meyer-olkin measures of sampling adequacy. approx. chi-square bartlett’s test of sphericity df sig. .823 5583.190 153 .000 through the main component analysis, the exploratory factor analysis was used to determine the item that is applied to a given component. in order to evaluate the data for factor analysis, the bartlett test and kaiser-meyer-oklin (kmo) were used. the value of the (kmo) test is 0.823, which is higher than the threshold of 0.60 (cerny & kaiser, 1977). bertlet's https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 55 sphericity test is significant at (chi-square = 5583.190, df = 153 and p = 0.000). this means the data is solid enough to move forward with the factor analysis. table 3. constructs, its items, loading, cronbachs alpha, mean and standard deviation. constructs code items items loading @ mean sd tax rate tax 1 the tax rate is reasonable for you. .781 .88 6.07 1.468 tax 2 the tax rate should be reduced. .834 5.55 1.489 tax 3 you are getting tax rebate. .894 5.52 1.462 taxpaying system tps 1 tax payment time is appropriate for you. .777 .83 3.71 2.583 tps 2 you support the online tax payment system. .901 3.71 2.459 tps 3 you support the manual tax payment system. .843 3.17 1.747 tps 4 you face a problem when paying tax. .765 4.93 1.997 behavior of tax employee bte 1 the behavior of tax employees is satisfactory. .877 .85 5.67 1.561 bte 2 the behavior of tax employees should be improved. .856 6.25 1.132 bte 3 non-satisfactory behavior of tax employees discourages tax payers from paying tax. .912 6.02 1.362 individual taxpayers’ satisfaction ips 1 you are satisfied with the overall individual tax system in bangladesh. .790 .89 6.07 1.342 ips 2 your satisfaction is increasing day by day. .880 6.14 1.376 ips 3 your satisfaction never deteriorates. .832 6.15 1.060 ips 4 you share your satisfaction or dissatisfaction with other individual taxpayers. .723 6.09 1.041 to assess for applicability, the 14 items were subjected to principal component analysis with varimax rotation. the results show that the 14 questions scored higher than 0.50, as indicated by hair et al. (2010). as a result, four components with eigenvalues greater than one emerged from the 14 elements. the tax rate has an eigenvalue of (4.612), the taxpaying system has an eigenvalue of (3.162), and the behavior of a tax employee has an eigenvalue of (2.123). the individual taxpayers’ satisfaction eigenvalue is (1.132). the reliability measures mean values ranged from 3.17 to 6.15, indicating that the respondents had a high level of agreement with the variable. the respondents agreed with all of the statements in the construct on average. while there appears to be a reasonable range of responses based on the standard deviation, the score in the table varies from 1.041 to 2.583 in total. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 56 multiple regression analysis multiple regression analysis was done to see if the independent factors have any effect on the satisfaction of individual taxpayers’ (dependent factor). each of the component scores (beta coefficients) of the independent factors has been regressed against the dependent variable (individual taxpayers’ satisfaction). the dependent variable (individual taxpayers’ satisfaction) was utilized as a proxy for respondents' assessments of individual taxpayers’ satisfaction in dhaka, bangladesh. the regression analysis findings are presented in tables 4, 5, and 6. the multiple correlation coefficients (r), coefficient of determination or square multiple correlation coefficients (r), adjusted r², f ratio with significance were investigated to forecast the regression model's goodness-of-fit. table 4. model summary model r r square adjusted r square std. error of the estimates 1 .823ª .678 .672 .54769 a. predictors: (constant), behavior_tax_employee, taxpaying_system, tax_rate b. dependent variable: individual_taxpayer_satisfaction to begin, the multiple correlation coefficients (r) of the independent variables (14 components) on the dependent variable (individual taxpayers’ satisfaction) are 0.823, which shows that certain factors have a favorable impact on individual taxpayers’ satisfaction. in other words, the r square value of 0.678 indicates that the predictors and dependent variable are 67.8% correlated. secondly, the square multiple correlation coefficient (r²) is .678, indicating that the predictors or independent variables or three components or variables account for more than 67.8% of the variation or variance in the dependent variable (individual taxpayers’ satisfaction). this satisfies the non-zero variance assumption since the r² value represents the variation in the predictor values, which is not zero in this situation. thirdly, the adjusted r² value of 0.672 is good for generalizing the model well because it is close to the r² value with only a 0.006 difference (0.678-0.672). if the model were applied to the entire population, it would explain 0.6 percent less variation in results. table 5. anovaª model sum of squares df mean square f sig. regression residual total 77.22 37.07 114.29 4 395 399 19.31 .09 205.73 .000b predictors: (constant), behavior_tax_employee, taxpaying_system, tax_rate dependent variable (individual_taxpayers_ satisfaction) firstly, the f ratio is 205.73, which is extremely significant, indicating that the model increases ability to predict the outcome variable greatly. the p value in this table is 0.000, which is less than 0.05, indicating that the model fits the entire data well. as indicated by the r, r², adjusted r², and f ratios, the regression model obtained a sufficient level of goodness-of-fit in https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 57 predicting the variance of individual taxpayers' satisfaction in relation to the three components or variables. table 6. summary of testing hypothesis model unstandardized coefficients sig. b std. error (constant) 1 tax_rate taxpaying_system behavior_tax_employee 0.53 0.38 0.24 0.16 .014 .04 .04 .03 .000 .000 .000 .000 a. dependent variable: individual_ taxpayer_ satisfaction secondly, the use of the b, beta values in the multiple regression model equation interprets this model to suggest that a one-unit rise in the factor tax rate affects individual taxpayers' satisfaction by 0.038. the findings reveal that, when all other variables are held constant, there is a positive association between the elements that affect individual taxpayers’ satisfaction. thirdly, the beta values can be used to infer the relative relevance of each predictor or component to the model because they are standardized versions of the b-values and are directly comparable. in other words, the beta coefficients might be used to explain how the three dimensions (independent variables) contribute to the variance in individual taxpayers’ satisfaction (dependent variable). in summary, it can be stated that all the underlying dimensions are positive and, therefore, are significant. thus, the result of multiple regression analysis proved that h1: tax rate has a positive and significant impact on individual taxpayers’ satisfaction in bangladesh. h2: the tax system has a positive and significant impact on individual taxpayers’ satisfaction in bangladesh. h3: the behavior of tax employees has a positive and significant impact on individual taxpayers’ satisfaction in bangladesh. so, there is a relationship as expected. results and discussion in this regard, the main findings of this study confirmed and proved a positive relationship between the independent variables and the dependent variable. the results obtained from data in the model showed there is a direct relationship between the independent variables (tax rate, taxpaying system, and behavior of tax employees) and the dependent variable (individual taxpayers’ satisfaction). the impact of three factors on individual taxpayers’ satisfaction is as follows:  tax rate, positive impact, p<0.05  tax system, positive impact, p<0.05  behavior of tax employee, positive impact, p<0.05 the study’s first objective was to test a model regarding individual taxpayers’ satisfaction and its predictors' influence on it. to do so, a model was developed and shows the linkages among variables, indicating a discussion to show the direction among variables. the study’s https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 58 second objective, to find out the impact of independent variables on dependent variable, was also met. the study’s third objective, the relationship between positive or negative among the constructs, was also met in the study. the study’s fourth objective is to provide some recommendations regarding individual taxpayers' satisfaction has also been provided in the study. policy implications according to the researcher’s point of view, this study carries high importance for policy implications. individual taxpayers’ are not interested in paying tax and have the tendency to show lower income in their tax file. if the tax authorities of bangladesh provide individual taxpayers satisfaction by reducing the existing tax rate and providing rebates, besides improving the current taxpaying system and the behavior of tax employees, they will be able to collect more revenue on behalf of the government of bangladesh. satisfaction is a motivational term and it is a more powerful weapon than enforcing the law. in this regard, it is necessary to say that proper enforcement of tax laws is still not implemented in our country. limitations and future research direction the study is not free from flaws. mentionable flaws of the study are: (1) the data collection was based on the entire city, so distance is an obstacle to collecting data from different individual taxpayers’. (2) the data collected through a face-to-face survey questionnaire was very timeconsuming. (3) the budget limitation was a major obstacle to this research because it was completed through the researcher’s own fund. a few questions have arisen in the mind of the researcher during this research work, but there is no scope to include them in the study. it is recommended for future study by other researchers. those questions involve: (1) future research may include new factors if it is supported by its country's context (2) this study was a paper-based survey. the country which is advanced in internet use can do research through an internet-based survey because more respondents' opinions are possible to collect for generalization of the results. conclusion the focus of the government's revenue department is to collect taxes from the relevant taxpayers’ and the performance of the department depends on how smoothly they have achieved the targeted revenue. the law itself is not enough to collect taxes from taxpayers’. the study found out taxpayers’ satisfaction is also necessary and, in this regard, necessary constructs and their scales have been presented in the study. the nbr and policy makers of tax should focus on taxpayers’ satisfaction besides other policy and strategy. references adeyemi, a. (2013). assessing the effects of taxation system on nigerian economic growth. in proceedings of 2013 international conference on poverty alleviation income redistribution & rural development in developing countries. besley, t., & persson, t. (2013). taxation and development. in handbook of public economics (vol. 5, pp. 51-110). elsevier. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 59 cerny, b. a., & kaiser, h. f. (1977). a study of a measure of sampling adequacy for factor analytic correlation matrices. multivariate behavioral research, 12(1), 43–47. carnahan, m. (2015). taxation challenges for developing countries. asia and the pacific policy studies, 2(1), 169-182. deyganto, k. (2018). factors influencing taxpayers' voluntary compliance attitude with tax system: evidence from gedeo zone of southern ethiopia. universal journal of accounting and finance, 6(3), 92-107. ibrahim, m., musah, a., & abdul, h. a. (2015). beyond enforcement: what drives tax morale in ghana? humanomics, 31(4), 399–414. https://doi.org/10.1108/h-04-2015-0023 luthans, f. (2002). the need for and meaning of positive organizational behavior. journal of organizational behavior, 23, 695–706. mahmood, m. (2018). the tax regime in bangladesh: issues in expanding the tax base. the financial express. retrieved from https://www.thefinancialexpress.com.bd/views/thetax-regime-in-bangladesh-issues-in-expanding-the-tax-base-1526745339 padovano, f., & galli, e. (2001). tax rates and economic growth in the oecd countries (1950–1990). economic inquiry, 39, 44 – 57 (january). palil, m. (2010). tax knowledge and tax compliance determinants in self-assessment system in malaysia. retrieved from https://core.ac.uk/download/pdf/76107.pdf wright, t. a. (2003). positive organizational behavior: an idea whose time has truly come. journal of organizational behavior, 24, 437–442. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.1108/h-04-2015-0023 https://core.ac.uk/download/pdf/76107.pdf australian finance & banking review vol. 5, no. 1; 2021 issn 2576-1196 e-issn 2576-120x published by cribfb, usa 1 an exploratory study on efficacy of demonetization in india: policy rollout on demonetizing old currency abdul masood panah phd scholar department of commerce mangalore university, mangalagangothri mangalore, karnataka, india, 574199 e-mail: mazzpanah@gmail.com dr. y. muniraju professor & dean department of commerce mangalore university, mangalagangothri mangalore, karnataka, india, 574199 e-mail: drymuniraju97@gmail.com abstract demonetization is the process of declining the use of currency from circulation by the government or monetary authorities in a country. this research paper analyses the efficacy of indian demonetization from common public perspectives, the policy that the government of india has implemented to fight against black money, drying the financial roots of terrorism, and direct the civilization towards digital transactions and a cashless economy. a field survey was conducted in karnataka and kerala’s coastal region by distributing a structured questionnaire among the common public to generate the data. the authors run descriptive statistics and ordinal regression analysis to obtain the result for the study’s objectives. the descriptive statistics result found that demonetization increased the number of bank account holders in india. there is not much impact of demonetization on controlling evasion of tax and illegal investments of black money, and the policy adversely affects regular business in the country. the findings from ordinal regression reveal that the time frame was given to the public to demonetize their old notes were sufficient; money circulation was well planned at the time of demonetization. the policy implemented at the right time and the common public, despite facing enormous challenges while purchasing goods and services at the time of demonetization, considers that demonetization implementation was effective. keywords: demonetization, common public, efficacy, policy implementation, currency. jel classification codes: e5, e6, e7, e58, e60. mailto:mazzpanah@gmail.com mailto:drymuniraju97@gmail.com https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 2 introduction money is an essential instrument in the economy. money is influencing the output and employment by affecting the cost of goods and services. it is also controlling the aggregate flow of saving and investment (m c vaish, 2005).the majority of the people worldwide use money daily to buy or sell goods and services, pay or get paid, or write or settle contracts. notes are central to the workings of the modern economy (mcleay & radia, 2014). the central bank issue maintains the currency and is authorized to decline or ban the money from circulation in a country’s economy (khiaonarong & humphrey, 2019). cash is the most extensively used payment instrument worldwide(paul van der knaap et al., 2018), but cash will no longer be king (massi et al., 2019) as a large number of countries in the globeare trying to reduce the use of cash in their economies. economies that are much cash-intensive tend to grow slowly and miss out on significant financial benefits. conversely, economies that switch to digital are much successful; the switch can boost economic growth by as much as three percentage points (massi et al., 2019). numerous countries attempted to digitalize their economies and people by demonetizing their currencies and overcoming hyper-inflation and also, getting rid of the defects of black money and counterfeit currency (mahajan & singla, 2017; chowdhury & hosain, 2018). demonetization is the process of declining the use of money from circulation by the government or monetary authorities in a country (ghosh et al., 2017). it is the process where governments are stripping a currency unit or the realmoney as a legal tender, usually by replacing it with a new currency (panah & muniraju, 2020).therefore, the common public cannot use the old money in their daily dealings for purchasing goods and services. india to fight black money, fake currency, which was a good source for terror groups, and also, to reduce the number of cash in circulation, which was directly related to corruption in the country, and to digitalize the economy demonetized 86% of the total currency in circulation on 8 november 2016 (ghandy, 2016; sivathanu, 2019). india’s government has given the common public a limited period to bring their old notes and exchange them with the new currency (beg & joshi, 2017). therefore, this paper aims to study the common public’s opinions on policy reactions, understand their hardships due to the notes’ demonetization, and study whether the policy implementation was effective. the study results depict that demonetization increased the number of bank account holders in india. there is not much impact of demonetization on controlling evasion of tax and illegal investments of black money, and the policy adversely affects regular business in the country. despite facing enormous challenges while purchasing goods and services at the time of demonetization, the common public considers that demonetization implementation was effective in india. literature review demonetization is one of india’s most memorable economic events that affect all citizens and the economy through the liquidity side. the objectives of the demonetization were annihilating black money, counterfeit currency, drying up the financial roots of terrorism, and direct the economy of the country and civilization toward cashless transactions and cashless economy (briceno & de hurtado, 2019; chodorow-reich et al., 2020; ghosh et al., 2017; kumar, 2017; mohan & ray, 2019; sharma, 2019; vij, 2018). studied the impact of demonetization on the indian economy (briceno & de hurtado, 2019; chodorow-reich et al., 2020; kumar, 2017), the results obtained from demonetization in india are a shortage of liquidity, changes in consumer preferences, increased inflation, decreased productive activities, the new distribution of monetary cone, and more significant electronic usage transfer and increased deposits, and decreased the banks’ credit https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 3 growth in india.(mohan & ray, 2019; sharma, 2019; vij, 2018), the decision of demonetization shocked the economy for a while. it impacted the economy in various sectors. the size of black money reduced to 15% of official gdp, the gdp has been hampered. there was a positive impact of the demonetization on the cpi inflation rate as the rate dropped post demonetization. the exchange rate of foreign currencies has not been significantly impacted.(ghosh et al., 2017), studied the impacts ofdemonetization on the economy, they mentioned that demonetization doesn’t lead to a reduction in inflation as it can only be achieved through the recession; their book (2017, p15, 58, 64) discussed that demonetization resulted in the most significant adverse effect on the informal economy due to loss of liquidity, which drastically affected trading and supply chain across the country.(dash, 2017; lal, 2018; samuel & saxena, 2017; singh, 2018), studied positive and negative impacts of demonetization. the demonetization shows a mixed effect on various issues; the shortage of cash creates hardships and challenges in the everyday living of the common public in short-rub, but its impact will defiantly prove positive in the longterm.(beg & joshi, 2017; dash, 2017; koshy, 2017; mahajan & singla, 2017; mishra, 2017; mohindra & mukherjee, 2018), studied the impact of demonetization on the common public. their studies show thatdemonetization mainly impacted ordinary people rather than the people who are the main contributors to black money. its impacts had a negative consequence on the poor. indeed, the demonetization left many people with low access to cash in their daily lives. different dimensions and effects of demonetization have been studied in the existing literature; this paper will address the efficacy of demonetization from common public perspectives on policy rollout demonetizing old currencies in india. statement of research question demonetization is not a recent phenomenon in india, and india has been implemented demonetization twice earlier. suddenly, at midnight, november 2016, the government of india announced to the public that due to the existing large number of black money, destroying the financial resource of terrorist groups, and directing the country toward a digitalizedeconomy and a cashless society, the high-value currency which creates 86% of the total money in circulation will be no longer a legal tender and cannot be exchanged for purchasing goods and services until they replace it with the new currency in a short period. the next day, many of the common public rushed to the banks to exchange their old notes. atms had stopped working; the bank service rendered to people was not sufficient enough to reach all. the ordinary people were at the forefront of the government’s decision to suffer from the harms of demonetization and shortage of liquidity in the country. therefore, the scope of the efficacy of demonetization from the general public perspectives makes it more attractive to the researcher to study in-depth their opinions and reactions. on the other hand, it will add to the existing body of knowledge and act as a potential reference for policymakers for better future national policy implementation. 1) did the policy rollout on demonetization effective? 2) does demonetization help to achieve tax-compliance among citizens? 3) does demonetization help in curbing the misuse of black money (illegal activities)? 4) does demonetization affect the sme’s (petty business) research objectives  to study if the policy implementation was effective.  to study the opinions of the public on policy reaction  to understand their hardships due to the implementation of the policy. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 4 research limitation this study is limited to the common publicfrom the coastal region of karnataka and kerala.the researchers had faced a lack of understanding of local languages for interacting with the commonmasses and convincing them to respond to the questionnaire,lack of common public awareness about scientific research, and the researcher’s vast challenges for conducting this research. many times, the respondents were not ready to spare their time responding to the questionnaire. research delimitation efficacy of demonetization in india; policy rollout on demonetizing old currency is a fascinating topic and studied by conducting a survey between the general public inthe coastal region of karnataka and kerala states of india. the datasets were generated from the general public through sharing the questionnaires from august 2019 to november 2019.section three of this study discusses the research methodology and section four represents the discussion of the results, and chapter five concludes the paper. research method population & sample the authors obtained the variables measured for this research model from a review of relevant literature.for this study, the respondents are the general public from the coastal region of karnataka and kerala.this study’s source is from different groups; mostly, the researchers surveyed the people who do not have stable income such as, daily wage workers, agriculturalists, small business holders, retailers, and people who are part of the unorganized labor class. nonprobabilistic convenient sampling technique was conducted. the nonprobability sampling technique is mainly used in surveys where the total population is unknown or cannot be individually identified(chawla & sondhi, 2015; kumar, 2011). data & questionnaire the authors collected the respondent’s responses to the pre-tested designed questionnaire. the questionnaire has been distributed between the common public in the coastal areas of karnataka and kerala. a total of 450 questionnaireswere printed and distributed among various groups of the respondents, and 274 respondents answered the survey questionnaire, of which 250 respondents considered appropriate responses for the study. the responses’ internal consistency has been checked using cronbach’s alpha test and the scale items as 0.825, indicating that the investigation is 82.5 percent reliable. data analysis the authorsanalyzed the common public reactionsto demonetization policy implementation by india’s government using descriptive statistics. the researchers used ordinal regression analysis (ora) to measure the common public’s opinions on policy rollout on demonetizing old currency to understand its efficacy from the general public perspectives. the data on the government’s appropriateness to demonetize the old money is considered as the response variable. and the money circulation planning,the time framegiven to the public to demonetize their old notes, public awareness on objectives of the policy rolled, the right time for demonetization implementation, facing problems while purchasing goods and services at the time of demonetization, lack of prior preparation, waiting in queues for exchanging old notes, and the https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 5 quality service rendered by the banks are considered as covariates or explanatory variables. this is done to verify the common public reactions relating to the policy rollout’s efficacy on demonetizing old currency matches and predicting the general public concerning the implemented policy’s appropriateness. furthermore, the researchers consider the categorical measure of numerous age and professional groups as explanatory variables in the analysis to measure the policy appropriateness from different age and occupation groups’ perspectives. the case processing summary of the categorical elements and the response variable is represented in table 01. the authors classify the respondent’s age into six alphabetic groups, group a. [25-30], and group b. [31-35], are the youngsters.group c. [36-40], and group d. [41-45], represent middle-aged people. group e. [46-50] and group f. [50 &above] depict the veterans. similarly, researchers categorize the occupational groups as daily wage workers, agriculturalists, small business holders, shopkeepers, and group ‘others’ representing the people from the unorganized labor class (housewives) and students. the following equation signifies the general expression of our ordinal regression model. log𝑖𝑡𝑌𝑖,𝑗 = ∝𝑗− ⌊∑ 𝛽𝑖𝑋1𝑖 + ∑ 𝑌𝑖𝑋2𝑖 + 𝛿𝐹 + 𝜍𝐵 + 𝜂𝐼 + 𝜆𝑀 + б𝑆 + 𝜃𝑇 + գl + чy + 휀𝑗 𝑝 𝑡=1 𝑛 𝑖=1 ⌋ where, 𝑌𝑖,𝑗is thecumulative probability of the𝑗thcategory for the 𝑖thcase; log𝑖𝑡𝑌𝑖,𝑗is the log of an odds ratio⌊log 𝜓 1−𝜓 ⌋where 𝜓probability of the respondents in favor of demonetization.∝_j is the threshold/intercept value; x1 and x2 are factors in the ordinal regression model representing the categorical variables such as age and profession group, with β and γ coefficients, respectively; n and p indicate one less than the total number of categories in the age group and professional group, respectively. the variables f, b, i, m, s, t, l, and y represent the model’s covariates.money circulation was well planned;the time framegiven to the public to demonetize their old notes, public awareness on objectives of the policy rolled, the right time for demonetization implementation facing problems while purchasing goods and services at the time of demonetization, lack of prior preparation, waiting in queues for exchanging old notes, and the quality service rendered by the banks.the coefficient of these covariates is δ, ζ, η, λ, б, θ,գ, and ч respectively. table 1. case processing summary statistics (demographic information) panel a: appropriateness of the decision demonetization: sd d n a sa total frequency (%): 39 (15.6) 31 (12.4) 51 (20.4) 73 (29.2) 56 (22.4) 250 (100.0) panel b: demographic information demographic information population of the respondents profile categories frequency percentage https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 6 age 25-30 31-35 36-40 41-45 46-50 51 and above total 103 58 20 36 13 20 250 41.2 23.2 8.0 14.4 5.2 8.0 100.0 gender male female total 175 75 250 70.0 30.0 100.0 education illiterate up to primary school up to 10th standard school up to 12th standard school undergraduate post-graduate total 17 23 29 64 86 31 250 6.8 9.2 11.6 25.6 34.4 12.4 100.0 family size join family nuclear family total 115 135 250 46.0 54.0 100.0 occupation daily wage earner agriculturalist shopkeeper small business others total 40 18 46 37 109 250 16.0 7.2 18.4 14.8 43.6 100.0 source: authors’ computation based on the questionnaire the respondents’ demographic profile is reported in table 01 based on age, gender, education, family size, and occupation. 103 respondents, representing 41.2 percent of the total respondents, are 25-30, followed by age group 31-35, representing 58 respondents and 23.2 percent of the total respondents. similarly, the age group of 46-50 and above 51 represents 5.2 and 8.0 percent of the respondents. likewise, the gender of the respondents is dominated by male and female, 175 respondents, and 70.0 percent are male, and 75 respondents and 30.0 percent are female. we have also asked about the respondents’ education, family size, and occupation, represented in the table. daily wage workers dominate the respondents’ occupation, agriculturalist, shopkeeper, small business andothers’ represent those who do not come under working class such as housewives (homemakers) jobless people who are a part of the unorganized labor class. the necessary model fit condition has been checked using baseline comparison and tests the ordinal regression assumptions using a multi-collinearity test and parallel line test to assess the empirical approach’s suitability. multi-collinearity exists when the regression equation’s independent variables are positively correlated with each other(zikmund, 2010). table 04 shows the tolerance level and the variance inflation factors (vif) for all the model variables. the vif values <1 or > 10 indicate that the variables are multi-collinear. the vif between 1 and 10 in each casesuggests the absence of multi-collinearity(gujarati & porter, 2009). the multihttps://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 7 collinearity in regression analysis refers to how strongly interrelated the model’s independent variables are(zikmund, 2010). the other assumption relating to the ordinal regression is proportional odds, which specify the correlation among the response variable. the explanatory variable does not change for the response variable’s categories. the parameter estimations do not change for cut-off points as well. in ordinal regression, the assumption of the proportional odds test observes the various categories’ quality and resolves whether the assumption holds or not. suppose the assumption does not fit, the interpretations about the results will be inaccurate(erkan & yildiz, 2014). researchers examine the test assumption with support of the full likelihood ratio test that compares the fitted location model to a model with varying location parameters(laerd statistics, 2013). the results of these tests are discussed in the below sections. result & discussion in the survey pertaining to the efficacy of the demonetization and the policy rollout on demonetizing old currencies from common public perspectives, most of the respondents favorthe policy rollout on demonetizing old currencies by the government. the summary of the survey findings shows that respondents considered the decision asappropriate. concerning changes in the number of bank account holders’ pre and post-demonetization, the result is depicted in the following table. table 2. bank account holders bank account holder before demonetization no yes total frequency 65 185 250 percentage (26%) (74%) (100.0) bank account holder after demonetization no yes total frequency 15 235 250 percentage (6%) (94%) (100.0) source: spss output table 2 reveals that the numbers of bank account holders among the respondents’ pre and post-demonetization.where 185 respondents are 74% of the study respondents, have a bank account before the demonetization. likewise, the table shows that the number of bank account holders increased from 185 to 235 respondents, which is 94% of the study respondents. therefore, the results of table 02 indicate that demonetization increased the number of bank account holders in india. authors measure the common public’s opinions on the efficacy of the demonetization in controlling tax evasion, controlling black money, illegal investments, and regular business transactions. the following table 03 shows the views of the common public on the efficacy of demonetization. table 3. opinions of common public on demonetization demonetization helps controlling tax evasion sd d n a sa https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 8 frequency 22 38 75 84 31 percentage (8.8%) (15.2%) (30%) (33.6%) (12.4%) demonetisation helped control the investment of black money sd d n a sa frequency 16 28 66 80 60 percentage (6.4%) (11.2%) (26.4%) (32%) (24%) demonetizationadversely affected regular business transactions sd d n a sa frequency 21 23 47 125 34 percentage (8.4%) (9.2%) (18.8%) (50%) (13.6%) note: likert scale data tenets choice from 1-5, where 1 stands strongly disagree (sd), 2 stands for disagree (d), 3 stands for neutral (n), 4 stands for agree (a), and 5 stands for strongly agree (sa). the results depict that the ordinary public hasperceived that india’s demonetization policy was not effective in controlling tax evasion, illegal investments of black money. at the same time, 63.6% of the respondents agree and strongly agree that demonetization adversely affected india’s regular business transactions. in order to get a clear sign about the independent variable i.e. appropriateness of the demonetization decision by the government from the common man (general public) perspectives, researchers run ordinal regression analysis, the appropriateness of the government decision to demonetize the old currencies and introduce new currency, reflecting the insights and perceptions of common public as a response variable and the policy rollout on demonetizing old currencies measured via planning of money circulation at the time of demonetization, difficulties while purchasing goods and services, the timing of the demonetization, the time frame given to common public to demonetize their old currencies, lack of prior preparation, public awareness on objectives of the policy, waiting in lines to change the old coins, and the quality service rendered by the banks at the time of demonetization, represented in five-point likert scale as a covariates laterally with age and occupation-based categorical variable. table 4. test of ordinal regression assumptions panel a: test of multi-collinearity variables collinearity statistics money circula tion the time frame has given public awarene ss on objectiv es the right time to impleme nt demon lack of prior preparati on problems while purchasi ng goods waiti ng in lines quality services rendere d by banks tolerance 0.561 0.671 0.699 0.471 0.591 0.486 0.630 0.778 vif 1.781 1.622 1.431 2.122 1.693 2.062 1.587 1.285 panel b: test of parallel lines model -2 log likelihood chi-square df sig. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 9 null hypothesis 501.057 general 476.682b 24.375c 51 0.999 source: spss output the model diagnostic statistics results have been reported in table 04 to understand whether the ordinal regression model used in the study satisfies all pre-conditions/assumptions. a multi-collinearity test that checks forthe high degree of correlation between the explanatory variables specifies that the study’s model is free from multi-collinearity issues as the vif values areless than 10. tolerance values are greater than 0.10 for all the explanatory variables. the ordinal regression models used in the study are based on the fundamental assumption of proportional odds that highlights an identical effect is observed from each explanatory variable at each cumulative split of ordinal response variables(laerd statistics, 2013). theparallel line test is used to prove whether the model used in this study satisfies the proportional odds assumption (see table 04, panel b). the parallel lines test result shows an insignificant probability value at a 5 % level of significance. we failed to reject the test state’s null hypothesis that the location parameters (i.e., slop coefficients) are the same across response categories. this indicates that the model used here also satisfies the assumption of proportional odds. before discussing the ordinal regression estimates, the researchers verified the goodness of fit by comparing the baseline model with the model used. the significance of the (mccullagh & nelder, 1989) chi-square value depicts that the model used here indicates better prediction than the simple intercept-only (baseline) model, which is similar to making a guess based on the marginal probabilities for the outcome categories{citation}(elamir & sadeq, 2010). the following table, 04, shows a summary of model fitting. table 4. overall model fitting information model fitting information model -2 log likelihood chisquare df sig. intercept only 774.581 final 501.057 273.525 17 0.000 source: spss output after conducting the diagnostic check and model fit verification, the researchers further discuss the ordinal regression results. the following table, 05, reveals the estimates of ordinal regression parameters. table 5. estimates of ordinal regression parameters variables coefficient notation estimate std. error wald sig. odds ratio constant [sd] α1 3.296 0.909 13.142 0.000*** 27.005102 constant [d] α2 4.839 0.938 26.629 0.000*** 126.31409 https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 10 constant [n] α3 6.978 1.011 47.638 0.000*** 1073.2446 constant [a] α4 9.751 1.101 78.387 0.000*** 17163.848 money circulation δ 0.581 0.150 15.082 0.000*** 1.7875468 lack of prior preparation ζ -0.063 0.138 0.205 0.651 0.9392421 problem while purchasing goods η -0.380 0.145 6.826 0.009** 0.6840535 public awareness on objectives λ 0.080 0.139 0.329 0.566 1.0830595 time frame given б 0.330 0.128 6.680 0.010** 1.3907601 waiting in lines θ 0.089 0.146 0.372 0.542 1.0932785 quality services rendered գ -0.060 0.136 0.196 0.658 0.9417167 the right time to implement demonetization ч 1.512 0.181 70.007 0.000*** 4.5372563 age group a. [25-30] ß1 0.733 0.518 1.998 0.058* 2.0802892 b. [31-35] ß2 0.797 0.544 2.143 0.043* 2.2184108 c. [36-40] ß3 0.495 0.667 0.551 0.458 1.6404722 d. [41-45] ß4 -0.075 0.589 0.016 0.898 0.9273929 e. [46-50] ß5 0.391 0.722 0.294 0.588 1.4787684 f. [50 & above] ß6 0a occupation group [daily wage workers] ϒ1 0.251 0.396 0.403 0.526 1.2855481 [agriculturalists] ϒ2 0.043 0.554 0.006 0.938 1.043906 [shopkeepers] ϒ3 -0.576 0.383 2.262 0.133 0.5620558 [small business holders] ϒ4 -0.023 0.404 0.003 0.955 0.9773644 [others] ϒ5 0a source: spss output. note: *indicate values significant at 5% level ** indicate values significant at 1% level table 5 shows the results of the estimate of ordinal regression parameters, among the covariates used to capture the influence on the response variable, the variables relating to the planning of money circulation, difficulties while purchasing goods and services, the time frame of the demonetization by the government, and the time frame given to the common public to demonetize their old currencies are turned to be statistically significant. and the variables such as lack of prior preparation, public awareness on objectives of the policy, waiting in lines to change the old currencies, and the quality service rendered by the banks at the time of demonetization are not statistically significant. the variable that shows the planning of money circulation at the time of demonetization indicates that a unit increase in the value of the variable will increase odds in favor of the response on the appropriateness of the decision to demonetize the old currency and introduce the new money over the answer against the demonetization decision are more significant than 1.7875468, times. likewise, the odds of getting a response in favor of the decision to demonetize old currency are greater if respondents are in prefer, positive response relating to the reactions on difficulties while purchasing goods and services, the time frame of the demonetization by the government, and the time frame given to the common public to demonetize their old currencies as indicated by higher odds ratio relating to these variables. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 11 in the categorical variables agegroups, the results show that there is more possibility that respondents in the age group (25-30), (31-40) the youngster and middle-aged individuals are more likely in favor of positive response toward the decision to demonetize old currency and introduction new currency to the economy, compared to the veterans, the statistically significant values for the age group (25-30) and (31-40) reveals that the odds are firmly in favor of the decision is 2.0802892, and 2.2184108, times greater than the veterans as shows by cumulative odds ratio values. likewise, in the case of the occupational group, the result indicates that there is a possibility that the respondents in daily wage workers and agriculturalists are more likely in favor of the demonetization decision compare to the group’s shopkeepers, small business holders, and group others that represent the people from unorganized sectors. the daily wage workers’ statistical values indicate that the odds are firmly in favor of the demonetization decision is 1.2855481, and 1.043906 times greater than the other class of people, due to the cumulative odds ratio. findings & conclusion the study explores the efficacy of demonetization from india’s common public perspectives, the policy implemented by india’s government to fight against black money, drying the financial roots of terrorism, and direct the civilization towards digital transactions anda cashless economy. the study’s main purpose is to study if the policy implementation was effective, study the public’s opinions on policy reactions, and understand their hardships due to policy implementation. the descriptive statistics results suggest that the demonetization increased the numbers of bank account holders in india. there is not much impact of demonetization on controlling evasion of tax and illegal investments of black money, and the policy adversely affects regular business in the country. the ordinal regression findings reveal that the ordinary public, despite facing enormous challenges while purchasing goods and services at the time of demonetization, consider that demonetization implementation was a practical step in directing the civilization towards the digital transaction and cashless economy, the results obtained from the ordinal regression analysis also depicts that the government implemented the policy at the right time, the government well planned the money circulation at the time of demonetization, the time frame given to the public wassufficient enough to change their old notes. before demonetization, there was a proper system in place, and the general public has not faced any problems. the otherwise innocent common public was harassed and disturbed to their day-to-day transactions and withdrawn their complex and earned money in the name of controlling black money, terrorism, and fake currency circulation should not be punished to the common public. references beg, s., & joshi, n. 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(2018). india since demonetisation. ssrn electronic journal. https://doi.org/10.2139/ssrn.3151238 https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 14 sivathanu, b. (2019). adoption of digital payment systems in the era of demonetization in india: an empirical study. journal of science and technology policy management, 10(1), 143– 171. retrieved from https://doi.org/10.1108/jstpm-07-2017-0033 vij, d. d. (2018). demonetization: effects on indian economy. international research journal of business and managementirjbm, volume no-xi(issue-1), 11. zikmund, w. g. (2010). business research methods. south-western cengage learning. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) australian finance & banking review vol. 5, no. 1; 2021 issn 2576-1196 e-issn 2576-120x published by cribfb, usa 29 an analysis on the effects of coronavirus (covid-19) on the financial management of multinational corporations nurul mohammad zayed assistant professor & head department of real estate daffodil international university, dhaka, bangladesh e-mail: zayed.bba@daffodilvarsity.edu.bd k. m. anwarul islam associate professor department of business administration the millennium university, dhaka, bangladesh e-mail: ai419bankingdu@gmail.com shahiduzzaman khan shahi independent researcher department of real estate daffodil international university, dhaka, bangladesh e-mail: shahi27-334@diu.edu.bd md. sazidur rahman executive officer dutch-bangla bank limited, dhaka, bangladesh e-mail: sazid191017@gmail.com tahsin sharmila raisa lecturer department of business administration daffodil international university, dhaka, bangladesh e-mail: raisa.bba@diu.edu.bd abstract this paper develops a sensible framework to get a handle on the spatiotemporal plans of the covid-19 event, its real nature, and its implications to the financial management of mncs (multinational corporations). in the most straightforward structure, the construction of multinational corporations is included a parent organization that holds all licensed innovation rights, contract makers or undeniable makers which complete the creative work in the nations with low work costs, and the restricted or undeniable wholesalers that sell the completed merchandise in different business sectors and behaviors market explores in their nations of activity. the pandemic effect on financial movement contrasts as far as extent and force. this mailto:zayed.bba@daffodilvarsity.edu.bd mailto:ai419bankingdu@gmail.com mailto:shahi27-334@diu.edu.bd mailto:sazid191017@gmail.com mailto:raisa.bba@diu.edu.bd https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 30 has delivered unrivaled proportions of shortcomings. this paper tries to diagram the overall elements of worldwide financial management of mncs (multinational corporations) with country explicit dangers and primary dangers. fundamental data is accumulated from different online media, adroit journals, various kinds of examination papers, and other online sources, etc. the globalization of financial management of mncs (multinational corporations) is coordinated to the enormous extension of greatness and enhancement of monetary exchanges. at long last, all areas show and portray in detail this subject and give a few suggestions to conquer the present circumstance. keywords: coronavirus, covid-19, international, financial management, multinational corporations, economy, market. jel classification codes: f36, g32, f23. introduction the covid-19 episode has just started to influence how financial specialists carry on across economies, i.e., starting from the way of life and socialization to monetary exercises of individuals and firms. the financial effects of the new coronavirus ("covid-19"), which arose in wuhan, china in december 2019 and spread to the world in a brief time frame with the commitment of between reliance among nations, happen at an exceptional level contrasting with emergencies experienced previously. the international financial market is where budgetary wealth is traded among individuals (and between countries). it will, by and large, be viewed as a wide blueprint of rules and establishments where resources are exchanged between specialists in overabundance and managers in insufficiency and where affiliations set out the standards. also, found on this market is a wide scope of widespread trade. along these lines, this market is a pointer to the moneyrelated turn of events. as of now daily of covid affects the everyday issue. a multinational corporation (mnc) is an organization that works in its nation of origin, just as in different nations around the planet. it keeps a focal office situated in one country, which arranges the administration of all its different workplaces, like regulatory branches or manufacturing plants. in the easiest structure, the construction of worldwide undertakings is contained a parent organization that holds all protected innovation rights, contract makers or undeniable makers which do the creative work in the nations with low work costs, and the restricted or undeniable wholesalers that sell the completed merchandise in different business sectors and behaviors market explores in their nations of activity (contingent upon the conditions). the financial effects of the covid-19 happen at an exceptional level contrasting with the emergencies experienced previously. for some businesses, both the store network has been hindered and client request has contracted simultaneously. restructurings and changes in transfer pricing policies will be inescapable for the progression of organizations and exercises since the covid-19 emergency has caused an unanticipated worldwide danger acknowledgment that couldn't be anticipated when the intra-bunch legally binding connections were set up and the gathering activity model was planned. albeit the presence of conditions that require the requirement for strategy changes is frequently viewed as negative, it can likewise be transformed into a chance by worldwide endeavors. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 31 additionally, this reciprocal pressing factor contrasts from one industry to another, yet besides from one country to another and even from one area to another inside a similar country. removed the common wellbeing impacts of local or worldwide arising and endemic irresistible disease, occurrences spread more extensive financial results that win frequently not mulled over in harm's way or impact examinations. the far-reaching arrangement among financial specialists about the transnational money-related shut down because of the sickness pandemic is perceived to be the significant determinant of securities exchange instability that could supervise the biggest financial exchange impact in the 21st century. during the covid-19 scourge, the whole world is going through on an edge of affliction. as a result of this infection was massively destructive. every country has just embraced a technique to confine the stretch. a few nations have endured safety measures through open separation techniques, like shutting off scholarly associations, confining work, and limiting the portability of individuals. these arraignments have had a fast and significant impact on all economies around the world. the disintegration sought after because of reduced creation, the allowances in particular administrations that need close human association, the joblessness of workers because of this scourge, deterring numerous organizations incidentally and endlessly brought about a tremendous impact on the worldwide economy. the pandemics covid-19 period has annihilated the production network in the worldwide economy. this is going on with both the nearby and worldwide business sectors. worldwide market harmony is a distant memory. the essential utilization of organic market harmony is imbued into everyday activities whether somebody is a rancher, drug producer, scholarly, or a buyer. market interest is critical for the economy since they influence the expenses of buyer items and ventures inside an economy. as per the hypothesis of the market economy, the association among market interests adjusts a point, which is known as the harmony cost or market balance. market balance is something vital for the global economy. how a market works with the standard market interest measure, it consequently will in general accomplish the harmony in a point. due to the worldwide pandemic, supply is tremendously diminished where request generally stays as before. the prudent exchange of everywhere in the world is influenced generally. coronavirus impact has now expanded past reasoning ability. this epic pandemic caused the biggest misfortune in financial history. the worldwide financial exchange has fallen. there is a deficiency of merchandise, staple goods, medications, machines, and gadget pieces of clothing items, food sources, oil, and so on in creation or an inventory organization, the individuals who are working if one individual gets influenced can without much of a stretch influence other. from a business perspective, there is a connection between each country on the planet so the assets produced in one nation are provided to another nation dependent on interest. the creation of merchandise has normally declined because of the conclusion of plants, individuals' pay has gone down because of the conclusion of the working area, because of which the interest for the item has additionally diminished and the stockpile has halted. so unique organization halted their creation only hence and supply moreover. they need to think often about their specialist's wellbeing. worldwide security is likewise a major issue there. this contamination affected worker's lost compensation and all buyers cut back on spending and in like manner, the stockpile shock has incited a lot greater interest to paralyze. this paper recreates the impacts of (covid-19) on the interest and supply of the global economy and how the decreasing popularity for administrations occurred and the decrease in the inventory of items that occurred due to joblessness and different aftermaths. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 32 it is anyway too quick to even think about expecting the outcome of covid-19 on the financial management of mncs (multinational corporations). the world depends on a full measurable sign. it is hard to assess the results and the aftermaths of the pestilence as it circles and to explicitly ascertain what amount of time it will require countries to withdraw to normal monetary movement. literature review the covid-19 comes in to see close to the completion of december 2019 in china (chahrour, 2020). the covid-19 spread rapidly in wuhan. the specialists in wuhan made extreme walks and lock the city on january 23, 2020 (xiang, 2020). inside a large portion of a-month, instances of covid-19 were distinguished in a few distinct countries and soon it transformed into an around the world fear (spina, 2020). the world health organization (who) broadcasted the crown plague a pandemic (who, 2020a). as of march 29, the disease had spread to more than 177 countries and debased 722,435 patients, achieving 33,997 passings (johns hopkins university, 2020). watching critical flare-ups out-breaks in china, europe, iran, south korea, and the united states began to make starting strides (khachfe, 2020). who communicated that europe had become the new point of convergence of the pandemic on march 13 (who, 2020b). china took powerful action and winning concerning diminishing new cases. deplorably, this diminishing was not the circumstance in various bits of the world, including iran, italy, the us, and other european countries (remuzzi, 2020). to give a reaction to covid-19, unique nations have now presented travel limitations (both inside and outside) to forestall the stretch of the infection. general wellbeing organizations and government experts are taking assessments like social disconnecting, self-separation, or withdrawal (bedford, 2020). jim (2020) decided "associations encountering reduced benefits, more important working costs or pay difficulties because of covid-19". it has been conveyed that as the world is encountering the slump monetarily to revamp and recuperate the economy will be over the long haul because of the extraordinary enormous negative result of the covid-19 to the world economy. ruiz estrada (2020) investigated the chance and hugeness of a plague are appended to the financial elements of a comparable district. it is conceivable to expect that the result of wuhan covid can cause a broad financial disturbance. ye (2020) found that gauges that worked in the rearward in a sad economy don't work today if the radix of the matter isn't tended to. the capital market today is very different from years prior when financial backers expect the fundamental organization grade before making a variety to their portfolio. today in this existence where calculations are testing to discover how much the market can spill or rise. buheji (2020) examined the savagery of these contaminations transport individuals vacillates from light to perilous. mann (2020) said manufacturing will show a 'v' or 'u' shape and administrations, will experience an 'l' shape. amassing excess from assembling plant end represents a likely danger in the near term, by and by, creation will power to restock inventories once confines end and creation lines resuscitate. during the term of organizations, the race to the movement business, transportation organizations, and the family unit works out, generally, won't be recovered, and the indisputable set back of overall advancement will also trouble the l-formed vent of interest for these nontrade able organizations. furman (2020) expressed the impact of covid-19 is another stun for the economy, which has never shown up before. gopinath (2020) called attention to that the financial effect of this infection is expanding altogether harshly and as of now obvious in numerous nations. china is the case of that sort of economy where from the initial two months in 2020 creation and assembling area exercises were strongly declined. mauro (2020) cautioned https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 33 that the pandemic could effectively affect agricultural nations. ramelli (2020) demanded, "these early outcomes propose that the market decently fast started to react to worries about the conceivable financial results of the novel covid". baret et al. (2020) guaranteed that the covid-19 has huge outcomes on the normal financial business areas. this covid-19 has impacted the inventory and impacts the overall economy. there are constraints on making an excursion from one country to the next. during voyaging, amounts of cases are perceived as positive, especially taking worldwide visits. all legislatures, wellbeing affiliations, and various experts are perseveringly glancing in on perceiving the cases impacted by the covid. clinical benefits specialists face various inconveniences in staying aware of the idea of clinical benefits (chinazzi, 2020). hoque et al. (2020) depicted that the reinforcing of the coronavirus is being thought to cause a drawn-out impact on the movement business of the country china by using assistant data. antonakakis et al. (2013) saw time-fluctuating associations among monetary trade returns, engaging precariousness and approach weakness. their revelations suggested that the connections are doubtlessly time-fluctuating and oil demand dazes and the us decline captivating. mckibbin et al. (2020) showed that an included erupt can essentially influence the overall economy in the short run. chang et al. (2020) demanded that covid-19 has adjusted the world endlessness and has drastically the worldwide travel, the travel industry, and accommodation organizations, which are profoundly powerless to pivotal stuns like covid-19. it is vital to investigate how these indispensable businesses will recover and proceed with feasibility in a cutting-edge world pronouncement after covid-19. baret (2020a) battled that the covid-19 has significant outcomes on the regular monetary business sectors as recently the world saw the breakdown of offers, oil, capital, and bonds all through the world. on account of the assorted macroeconomic stuns, bank borrowers' people and firms face a high danger of default (vidovic, 2020). notwithstanding default hazard, banks may likewise confront a liquidity emergency as numerous contributors may decide to pull out their investment funds to help their living and wellbeing costs (baret, 2020b). in the pandemic, pay openings for individuals and partnerships become progressively restricted, which may constrain them to gobble up their investment funds. especially, individuals losing positions will frantically attempt to get by on their reserve funds. this, whenever preceded for long, will cause a liquidity deficiency and cutoff the loaning limit of banks (cheney et al., 2020). the financial area may see a shoot-up in default danger and rates due to diminished earnings and money inflows to their borrowers because of the monetary stoppage and constrained closure. the emergency will be more awful for borrowers depending on fares to the worldwide market, as the world economy battles to endure the pandemic. these impacts will be extreme additionally for private companies whose solitary help is doing everyday business and creating sufficient working money inflows to endure (dua et al., 2020). because of financial stoppage locally and worldwide, interest for credits will droop and it has just been going on in numerous economies. as firms limit their activity and creation, interest for both short-and long-haul financing decays considerably, which has no chance of bounce back until the monetary itself recuperate (ryan et al., 2020)? barua (2020) studied that the pandemic could influence global connections by influencing the current and the forthcoming financial projects under the public authority to government (g2g) collaboration especially among china and different economies. because of the flare-ups, china-upheld public undertakings under-speculation or help structures have come to stop as materials and venture staff can't go to and for bringing about postponements or abrogation of g2g help or venture programs as china and their accomplice nations. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 34 objectives the significant goal of this paper is to find the effect of the covid-19 on the financial management of mncs (multinational corporations). the specific targets are to locate the current point of view on the world economy for the explanation of covid-19, covid-19 repercussions for the world budgetary market, and the world market breakdown little by little and colossal moves in the stock organization. recognizing the components and factors, which are identified with the demand and supply of the international economy to the pandemic circumstance? discover the gathering and situational impacts that influence the financial management of mncs (multinational corporations). deciding the various factors, which influence the financial management of mncs (multinational corporations). methodology the methodology of this study is mainly qualitative. the authors adopted a systematic literature review from recent distributions. the wellsprings of data are gathered from various types of writing, recent articles, reports which depend on the predominant pandemic circumstance. this structure is put together eventual outcomes of covid concerning the financial management of mncs (multinational corporations). for this evaluation, in any case, the optional data was endeavored circumspectly before managing them. results & discussions unido's information showed a steady decrease in underway development, demonstrating a by and large financial lull as of now before the episode of the covid-19 emergency. assembling yield development fell underneath the milestone of 1 percent and stayed at 0.7 percent in the final quarter of 2019 (figure 01). figure 1. global gdp growth, 1995–2020 source: unctad calculations based on imf, weo, october 2019 https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 35 in the final quarter of 2019, just three ventures enrolled a positive year-over-year development rate on the whole nation gatherings, specifically essential medical items, drinks, and food items. while these three ventures address fundamental essential buyer merchandise and are probably going to keep on performing above and beyond the coming months, other assembling enterprises are relied upon to endure an extreme blow because of the covid episode and the subsequent financial ramifications. thus, world gdp development can be relied upon to decrease in the coming months. on the intriguing side, a blend of reduced compensation and fear of contamination will achieve lower private spending. but a part of these effects might be adjusted by extended government spending; the covid-19 stagger's net interest sway is needed to be negative in the short run. at last, extended peril shirking and a flight-to-liquidity notwithstanding weakness achieved by the covid-19 paralyze, the pressing factor of the financial market will weigh energetically on the overall economy. further fluctuations are ordinary in the new exchange market. all around, projections suggest that inflows of external private cash to oda-qualified countries in 2020 could plunge by usd 700 billion stood out from 2019 levels (figure 02). with all wellsprings of external private records falling quickly, this presents an extraordinary squeezing element and financing void for making economies, outperforming the post-2008 global financial crisis experience by 60% and moving toward 35% of the 2018 level of outside cash. figure 2 (a). the overall covid-19 impact on external private finance in developing economies https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 36 figure 2 (b). the overall covid-19 impact on external private finance in developing economies source: imf balance of payments (imf, 2020) and national central bank data. world bank world development indicators (2020). in the steady times of the economy, primary changes that are put on the table pull in more consideration and are examined by the expense specialists. be that as it may, uncommon periods where vacillations and consistency are negligible, for example, the covid-19 period, are reasonable for creating strong reasoning for perspective changes. also, it would be sensible currently to sell out substantial and elusive resources which have been intended to be moved between related organizations as market esteems would be lower if exists than it is in the steady time frames. conclusion and recommendations notwithstanding, as covid-19 showed its effects, the principal issue is advanced from how the benefit is distributed among bunch organizations to the issue of danger acknowledgment and how the misfortune ought to be apportioned. even though industrial facilities are shut and merchants can't sell because of the decreasing interest and store network disturbance, they continue bearing the inactive limit and working costs which are unavoidable. as it is known, the income that the organizations in the gathering ought to acquire is dictated by considering the capacities played out, the dangers attempted and the resources possessed. notwithstanding, for the current situation, there is normally no income to be ascribed to any recipient. as usual, rebuilding and changes in exchange estimating approaches will be inescapable for the progression of organizations and exercises since the covid-19 emergency caused an https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 37 unanticipated worldwide danger acknowledgment which couldn't be anticipated when the intrabunch authoritative connections were set up and the gathering activity model was planned. before settling on how many offers the organizations in the plan of action ought to get from benefit or misfortune, the matter of who controls the dangers ought to be looked into. on the off chance that the plan of action of the worldwide undertakings contains generally safe level wholesalers or agreement makers which don't affect the dynamic system, the applicable organizations are relied upon to have a standard return dictated by one or the other expense in addition to or value-based net edge technique. because of their low degree of danger, it can't be considered typical that those organizations get an offer from neither high benefit nor flighty misfortunes of the gathering. a few issues, for example, breaks in the inventory network, the reducing interest, and the end of the exercises brought about by covid-19 wellbeing emergency would lead worldwide endeavors to survey, change and somewhat or end a portion of their exchange estimating arrangements and plans of action. the oecd is relied upon to distribute rules, as it did in the effect of the covid-19 emergency on assessment deals, on how misfortune brought about by worldwide danger acknowledgment ought to be divided between the organizations inside a gathering, the impacts of conceivable restructurings and effect of financing instruments on a manageable distance nature of the intercompany exchanges. albeit the presence of conditions that require the requirement for strategy changes is frequently considered as negative, it can likewise be transformed into a chance by global endeavors. references antonakakis, n. c. 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(2020). a bibliometric analysis of covid-19 research activity: a call for increased output. cureus, 6(2), 249-261. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 38 chang, c. l. (2020). alternative global health security indexes for risk analysis of covid-19. international journal of environmental research and public health, 17(9), 3161-3172. cheney, j. (2020). covid-19 impact on bank liquidity risk management and response. deloitte & touche llp, 6(8), 72-88. retrieved december 1, 2020, from https://www.deloitte.com/content/dam/deloitte/us/documents/regulatory/covidregulators-response.pdf chinazzi m, d. j. (2020). the effect of travel restrictions on the spread of the 2019 novel coronavirus (covid-19) outbreak. science. dua, a. j. 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(2020). 8 real and financial lenses to assess the economic consequences of covid-19. economics in the time of covid-19, 81. mauro, r. b. (2020). economics in the time of covid-19. voxeu ebook. mckibbin, w. j. (2020, march 2). the global macroeconomic impacts of covid-19: seven scenarios. cama working paper no. 19/2020, 3(1), 42-53. retrieved from https://ssrn.com/abstract=3547729 or http://dx.doi.org/10.2139/ssrn.3547729 ramelli, s. (2020). feverish stock price reactions to covid-19. remuzzi, a. (2020). covid-19 and italy: what next? lancet, 5(3), 78-88. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 39 ruiz estrada, m. a. (2020). the application of the 2019-ncov global economic impact simulator (the 2019-ncov-gei-simulator) in china. ssrn electronic journal, 4(2), 98108. ryan, d. b. (2020). covid-19 and the banking and capital markets industry. pwc, 5(3), 48-57. retrieved december 1, 2020, from https://www.pwc.com/us/en/library/covid19/coronavirus-banking-and-capital-markets.html s. baret, a. c. (2020). covid 19 potential implications for the banking and capital markets sector. maintaining business and operational resilience. deloitte insights, 96108. spina, s. (2020). the response of milan's emergency medical system to the covid-19 outbreak in italy. lancet, 2(4), 49-50. vidovic, l. (2020). the outlook for corporate credit risk: covid-19 pandemic and macroeconomic. s&p global, 6(7), 58-62. who. (2020a, march 25). coronavirus disease (covid-2019) situation reports. geneva: world health organization. who. (2020b, march 20). coronavirus disease (covid-19) pandemic. xiang. (2020). timely mental health care for the 2019 novel coronavirus outbreak is urgently needed. lancet psychiatry, 5(1), 28-29. ye, z. (2020). covid-19 and the equity market. a march 2020 tale. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) australian finance & banking review vol. 5, no. 1; 2021 issn 2576-1196 e-issn 2576-120x published by cribfb, usa 15 the determinance of the financial behavior among graduate students in indonesia dr. nyoto lecturer faculty of business institut bisnis dan teknologi pelita indonesia, indonesia e-mail: nyoto@lecturer.pelitaindonesia.ac.id nicholas renaldo lecturer faculty of business institut bisnis dan teknologi pelita indonesia, indonesia e-mail: nicholasrenaldo@lecturer.pelitaindonesia.ac.id dr. gunasegaran karuppannan associate professor faculty of education and social science university of selangor, shah alam, malaysia e-mail: drguna@unisel.edu.my dr. abul bashar bhuiyan associate professor faculty of business and accountancy university of selangor, shah alam, malaysia e-mail: bashariuk@gmail.com dr. mokana muthu kumarasamy lecturer faculty of business and accountancy university of selangor, shah alam, malaysia e-mail: mokana@unisel.edu.my abstract the lifestyle of adolescents who migrate to work and college will largely determine their future. concerns about economic conditions can cause problems with their behavior. this research has aimed to explore the most influential factors on financial behavior among graduate students in indonesia. the primary data collected by distributing questionnaires using a likert scale. there are 239 samples have collected based on the combination of purposive and convenience sampling methods. the study used descriptive statistical techniques and path analysis techniques for data analysis. based on path analysis results, study findings indicate that there is a significant influence of financial knowledge on financial self-efficacy; financial self-efficacy and financial knowledge on financial behavior; financial attitude and financial self-efficacy on mailto:nyoto@lecturer.pelitaindonesia.ac.id mailto:nicholasrenaldo@lecturer.pelitaindonesia.ac.id mailto:drguna@unisel.edu.my mailto:bashariuk@gmail.com mailto:mokana@unisel.edu.my https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 16 financial behavior but there is no significant influence of financial knowledge on financial behavior. the study results also showed that adolescent habits are still not good but can be improved through education such as character education and achievement of a better motivation to deal with economic problems. the study recommended that the good habits can be passed on to friends of his age, especially adolescents so they can have a good future. keywords: financial behavior, self-efficacy, knowledge, attitude. jel classification codes: f36, g02, a23. introduction the development of advanced technology in 2019 will certainly affect the lifestyle of many people. everything is done through technology such as online shopping, online transactions, even to buy food also through smartphone applications. of course, this will be more familiar with adolescents, especially adolescents who migrate to the city. the use of the latest technological devices directly affects the cost and lifestyle of a person. the cost of living if done properly is still not a problem but the lifestyle of a new adolescent is dominated to gather with friends, online shopping, holiday after receiving bonuses, or year-end leave. the use of the latest technology certainly costs a lot. the pre-survey results showed that around 34% of institut bisnisdan teknologi pelita indonesia (ibtpi) students showed bad habits. for those who have worked more than 1 year, a regional minimum wage increase of around 8% per year should be a good thing but because the adolescent's full prestige style can result in their downfall in financial prisons. adolescents aged 18-25 years can be said as a stage towards maturity. if they fail financially in this age range, it will cause a domino effect going forward. important skills for understanding money include controlling expenses, saving, and investing. it really depends on how well they follow their financial goals. the matter that a lot of people will face, especially younger individuals, is the lack of monetary knowledge that results in poor financial management(susan, 2018). theory of planned behavior (tpb), related to rational actions based on the assumption that humans act logically, considering all available information, directly and indirectly, calculates the impact of the actions they take. according to the theory of rational action, the individual will take action whenever he sees that the action is positive and every time the individual believes that someone else wants him to do such an action (arifin, 2017). research from herawati et al., 2018 showed a significant positive effect on financial self-efficacy on financial behavior (herawati, candiasa, yadnyana, & suharsono, 2018). research from (ismail et al., 2017)showed a positive and not significant effect whereas faique et al., 2017 showed significant negative results (faique et al., 2017). the effect of financial attitude on financial behavior can be seen in research from (susan, 2018)which showed significant positive results. these results contradict the study from (falahati, sabri, & paim, 2012) which gives significant negative results and with positive and insignificant results (ismail et al., 2017). the effect of financial knowledge on financial behavior in research from arifin, 2018 showed significant positive results (arifin, 2018. while yong, yew, & wee, 2018 on the same variable gives positive and insignificant results (yong, yew, & wee, 2018). based on the description of phenomena, existing research gaps, and theoretical gaps, it will be interesting research to discuss more the financial behavior of ibtpi students in 2019. combined with this research, it can increase their awareness that financial maturity will be very beneficial for this generation to face the future. thus, this research has aimed to explore the most https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 17 influential factors on the financial behavior in among graduate students in indonesia. it is hoped that the results of this study can be beneficial for the development of education both theoretically and practically. the theoretical benefit is that this research will be a scientific development in the field of personal financial management and human resource management. this research is also useful as reference material for academics and also this research can subsequently be a reference for future researchers. literature review financial behavior financial behavior is human behavior related to financial management. financial behavior is a combination of cash flow management, credit management, savings, and investment. financial behavior is related to personal responsibility in financial management. effective financial management such as setting a budget and assessing debt purchases and retirement needs in a reasonable time. financial behavior is the attitude and behavior of someone in managing finances. expenditures and savings behavior are used as benchmarks for research. financial behavior is related to the way people treat, manage, and use available financial resources. financial behavior can be measured in several ways: (1) expenses, (2) payment of bills, (3) financial planning, (4) providing money for yourself and family, (5) savings (arifin, 2018). theory of planned behavior (tpb), which is related to rational actions on the assumption that humans take logical actions and consider all available information to directly or indirectly calculate the impact of their actions. in addition, this theory of planned behavior adds a third factor, control of the trust (arifin, 2017). the theory of planned behavior explains that individual behavior arises because of intention. behavioral intentions are determined by three factors, namely: (1) behavioral beliefs, which are individual beliefs about the results to be obtained, and evaluation of results, (2) normative beliefs, are motivations for achieving expectations for normative expectations together with others, and (3) control of belief, namely the existence of things that support or hinder the behavior that arises, and how strong the support or resistance is (arifin, 2018). according to the theory of rational behavior, every time someone sees that the behavior is positive, and every time the individual thinks that someone wants it, he will act. a person's intention to do something or not to do something is influenced by two basic factors, namely attitudes derived from behavioral beliefs and subjective norms derived from normative beliefs (arifin, 2017). the literature shows that financial behavior and financial management can influence the financial situation. personal financial practices such as cash management, credit management, budgeting, financial planning, and general fund management have the greatest impact on personal financial satisfaction (sabri, paim, falahati, & masud, 2013). financial or money attitude individual attitudes towards money can determine their personality and management style. attitude is a subjective tendency to do something and be expressed which will be demonstrated through the evaluation of favorable or unfavorable objects (susan, 2018). in today's materialist environment, money is not limited to the medium of exchange, but also the means to achieve happiness and prosperity. money has four iconic values, namely status, respect, freedom, and luxury. materialistic or obsessed people with money are often more satisfied with their financial situation because of their ability to satisfy their material desires. the results showed that the https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 18 perception of individuals who have welfare is determined by their life aspirations (sabri & zakaria, 2015). financial attitude plays an important role in determining the success or failure of one's financial behavior. financial attitudes are defined as psychological tendencies and are most easily expressed by showing likes or dislikes. financial attitudes that state the level of intelligence that agrees or disagrees can help individuals manage their finances. the higher the financial attitude of a person, the higher the awareness to be responsible for financial use, so that it will have a positive impact on financial behavior (arifin, 2018). financial attitude is defined as a person's state of mind, opinion, and judgment about finance. based on the theory of social learning there is a three-way relationship that locks one another, namely behavior, environment, and events that affect perceptions and actions. events in influencing perceptions and actions in this study are financial attitudes and financial management behaviors. financial management behavior can be started properly and correctly by applying good and correct financial attitudes (ameliawati & setiyani, 2018). financial knowledge there are two main branches of financial knowledge, namely the ability of respondents to use and apply general financial knowledge or special financial knowledge as a synonym for financial literacy. measurement of financial literacy mainly involves four aspects, namely personal financial knowledge, general financial literacy, investment, and financial and tax planning. there is a scale of knowledge that includes skills and knowledge related to deposits and debits, insurance and investment projects, and financial information. another way to measure financial knowledge is through self-assessment of financial knowledge. in addition, financial management knowledge is used as an evaluation instrument (susan, 2018). to develop financial behavior, a person must have financial knowledge. financial knowledge is the key to understanding finances and ideas needed that are useful for society. financial knowledge in question is banking and savings, insurance, the use of credit, tax and investment. every individual has financial knowledge depending on how deep the knowledge is possessed. financial knowledge can be measured in several ways, such as (1) interest rates, financial costs and credit, (2) credit interest rates and credit data, (3) financial management, (4) investment, (5) credit reports (arifin, 2018).financial knowledge is the ability to understand, analyze, and manage finances to make correct financial decisions to avoid financial problems. to have financial knowledge, one must develop financial skills and learn to use financial tools, such as preparing a budget, choosing an investment, and choosing an insurance plan. financial knowledge can be obtained from schools, seminars, training, and non-formal education. financial self-efficacy self-efficacy can be understood as an individual's belief about his ability to organize and carry out a series of actions that are deemed necessary to achieve something desired. in relation to financial behavior, self-efficacy can be defined as a belief in a person's ability to change financial behavior for the better. self-efficacy is a key component in bandura's social cognitive theory that characterizes a person's confidence in his ability to succeed in performing tasks. individual confidence in his own ability can help in determining the expected results because individuals have confidence in anticipating all actions to achieve the desired goals. someone who is confident sees difficult tasks as a challenge to be met rather than as a threat that must be avoided. he has a stronger interest and deep involvement in an activity carried out, writes challenging https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 19 goals, and has a strong commitment to achieving the desired goals. financial independence helps to act and change financial behavior for the better (herawati et al., 2018). financial self-efficacy is defined as one's belief that someone is capable of certain behaviors. self-efficacy is proportional to perceived personal abilities. self-efficacy affects the challenges made, how much effort must be spent, how long to survive in the face of obstacles and failures, and whether the failure is motivating or discouraging. thus, a person's sense of ability to engage in responsible financial behavior can also contribute to the individual's performance of that behavior (serido, shim, & tang, 2013). based on (faique et al., 2017), individuals who have high self-efficacy to carry out certain activities are more likely to try to do those activities and to develop a positive attitude towards them. conversely, if individuals have low self-efficacy to do some activities, they tend to try to do those activities and they develop a negative attitude towards these actions. research framework to explain the influence of variables, a research framework can be formed as follows. figure 1. financial behavior research framework source: self, 2020 method place and time of research this research was conducted in the city of pekanbaru and carried out in 2019 for the distribution of questionnaires and data processing in 2020. types of research this type of research is quantitative research with an objective descriptive approach using survey methods. surveys are systems for gathering information from or about people to describe, compare, or explain their knowledge, attitudes, and behavior (sekaran & bougie, 2016). this research will look at factors that can influence financial behavior. this research is a crosssectional study. h3 h5 h1 h6 h2 h4 financial knowledge financial self-efficacy financial attitude financial behavior https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 20 research variable exogenous variables are variables that are not dependent on or predicted by other latent variables or indicators. the exogenous variable in this study is financial knowledge. while the endogenous variable is a variable predicted by other latent variables or indicators (weston & gore, 2006). endogenous variables in this study are financial self-efficacy, financial attitude, and financial behavior. methods of data collection and sampling research techniques using surveys with a questionnaire instrument using a likert scale. the estimated population in this study (adolescents aged 18-25 years) was ± 800,000 people. klein recommends a minimum of 10 cases for each estimated parameter (streiner, 2005). from the 4 variables, there are 20 parameters, so a minimum sample of 20 x 10 = 200 samples is needed. from the 263 questionnaires distributed, a sample of 239 respondents could be used, with a combination of purposive sampling techniques (criteria for students of the institut bisnisdan teknologi pelita indonesia at least in second semester) and convenience sampling. research instruments the instrument was given to respondents using the likert scale 5-axis likert scale technique to measure the research variables. respondents will choose answers from positive statements with 5 alternative choices with the following scores: (1) strongly disagree; (2) disagree; (3) not agree; (4) agree; (5) strongly agree. questionnaire indicator indicators of each variable need to be elaborated to find out the indicators forming latent variables. indicators of each variable can be seen in table 1. table 1. research variable indicators attribute indicator reference financial attitude fa1 i compare credit options when repayments (potrich, vieira, & kirch, 2015) fa2 i invest regularly (potrich et al., 2015) fa3 i am responsible for my financial well-being (susan, 2018) fa4 i asked if i could get the same item at a lower price after buying (ali, rahman, & bakar, 2013) fa5 i imagine how to treat money (ali et al., 2013) financial behavior fb1 i have a reserve fund (potrich et al., 2015) fb2 i analyze finances before making a large purchase fb3 i save money every month for future needs (potrich, vieira, & mendes-da-silva, 2016) fb4 i made a plan to achieve financial (susan, 2018) https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 21 attribute indicator reference goals fb5 i buy bonds, stocks or mutual funds (mien & thao, 2015) financial knowledge fk1 i understand interest rates, financial costs, and credit terms (susan, 2018) fk2 i understand investment returns and risks fk3 i understand how to minimize risk in investments fk4 purchasing power decreases when inflation increases (ali et al., 2013) fk5 i understand financial concepts such as money management, investment, and budgeting (kumar, watung, n, & luinata, 2017) financial self-efficacy fs1 i can always overcome difficult problems if i try hard (lown, 2011) fs2 i stick to spending plans when unexpected expenses arise fs3 i am challenged to make progress towards financial goals fs4 i can find a way to get what i want (schwarzer & jerusalem, 1995) fs5 i feel confident in my ability to manage my own finances (serido et al., 2013) source: summary of various journals, 2020 data analysis technique descriptive analysis descriptive analysis in this study contains a discussion of the characteristics of respondents related to respondent responses. first, the analysis of respondents' characteristics consisting of age, gender, marital status, employment, homeownership status, ethnicity, religion, income, placement of funds, and primary and secondary financial socialization agents. the analysis will be done using mode. second, the analysis of respondents 'responses which contained a discussion of the respondents' responses related to the characteristics of respondents using the anova method (hafni, renaldo, chandra, & thaief, 2020; renaldo, sudarno, & hutahuruk, 2020). questionnaire eligibility test before conducting the influence test, the primary data preliminary test is performed. validity explains how well the data collected covers the actual area of investigation. validity basically means measuring what is meant to be measured. items loaded (loading factor) above 0.40, which is the minimum value suggested in the study are considered for further analysis. the second test is reliability which involves the extent to which the measurement of a phenomenon provides https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 22 stable and consistent results. reliability is also related to repetition. for example, a scale or test is said to be reliable if repeated measurements made by it under constant conditions will give the same results. the most commonly used measure of internal consistency is the cronbach’s alpha coefficient. it is recommended that reliability must be equal to or above 0.60 (taherdoost, 2016). assumptions of path analysis because the path analysis is an extension of multiple linear regression, many of the same assumptions apply to these two techniques. first, the relationship between variables must be linear. second, there should be no interaction between variables. third, endogenous variables must be continuous and normally distributed, with coefficients of skewness and kurtosis below 1. fourth, it is assumed that the covariance between the terms disturbances are zero (equivalent to assuming an error does not correlate between predictor variables in the regression), even though the analysis variant a more advanced path can deal with violations of this assumption. ultimately, as mentioned earlier, path analysis is quite sensitive to the model specifications including variables that are not relevant, or more seriously, eliminating those that are relevant, can drastically affect the results (streiner, 2005). results descriptive statistics the age of the most respondents is 20 years with a total of 36% and followed by the age of 19 years with the number of respondents 32%. the number of male respondents was 59% and 41% female. unmarried respondents were 96%. as many as 57% of respondents have worked full time and 14% of respondents have been self-employed followed by 12% who work part-time with the record respondents still come from among the students. ownership of houses inhabited by respondents as much as 66% owned by parents and 24% are still renting. as many as 75% of respondents are chinese and 11% are batak tribes. the majority of religious respondents were buddhist 67% and 17% were protestant christians. the length of work of respondents is mostly under 5 years. the income of respondents is 92% under rp. 5,000,000. as many as 38% of respondents learn financially from primary socialization agents (31% parents) and the rest from secondary agents (schools by 27%). to put down funds as much as 67% of respondents prefer to place funds in savings and 16% more in gold. from the descriptive analysis there is an assumption that ethnicity influences behavior patterns. in this study, chinese adolescents showed behavior in a larger number pattern for the activity of saving some of their money in the bank. analysis of answers to respondent characteristics the financial self-efficacy variable has different respondents' responses on ethnicity, religion, income, and secondary socialization agents. respondents from other ethnic groups and minang tribe groups gave higher scores than the nias tribe group and respondents who did not provide answers. hindu and protestant christians respondents gave a higher score than confucianism. respondents whose income is above 10 million rupiahs give a higher score than those whose income is 5 to 10 million rupiah. respondents who learn financially from print media score higher than respondents who do not have secondary agents. the indicator "i am difficult to stick to the expenditure plan when unexpected expenses arise" has a different response at the age where respondents aged 24-25 years and respondents who did not give a higher score than respondents aged 18-19 years. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 23 the financial attitude variable has different respondents' responses on marital status, ethnicity, and income. unmarried respondents score higher than those who are separated. respondents from other ethnic groups and batak ethnic groups gave higher scores than nias people. respondents whose income is above 10 million give a higher score than those whose income is 5 to 10 million rupiah and respondents who do not provide answers. the indicator "i compare credit options when repayments" has different responses of respondents to primary socialization agents where respondents who learn financially from siblings give a higher score than those who do not have primary socialization agents. this gives the meaning that ethnicity contributes to the pattern of financial attitude so that this research will be even more interesting when exploring the social behavior of certain circles of society. the financial knowledge variable has different respondents' responses to gender. male respondents give a higher score than women. especially on the indicator "i understand how to minimize risk in investment". psychologically, men are riskier than women. men are born as if they are responsible for making "lots of money" so that men are considered as a source of energy earners. whereas women are only considered as financial managers rather than what is produced by men. financial behavior variables in general do not have differences in respondent responses. but on the indicator "i buy bonds, stocks, or mutual funds", respondents who like to put funds in securities give a higher score than those who put funds on digital assets. this means that men are more interested in physical than digital assets. table 2. results of the questionnaire eligibility test indicator pearson correlation cronbach's alpha indicator pearson correlation cronbach's alpha fse1 0,797*** 0,803 fk1 0,710*** 0,803 fse2 0,645*** fk2 0,845*** fse3 0,790*** fk3 0,835*** fse4 0,777*** fk4 0,646*** fse5 0,739*** fk5 0,708*** fa1 0,674*** 0,625 fb1 0,746*** 0,715 fa2 0,192*** fb2 0,772*** fa3 0,718*** fb3 0,792*** fa4 0,663*** fb4 0,807*** fa5 0,769*** fb5 0,246*** *** significant at 1% source: processed data, 2020 based on table 2, validity testing uses pearson correlation which shows significant results at 1% for all indicators. whereas for reliability testing with the lowest cronbach's alpha 0.625 meets the requirements above 0.6. the next stage of analysis is path analysis. table 3. testing results of path analysis partial test estimate s.e. c.r. p direct effect indirect effect squared multiple correlations fse <--fk 0,257 0,057 4,493 *** 0,280 0,000 0,078 https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 24 partial test estimate s.e. c.r. p direct effect indirect effect squared multiple correlations fa <--fse 0,417 0,062 6,732 *** 0,393 0,000 0,253 fa <--fk 0,218 0,057 3,822 *** 0,223 0,110 fb <--fa 0,485 0,062 7,762 *** 0,472 0,000 0,343 fb <--fse 0,172 0,065 2,633 0,008 0,157 0,185 fb <--fk 0,061 0,057 1,077 0,282 0,061 0,201 source: processed data, 2020 squared multiple correlations shows how much influence exogenous variables have on endogenous variables. financial knowledge gives a 7.8% influence on financial self-efficacy. financial self-efficacy and financial knowledge influence 25.3% of financial attitude. financial attitude, financial self-efficacy, and financial knowledge influence 34.3% of financial behavior. figure 2. path analysis results source: processed data, 2020 direct and indirect effects path analysis can analyze the direct and indirect effects between variables. the amount of direct and indirect influence can be seen in table 3 and the direction can be seen in figure 2. the direct effect of financial knowledge on financial attitude (0.223) is greater than the indirect effect of financial knowledge on financial attitude through financial self-efficacy (0.110), then the direct influence that most influences which mean financial knowledge which will improve financial attitude. the direct influence of financial knowledge on financial behavior (0.061) is smaller than the indirect effect (0.201), then the most influential is the indirect effect which means through good financial knowledge, financial self-efficacy, and financial attitude will improve financial behavior. the direct effect of financial self-efficacy on financial behavior r 2 = 0,078 r 2 = 0,253 h3 0,393*** h5 0,28*** 0,157*** h1 h6 0,223*** h2 0,061 r 2 = 0,343 *** significant at 1% hypothesis rejectedhypothesis accepted h4 0,472*** financial knowledge financial self-efficacy financial attitude financial behavior https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 25 (0.157) is smaller than the indirect effect of financial self-efficacy on financial behavior through financial attitude (0.185), then the most influential indirect effect which means a good financial self-efficacy will increase financial behavior. discussion the positive influences of financial knowledge on financial self-efficacy are significant because, with adequate knowledge, a person will have the desire to develop into a better person. the result of the study is in line with (serido et al., 2013). understanding financial concepts such as money management, investment, and budgeting will enable a person to overcome difficult financial problems if he/she tries hard. the positive influences of financial knowledge on financial attitude is significant because good financial knowledge will make someone more preventive. this are in line with research from (susan, 2018; yong et al., 2018). adolescent understanding of financial concepts will positively determine their financial attitudes. accountability for financial well-being shows good results. adolescents like to try new things and form their personalities who like challenges. the positive influences of financial self-efficacy on financial attitude is significant because individuals have a high self-efficacy to do some activities, they tend to try to do this activity and they develop a positive attitude towards this action. the result of this study is in line with research from (faique et al., 2017). individuals will be more mature and will not think too much about financial problems such as fighting with parents or family about finances. the indicator "i can always overcome difficult problems if i try hard" shows an independent personality that is very consistent and strengthens the character of individuals plus the indicator "i feel confident in my ability to manage my own finances" shows high confidence that will encourage someone's independence .the positive influences of financial knowledge on financial behavior is not significant because adolescents still do not have much experience in finance so they cannot behave properly. this are in line with research from (yong et al., 2018)on indian ethnic and (joo & grable, 2004) but not in line with research from (arifin, 2017, 2018; ismail et al., 2017; mien & thao, 2015) and (yong et al., 2018) on other ethnics. it is only natural if their knowledge is still lacking in financial analysis. lack of knowledge about financial knowledge will lead to bankruptcy, credit problems, low savings rates, and the pleasure of impulsive purchases. the positive influences of financial self-efficacy on financial behavior are significant because good financial efficacy will be in line with adolescent financial habits. the results of this study are in line with research from (faique et al., 2017; herawati et al., 2018; ismail et al., 2017; serido et al., 2013). adolescents who are independent and dare to go outside the city/country to study or work. the lifestyle of saving for the necessities of living outside will make them more careful when shopping and will change their behavior slowly. the positive influences of financial attitude on financial behavior is significant because a person's attitude towards finances will affect the person's habits. the results of the study are in line with (ameliawati & setiyani, 2018; arifin, 2018; faique et al., 2017; mien & thao, 2015; serido et al., 2013; susan, 2018; yap, komalasari, & hadiansah, 2016; yong et al., 2018)and not in line with research (falahati et al., 2012; ismail et al., 2017). adolescents who mostly wander allocate money from their parents (for those who are not yet working) depending on each other's behavior. some of them even spend it and ask for extra and some set aside to save. this can form a personality that has prepared everything for its future, especially if there is an urgent need. https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 5, no. 1; 2021 26 conclusions and recommendations this study aims to observe to explore the most influential factors on financial behavior among graduate students in indonesia. the results of the study concluded that there is an influence that gives meaning to financial knowledge on financial self-efficacy; financial self-efficacy and financial knowledge of financial behavior; financial attitude and financial self-efficacy towards financial behavior but there is no significant influence of financial knowledge on financial behavior for students in indonesia. the results showed that adolescent habits are still not good but can be improved through education such as character education and achievement of a better motivation to deal with economic problems. good habits can be passed on to friends of his age, especially adolescents so they can have a good future. the weakness of this study is that the sample size is small and homogeneous. the variables used are still limited to those commonly used in human resource management research, and the analysis technique is still simple. it is hoped that future research can use a more diverse sample, use an interdisciplinary (interdisciplinary/cross-science) approach and methods that can strengthen the hypothesis to be tested. references ali, a., rahman, m. s. a., & bakar, a. 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(2018). financial knowledge attitude and behavior of young working adults in malaysia. institutions and economies, 10(4), 21–48. retrieved from http://ijie.um.edu.my/index.php/ijie/article/view/13444 copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) contents australian finance & banking review vol. 1, no. 1; 2017 issn 2576-1196 e-issn 2576-120x published by centre for research on islamic banking & finance and business 78 development of bangladesh through smes financing: a case study on idlc finance limited k. m. anwarul islam1 1department of business administration, the millennium university, dhaka, bangladesh correspondence: department of business administration, the millennium university, dhaka, bangladesh, e-mail: ai419bankingdu@gmail.com received: october 09, 2017 accepted: october 19, 2017 online published: october 30, 2017 abstract smes (small and medium enterprises) are very much crucial for the overall development of the economy. several banks and other non-banking financial institutions are now concentrating on this sector very actively. industrial development leasing company (idlc) of bangladesh limited started its operation in the year 1985 as the pioneer leasing company to facilitate lease-financing and capital investment in the industrial sector. over the years, the company has evolved itself as a multi-product non-banking financial institution providing a wide range of products and services. over the last two decades, idlc has contributed relentlessly to the country’s transition into a developing country and has emerged as bangladesh’s leading multi-product financial institution. the company now offers a multitude of diverse financial services and solutions to both institutional and individual clients to cater to their unique requirements. in this research paper, i have tried to focus on various roles and aspects of smes banking. the product and service offered for the smes clients, portfolio structure of the smes banking, marketing strategy for the smes clients, and the total credit operation of the smes banking by idlc finance are covered through this research. keywords: development of bangladesh, smes financing, idlc finance limited 1. introduction the development of small and medium enterprises (smes) in developing countries is generally believed to be a desirable end in view of their perceived contribution to decentralized job creation and generation of output. in bangladesh, smes playing a significant role for the development of our economy by creating employment opportunity and producing important alternative machines and machinery parts for saving huge foreign currency for our country. so as a part of our development strategy, we should intensify our efforts to develop this sector to grow industrial base and volume of foreign trade. as we know that in this age of globalization, it is impossible to stop the flow of foreign goods to any country. only quality products can meet the challenges in global market. for meeting this situation smes need to upgrade their technological capabilities and production facilities in order to produce quality products at a competitive price. with the changing world economic condition least developed countries (ldcs) and developing countries have development of bangladesh through smes financing: a case study on idlc finance limited k. m. anwarul islam 79 been moving to the rapid industrialization. in this industrialization small and medium industries are contributing much along with the large industries. small and medium enterprises (smes) occupy unique position in most of the countries especially in a developing country. there is a primary target for many countries desiring to stimulate economic growth and development as they are fueling the economic growth. smes require fewer amounts of resources but they can be managed more efficiently. how smes can be used to change the economic horizon of a country can be seen from the case of the asian tigers. the asian tigers such as singapore, taiwan, south korea, honk kong and malaysia were economically like bangladesh in few decades ago. but by ensuring the enormous development in the small and medium industries they have become able to bring them out of the developing class. due to the changing global economic horizon after the world recession an enormous opportunity has come to bangladesh to increase its export. that can be ensured by nurturing its small and medium industries carefully. 2. literature review alam and ullah (2006) in their study “smes in bangladesh and their financing : an analysis and some recommendations” found that lack of medium to long-term credit, limited access to market opportunities, technology, and expertise and business information. lack of suitable incentives, inefficient and limited services from relevant government agencies as well as poor capacity of entrepreneurs are other reasons for the slow growth of smes. study recommend that flourish, smes will create new entrepreneurs, generate more jobs and contribute to a great extent to the national economy. in philippines, hapitan (2005) recognized the access of smes to credit divided by two: those banks who are obliged to set aside a portion of their loan portfolios, and those institutions that have actively pursued direct financing program for smes. she studied thirty smes in philippines to analyze whether credit access due to competition has indeed increased, furthermore, its impact on sme lending in terms of the number of credit facilities availability and quite possibly lower interest rates. some worth noted from the observation are banks and other financial institutions should realize that many smes are not aimed to achieve stability in terms of operations and earnings rather opportunity taking. the situation occurred due to most of the smes are entrepreneurial-driven which had to enrich their product line or even change it from the original product. to fuel these opportunities, financial assistance and loans are needed. however, some smes do not realize that financial statement is not only a requirement but also as part of good governance. the non-provision of audited financial statements is one of the main reasons why many smes are unable to benefit financial assistance from banks and other institutions. difficulty in obtaining funding for businesses is still considered as the major problem of smes’ operation as quoted by joubert (1998). she conducted a case study to analyze the problems faced by smes in swaziland. the result indicated that generally, the smes’ owners believed that their successful business is mainly because they can manage to sustain them. however, the term success here differs from the widely used measurement of successful business, such as productivity level, profitability ratio, and rate of return. in order to optimize their capital structure, moro, lucas, grimm, & grassi (2010) suggested that smes should only focus on bank financing. keasey and mcguinness (1990) argued that in spite of the fact that bank financing is more expensive in comparison to other sources of finance, it generates a higher rate of return for smes. they further conclude that bank finance can help smes accomplish better performance levels than other financing sources can do. the explanation given by them is that smes employ the funds more efficiently when they are monitored by, and answerable to banks. development of bangladesh through smes financing: a case study on idlc finance limited k. m. anwarul islam 80 the empirical literature on bank financing to smes emphasises some mechanisms, techniques and models developed and adopted by banks to lend to smes such as relationship lending (e.g., petersen & rajan, 1994), factoring (e.g., soufani, 2002) and scoring (e.g., frame, srinivasan, &woosley,2001) just to mention some relationship lending is a powerful mechanism used to reduce problems related to opaqueness in firms especially smes. under relationship lending, “soft” information is gathered by a financial institution (usually small local bank) through continuous contact with the firm (usually sme) in the provision of financial services (berger & udell, 1998, p. 645). the information will be then used to evaluate the creditworthiness of the entrepreneur as a part of the loan process to ensure that the potential loan will be repaid. the strength of the relationship lending, measured by its duration or the breadth of the relationship, was found positively correlated to the availability of funds for smes (petersen & rajan, 1994). in addition to this, the literature reports other benefits including; lower cost of credit, protection against credit crunches and the provision of implicit interest rate or credit risk insurance (berger & udell, 1998). other study suggested that in order to increase credit supply for smes trust-based relationship lending is more effective than the establishment of longer or more concentrated bank-borrower relationship (hernández-cánovas & martínez-solano, 2010). akterrujjaman (2010) conducted a study “problems and prospects of smes loan management: a study on mercantile bank limited, khulna brach” where major findings are related to the high interest and loan duration rates, reasons for smes relatively informal way of doing business in contrast to bank’s formal procedures and prerequisites, bank’s relative inexperience in this field. uz zaman and islam (2011) in their article “small and medium enterprises development in bangladesh: problems and prospects” considered smooth and sustainable development of smes all over the country will be one of the vehicles for poverty alleviation, and generation of more employment. they found lack of investment finance and working capital finance, inability to market sme product, lack of skilled technicians and workers, non-tariff barriers (ntb) and changes in world trade regimes are the major financing constraints faced by smes in bangladesh. and suggested enhancing access to sme finance, development of sme infrastructure, quality of sme products, and training facilities for sme workers and entrepreneurship etc are as some policy measures to overcome those constraints. chowdhury and ahmed (2011) have made a working paper on “an appraisal of the problems and prospects of small and medium enterprises (smes) financing in bangladesh: a study on selected districts”. they observed that non availability of adequate credit, complex loan granting procedure, inadequate infrastructure facilities, problems of collateral requirements, paucity of working capital, non availability of skilled work force; poor salary structure, lack of coordination among sme related organizations, lack of appropriate marketing strategies etc. are the major hindrances to the development of the smes in bangladesh. they recommended easy loan application and disbursement procedure, fix the minimum salary, adequate finance for modernization, expansion and technological advancement of smes etc for the development of smes. chowdhury, azam and islam (2013) have made a study on “problems and prospects of sme financing in bangladesh”. the study found that smes contributes significantly in poverty reduction programs and potential contribution to the overall industrial and economic growth and suggested venture capital, bank syndication scheme, hrd in financial institutions and in government offices, training and development etc as potential tools of eliminating the constrains of smes financing. development of bangladesh through smes financing: a case study on idlc finance limited k. m. anwarul islam 81 3. objectives of the research  to study is to measure and analyse the functional, operational and financial performance of small and medium industries (smes) in bangladesh.  to find out the practices of small and medium industries in bangladesh  to propose some policy recommendations to mitigate the problems surrounding with smes 4. research methodology of the research 4.1 sources of data the information has gathered by two sources of data. majority of the information were collected from the secondary sources, which include books, publications, reading materials and various circulars and reports published by different financial and non-financial institutions. 4.1.1 primary sources interviews of executives, officers and employees of idlc, writer’s observation of the approval process, study of relevant documents, monitoring techniques of small and medium industries, discussion with the supervisor 4.1.2 secondary sources annual report of idlc finance (5 years), websites of idlc finance, newspapers, journals, etc., sme guideline provided by bangladesh bank, different books and periodicals related to the sme. 5. the way small and medium industrialization helps to develop an ldc’s economy smes are very important to almost all economies in the world, but especially to the ldcs. ldcs have a great challenge in increasing employment and distribution of income. smes help ldcs to overcome these challenges. the ways how small and medium industrialization helps an ldc to overcome its economic challenges and develop its overall economy are discussed below: 5.1 helping ldc economies 5.1.1 technology choice by smes part of the contribution of the sme sector both to the overall total factor productivity (efficiency, as usually defined) of an economy and to employment generation and distributional equality comes by virtue of its pattern of technology choice. sme technology tends to be intermediate between the highly labor intensive technologies of micro enterprise, which as a result achieve only low average labor productivity, and the highly capital intensive technologies of large firms which thereby achieve high labor productivity, but use more capital per worker than is available for the economy as a whole. 5.1.2 increasing employment its intermediate technology characteristic is what gives the sme sector a special role (together with small-scale agriculture) in the generation of adequate or decent employment. when most jobs are in the micro enterprise sector, too many of them are destined to be low productivity and hence low income in character. sme firms can be substantially more productive, so in terms of the potential to generate “decent” jobs this sector competes with large private firms and the government, but it has the advantage of being able to generate many more such jobs for a modest input of capital. the key mechanism in generating decent employment in most developing countries involves the expansion of this sector fast enough to absorb people previously unemployed (a few) or engaged in low productivity informal sector jobs (the bulk). development of bangladesh through smes financing: a case study on idlc finance limited k. m. anwarul islam 82 5.1.3 reducing income inequality a larger sme sector is best thought of as the alternative to a highly dualistic economy with most of the capital in the large scale sector and most of the workers in the very small-scale sector. an economy which is dominated by smes, as taiwan’s has been, can generate a low level of inequality in the distribution of primary income (before tax and transfer) whereas the dualistic economy characterized by the combination of much large enterprise and much micro enterprise typically generates a high level of primary inequality. smes can help in decreasing income inequality in bangladesh as it is rising gradually. 5.1.4 generation of economic growth apart from being the sector to which one would like to see a high share of resources allocated at a given point of time, for the above reasons, the sme sector also plays a key dynamic role in generating growth, especially pro-poor growth. 5.1.5 creating base for large industries at the other end of the size spectrum, most large firms have grown out of the sme sector, so its health helps to determine the future supply of large firms. possibly those large firms with an sme background will be more likely to engage in subcontracting with other smes, an additional benefit to overall economic efficiency. 5.1.6 creating dynamism in the economy smes tend to dominate a country’s new and fast growing industries. economies which discourage smes in any general sense are therefore likely to discourage some newer dynamic industries from putting down the roots they might otherwise do. in this respect, and in others, smes are associated with dynamism. 5.1.7 building market competition economists emphasize, with the good reason, the importance of competition for efficiency. except in large markets (whether defined by country, by region/ metropolitan area or whatever) there is not enough "space" for many large firms, perhaps only for a couple or perhaps only for one. in such cases the large firm or firms can exercise monopoly or oligopoly power. if there is to be price-lowering and quality-improving competition, it will come from smes. 5.1.8 providing backup for large industries the importance of an efficient collaboration between large firms and smes through subcontracting is at its peak in outward oriented countries especially those competing in international markets in products involving a good deal of labour. being able to rely on efficient low-cost subcontractors can substantially increase the competitiveness of the large exporters, and has been an important factor underpinning the successes of japan, taiwan and korea. it can also increase the efficacy of bangladeshi large companies. 6. reasons of smes’ efficiency in developing countries the technical efficiency of smes is central to the debate about the role of small scale industries in economic development. smes are unlikely to be an important source of growth and employment generation if they turn out to be relatively inefficient, with limited ability to compete, survive and grow into larger firms. some studies find smes to be more efficient than large firms in some industrial sectors but not in others, while other studies find them to be less efficient overall. there are some inherent reasons which make smes more efficient than large scale industrialization in developing countries like bangladesh. the reasons are  lower capital investment  moderate infrastructure and technology requirement development of bangladesh through smes financing: a case study on idlc finance limited k. m. anwarul islam 83  labor intensiveness  shorter start up period  lower cost per employment  lower capital output ratio  lower energy cost  more environmentally friendly  easy value addition  promotion of agro-industrial linkage etc. our results, based on large samples of firms from six developing economies, suggest a possible explanation for the mixed findings in these earlier studies. because smes are so heterogeneous, simple comparisons of the mean efficiencies of different size firms can be very misleading. thus, while we find that smes are less efficient on average than their larger counterparts in all five economies, we also find a significant number of highly-efficient smes that are more productive than many large firms. for policy makers, the latter is the more important finding since it indicates that smes are not inherently inefficient as compared to their larger counterparts. highly-efficient firms, both large and small, have several technological, work force, and organizational characteristics that can, in principle, be emulated by other less-efficient smes. efficient firms have better access to new technology through know-how licensing agreements, joint-ventures with foreign partners, and export contacts with foreign buyers and suppliers. they have a more educated work force, and are more likely to provide formal structured training to their workers. their work organization is characterized by greater automation and quality control in production, and by human resource management and compensation practices that emphasize job stability and skill acquisition. the wide dissemination and adoption of these best practices will have productivity-enhancing benefits to less efficient firms, smes in particular. 7. contribution of smes in the economy in view of present economic development effort in bangladesh the sme sector plays an important role. these are reflected in the following performance /activities of this sector:  during the fourth five year plan, a total of 0.35 million jobs were created against the target of 0.4 million.  contribution of sme sector to gdp remained above 4.5% during the period from 2000-01 to 2004-2005 despite decline in the amount of advances by the banking sector to this sector and it’s growing day by day.  sme sector employs 25% of the total labour force. as a result, this sector is the present available sector for creation jobs.  sme sector help alleviate poverty, increase income level of rural people and promote agro-industrial linkage in bangladesh.  sme sector requires lower energy supply, lower infrastructure facilities and this sector imposes less environmental risk. they contribute towards better utilization of local resources and skills that might otherwise remain unutilized.  small industries being labour oriented are capable of generating more employment.  they are necessary to maintain and retain traditional skills and handicrafts. development of bangladesh through smes financing: a case study on idlc finance limited k. m. anwarul islam 84  they are the only medium for diversification of rural economy and for peaceful and concurrent socio-economic development of all classes of people. from the above discussion, we can say that smes are playing an important role in our economy in various ways. in bangladesh, smes playing a significant role for the development of our economy by creating employment opportunity and producing important alternative machines and machinery parts for saving huge foreign currency for our country. so as a part of our development strategy, we should intensify our efforts to develop this sector to grow industrial base and volume of foreign trade. smes in bangladesh produce a multitude of labour intensive goods including, consumer items, toys small tools and paper products for the domestic market. further development of these industries offers various investment opportunities. export-oriented production in smes has gained momentum in the past few years. entrepreneurs from hong kong, japan and korea have taken advantage of bangladesh’s cheap and easily trainable labour and its infrastructure facilities to manufacture products for the export market. 8. approaches of sme financing by idlc successful sme financing strategy is a key success factor for idlc. for facilitating sme financing, idlc had earlier established a separate division, namely ‘emerging corporate division’, in early 2003. basically under this division, idlc has mainly financed smaller corporate clients. in 2006, this division was renamed to sme division to reach out to really small segment of the market. in order to tap the lower segment of the market and strengthen the sme financing, idlc has launched retail sme finance products. in this niche, idlc has been able to do business with a higher spread, and the availability of cheap source of funds in the form of refinancing from bangladesh bank has contributed to greater profitability. around 78% of idlc’s clients belong to sme segment based on fixed capital investment size, and sme client share 56% of idlc’s total loan portfolio. moreover, in late 2005, idlc established branches at bogra, gazipur, narshigdi, imamgonj, keraniganj, and narayanganj, specially focused to sme financing. 9. retail sme finance products of idlc at present, idlc is selling five retail sme schemes, besides its regular sme lease financing facility, machinery loan.  business loan business loan is provided in the form of term loan or working capital loan. this loan is ranged from bdt 500,000/to bdt 7,500,000/-. track record of at least one year of successful operation is a must for availing this financing facility. this loan has been provided for the tenure of 12 to 36 months with repayment mode of monthly installments. this facility is devised to groom small entrepreneurs to future leaders in the industry. upto bdt 1,500,000/financing can be provided with no collateral under this scheme. hypothecation of inventory and machineries, and personal guarantee from two acceptable persons and any other security as deemed fit is taken as security under this scheme.  business loan (cash security backed) under this product, loan facility is provided with 30% fdr of the loan amount if the business is found to be feasible, that further security may not be insisted on. this loan is also provided in the form of term financing, and the range of financing is same as business loan. the scheme provide financing for the maximum tenure of 48 months, and generally two years of successful business operation is required to be eligible to attain it. the security development of bangladesh through smes financing: a case study on idlc finance limited k. m. anwarul islam 85 requirement is same as business loan.  women entrepreneurs loan this scheme is specially devised to finance the successful businesses of women entrepreneurs, and to contribute in the emancipation of women in the society. any woman entrepreneur with al least two years of successful business operation can avail this loan, where no collateral is needed upto bdt 1,500,000/-. all the specification of this scheme is the same as business loan. bangladesh bank provides special refinancing facility for this scheme, making the borrowing rate significantly low.  machinery loan (lease) this is actually lease financing facility for sme clients. idlc offers the most competitive and flexible lease financing for all types of manufacturing and service equipment. in machinery loan, the client has the full liberty to select the equipment and supplier and also to fix terms and conditions, including price. lease rental is determined on the basis of acquisition cost and lease term. lease term usually ranges from 1 to 4 years. other conditions are same as business loan. client is required to arrange for the insurance coverage on the leased equipment for the entire lease period. he is required to maintain the leased equipment in good operating condition, though insurance shall cover most of the abnormal risks.  commercial vehicle loan idlc offers commercial vehicle loan as a lease facility for the purpose of purchasing new or reconditioned vehicles for your business use. this is a lease financing facility for sme clients. both new and recondition vehicles can be financed under this scheme. loan limit starts from bdt 500,000 to bdt 1 crore. truck, trailer, pickup van, covered van, microbus, sedan etc. that are required for commercial purposes of businesses are financed under the scheme.  supplier finance supplier finance is a revolving financing facility offered against receivables created due to supply of goods or delivery of services on credit. this short-term facility enables the suppliers/service providers to realize the maximum portion of the payment soon after the delivery has been made to the buyer.  abashan term loan abashan is a loan facility extended to small businesses that will construct or already have permanent structure for commercial rent (popularly known as mess rent), that are located in places surrounding the industrial areas and epzs across the country. 10. appraisal procedure of sme client after the marketing stage, appraisal procedure starts. in appraising, a comprehensive report has been prepared on the business performance of the client. the whole procedure is carried out through the following step by step procedure:  collecting preliminary information regarding the client: to collect the preliminary information, idlc maintain a standard formatted checklist. this checklist is designed to collect the information regarding the necessary legal documents of the company, owners liability position, financials of the business and its sister organization and other necessary information. a sample checklist format is attached at the appendix-1for better understanding development of bangladesh through smes financing: a case study on idlc finance limited k. m. anwarul islam 86  collecting cib report of bangladesh bank to know the liability status of the client: before any loan disbursement, availing report from credit information bureau (cib) of bangladesh bank regarding the liability status of the client is mandatory.  writing the main report: ecd follows a standard format to write the appraisal report on its client. this report format contains the following part to investigate the credit worthiness of the client:  client’s name, address, business type and other preliminary information  in case of an existing client, the exposure status of the client with idlc  description of the financing proposal in details and client’s previous track record (in case of an existing client)  financing rationales on client from different aspects like:  background of the business and the main sponsors of the business  analyzing the market potentials of the product client deals with  analyzing the shareholding structure of the company to reveal whether any problem lies with it.  keenly analyzing the previous 3 to 4 years financials of the client and make different comments on the changes he faced over the years  analyzing the business and financial condition of the sister concerns, if any and its impact on the said concern.  detail liability position of the client  projection regarding the income statement and cash flow of the client at post financing period and calculating the debt service coverage ratio.  in case of lease, brief description of the leased equipment and its price verification 11. credit control procedure after the completion of appraisal procedure, the report is sent to the credit risk management committee to assess the risky ness of the investment. the risk of the investment is measured from different point of view. the major headline along with major risk parameters under which the riskiness of an investment is measured is described below:  industry risk: demand and supply condition, availability of the raw material, availability of the technology, extent of the competition, the growth pattern of the market, etc.  company risk: company’s position in the market, strength of the company in the market, market coverage of the company’s product, etc.  management risk: years of operation, management structure, experience of the key persons, status of any legal proceedings against the company, etc. 12. loan approval procedure after the appraisal is done, the appraisal report is submitted to the credit evaluation committee (cec). the member of this committee is the management people of credit risk management and general manager. after their approval, it goes to deputy managing director (dmd) and to managing director (md). 13. use of decision models idlc finance ltd. uses several decision models to make the decision easy and more objective. though there is a development of bangladesh through smes financing: a case study on idlc finance limited k. m. anwarul islam 87 rule that idlc sme div won’t finance any client more than bdt 1,000,000/without having any registered mortgage sometimes management has to do contrary to that. market is highly competitive and there are lots of players in the market. moreover collateral is not always available. so sometimes financing is made without collateral. a decision model is used in that case to measure the strength of the client. a 10 point scale is used to measure the strengths. any client scoring more than 7.25 is eligible for getting finance for more than bdt 1 million without registered mortgage. 14. sector exposure sector wise distribution of the sme portfolio of idlc in 2013 is given below. this distribution shows the distribution pattern of some of the important sector. table 1. top-10 sector exposure of sme financing of idlc taka in million name of sector exposure (bdt) % exposure december 31, 2013 apparels & accessories 2,346 9.25% food and beverage 2,314 9.12% transport 1,946 7.67% building & construction materials 1,792 7.07% service 1,728 6.81% textiles 1,582 6.24% agro – based industries 1,521 6.00% household products 1,452 5.72% housing and real estate 1,431 5.64% iron and steel 1,311 5.17% source: primary figure 1. top 10 sector exposure source: primary 15. current status of sme division as of january 01, 2013 we had around 340 live contracts in the small business financing-dhaka portfolio. if the budgeted disbursement target of bdt 450 mln (for dhaka) is to be achieved about another 500 contracts development of bangladesh through smes financing: a case study on idlc finance limited k. m. anwarul islam 88 (considering average loan size of bdt 0.85 mln) need to be executed. so, the number of live contracts is expected to be around 790 at the end of 2013. 16. recommendations in order to overcome the above mentioned problems the following suggestions are recommended  government must have to take adequate measures to ensure the uninterrupted supply of raw materials for sme.  government needs to take appropriate measures to fix the minimum salary/wages of the employees of sme. that will help to minimize the employee turnover.  government and financial institution may provide adequate finance for modernization and technological advancement.  development of infrastructure is essential for the optimum growth of sme. so government of bangladesh needs to take appropriate policy strategy for the infrastructure development of bangladesh.  government, financial institutions and non-government organizations (ngos) may take necessary steps to ensure uninterrupted financial support to the prospective smes in bangladesh.  due to the absence of uniform definition the policy formulation and implementations are not possible. government should take initiative to develop a uniform definition of each category of smes.  govt. of bangladesh should take the initiative to develop web pages exclusively for sme and an integrated sme database. it will reduce the barriers to sme access to global market.  in order to ensure the retention of skilled workforce the government should make the entrepreneurial career attractive by minimizing the uncertainty.  in order to encourage women entrepreneurship govt. may; involve women entrepreneurs in policy formulation and implementation and arrangement of funds for women entrepreneur, providing necessary training to women entrepreneurs in rural and urban area of bangladesh.  sme foundation may take appropriate marketing tools to popularize their products.  for minimizing red tapes and accelerating the growth of sme government may provide one roof service under the sme foundation.  appropriate legal framework is necessary to ensure the development of sme of bangladesh.  in this era of intense competition continuous planning and quality improvement act as a prerequisite for the survival of smes. in order to improve the quality smes can follow the just in time (jit) philosophy and use total quality management (tqm) and can ensure the improvement of quality and productivity at a time.  government should establish a credible certification authority especially for smes. so that this sector can obtain a technical evaluation of the quality of their products within a shortest possible time. the certification of the authority should be worldwide accepted. govt. may also provide assistance to smes during the certification process and promote the importance of product certification for international acceptance among the smes.  research and development (r&d) is must for the development and growth of sme. so government must have to invest in r&d for ensuring the intensification of sme of bangladesh.  restriction may be imposed on import of smes’ products which are available in bangladesh. development of bangladesh through smes financing: a case study on idlc finance limited k. m. anwarul islam 89 17. conclusion in bangladesh, smes consist of almost 90% of the total industrial setup. sme contributes almost 80% to 85% industrial employment, which is the 25% of the total employment of bangladesh. sme accounts for 25% to 30% of total gdp. in terms of value addition, sme contributes 45% to 50% of the total value addition of a year’s total production. (source: idlc database). the banking system which constitutes the core of the financial sector of any country plays a critical role in transmitting monetary policy impulses to the entire economic system. banking is a business built on risk. yet, it is essential to manage and minimize that risk. from the view point of smes’ importance to the overall economic growth and the opportunities that the financial institutions have in developing this segment, our central bank, other regulator as well as the policy makers should review the whole process in holistic approach as it is closely correlated with the economic emancipation of the general people of the country. besides the regulators, financiers should also understand the potential this sector has in terms of profitable business generation and building customer base. with proper and efficient credit risk management and right business model, smes can surely fast track a financial institution into a major player in the market and contribute towards its growth. the astronomic development of brac bank ltd., since its inception in 2001, is a prime example in this regard. commitment to the economic development, attitude to treat credit risk in holistic perspective, proper control mechanism and regional or cluster base business model can go a long way in developing a healthy and profitable sme portfolio for any financial institution. references alam, m. s., & ullah, m. a. (2006). smes in bangladesh and their financing: an analysis and some recommendations. the cost and management, 34(3), 57-72. akterujjaman, s. m. (2010). problems and prospects of smes loan management a study on mercantile bank limited, khulna branch. journal of business and technology, 5(02). berger, a. n., & udell, g. f. (1998). the economics of small business finance: the roles of private equity and debt markets in the financial growth cycle. journal of banking and finance, 22(6-8), 613-673. http://dx.doi.org/10.1016/s0378-4266(98)00038-7 chowdhury, t. a., & ahmed, k. (2011). an appraisal of the problems and prospects of small and medium enterprises (smes) financing in bangladesh: a study on selected districts. chowdhury, s. a., azam, k. g., & islam, s. (2013). problems and prospects of sme financing in bangladesh. asian business review, 2(2), 51-58. frame, w. s., srinivasan, a., & woosley, l. (2001). the effect of credit scoring on small business lending. journal of money, credit and banking, 33(3), 813-825. http://dx.doi.org/10.2307/2673896 hapitan, r. (2005). competition policy and access of small and medium enterprises (smes) to financial services: a review of selected smes. philippine institute for development studies. hernández-cánovas, g., & martínez-solano, p. (2010). relationship lending and sme financing in the continental european bank-based system. small business economics, 34(4), 465-482. http://dx.doi.org/10.1007/s11187-008-9129-7 joubert, p. (2004, june). constraints and challenges of small and medium enterprises (smes’) in swaziland: a case analysis. in international council for small business: 49th world conference, johannesburg, http://dx.doi.org/10.2307/2673896 http://dx.doi.org/10.1007/s11187-008-9129-7 development of bangladesh through smes financing: a case study on idlc finance limited k. m. anwarul islam 90 south africa, june (pp. 20-23). keasey, k., & mcguinness, p. (1990). small new firms and the return to alternative sources of finance. small business economics, 2(3), 213-222. moro, a., lucas, m., grimm, u., & grassi, e. (2010). financing smes: a model for optimising the capital structure. petersen, m. a., & rajan, r. g. (1994). the benefits of lending relationships: evidence from small business data. the journal of finance, 49(1), 3-37. soufani, k. (2002). on the determinants of factoring as a financing choice: evidence from the uk. journal of economics and business, 54(2), 239-252. uz zaman, a. h., & islam, m. j. (2011). small and medium enterprises development in bangladesh: problems and prospects. asa university review, 5(1), 145-160. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0). australian finance & banking review 7(1) (2023), 1-8 1 finance and banking afbr vol 7 no 1 (2023) p-issn 2576-1196 e-issn 2576-120x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/afbr published by cribfb, usa corporate social responsibility disclosure and value of listed oil and gas companies in nigeria: the moderating effect of foreign ownership aliyu sulaiman kantudu (a)1 kabiru isa dandago (b) abubakar yusuf (c) zaharaddeen salisu maigoshi (d) bashir ali sulaiman (e) (a) department of accounting, bayero university kano, nigeria; e-mail: aliskantudu@gmail.com (b) department of accounting, bayero university kano, nigeria; e-mail: kidandago@gmail.com (c) department of accounting, gombe state university, nigeria; e-mail: abubakaryusufgwani@gsu.edu.ng (d) department of accounting, bayero university kano, nigeria; e-mail: deenimadabo@gmail.com (e) department of taxation, federal university, dutse-nigeria; e-mail: bashirali0@gmail.com a r t i c l e i n f o article history: received: 1st may 2023 revised: 30th june; 10th july 2023 accepted: 20th july 2023 published: 1st august 2023 keywords: csrd, foreign ownership, firm value jel classification codes: o16 a b s t r a c t this study examines the moderating effect of foreign ownership on the relationship between corporate social responsibility disclosure and the value of listed oil and gas companies in nigeria. this study adopted an explanatory research design to achieve this objective using secondary data collected from annual reports and accounts of the sampled companies for four years (2018-2021). the study employs multiple regression using panel-corrected standard error (pcse) to analyze data for the study. findings indicate that corporate social responsibility disclosure has a positive significant impact on firm value. results also revealed that foreign ownership has a positive but insignificant impact on firm value. furthermore, on the interaction effect of foreign ownership on the relationship between corporate social responsibility disclosure and firm value, the result indicates that foreign ownership has moderated the relationship between corporate social responsibility disclosure and the value of listed oil and gas companies in nigeria by strengthening the existing relationship. the findings of this study encourage more investment from foreign investors to increase the disclosure of csr to enhance the value of listed oil and gas companies in nigeria. finally, the study recommends that the management of listed oil and gas companies should diversify to attract more foreign investors to improve the value of their companies. © 2023 by the authors. licensee cribfb, usa. this article is an open-access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0). introduction corporate social responsibility disclosure (csrd) has continue to gained wider recognition in different sectors of the economic across the globe especially within the context of the stakeholder-shareholder debate. the main idea behind “shareholder perspective” is that the responsibility of managers is only to serve the interests of shareholders in the best possible way using firms’ resources to increase their wealth by maximizing profits (jensen, 2001). however, the “stakeholder perspective” argued that besides shareholders, other groups of stakeholders are also affected by the activities of the organisation. therefore, stakeholders need to be considered when making decision (werhane & freeman, 1999). foreign investors being one of the major stakeholder’s in an organisation have much interest on company’s csr activities. this is because foreign investors always prefer to invest in companies that are considered to be socially responsible where their investment would be more secured because of the cordial relationship that exit between the company and its diverse stakeholders. hence, the need to disclosure information on csr in order to inform various stakeholders how the company have responded to their social and environmental challenges coursed by the activities of the company. 1corresponding author: orcid id: 0009-0002-5358-6861 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/afbr.v7i1.2057 to cite this article: kantudu, a. s., dandago, k. i., yusuf, a., maigoshi, z. s., & sulaiman, b. a. (2023). corporate social responsibility disclosure and value of listed oil and gas companies in nigeria: the moderating effect of foreign ownership. australian finance & banking review, 7(1), 1-8. https://doi.org/10.46281/afbr.v7i1.2057 https://orcid.org/0009-0002-5358-6861 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/afbr.v7i1.2057 https://orcid.org/0000-0002-3655-0421 https://orcid.org/0009-0008-5869-1146 https://orcid.org/0000-0003-4514-8546 https://orcid.org/0009-0003-6830-1766 kantudu et al., australian finance & banking review 7(1) (2023), 1-8 2 furthermore, the role of business organisations in improving the life of various stakeholders cannot be underestimated because nowadays many corporate organisation engaged in social activities that are formally considered as the responsibility of government alone (tilakasiri, 2012). the main objective of every corporate organizations is to maximize profit which could enhance the value of the firm, but that should not be at the expense of the society’s well-being. according to carroll (1999), organization should act in a socially responsible manner, obey the rules, and respect code of corporate governance so as to be morally upright as a good corporate body. nowadays the business paradigm has changed from maximization of shareholders’ wealth to maximization of stakeholders’ wealth. unlike before many companies are force to practice csr as a strategy to improve reputation and create good corporate image for the business in order to be sustainable. furthermore, the objective of increasing firm value can be achieved with the help of disclosing information on csr. this is due to the fact that many stakeholders place more value in companies that are socially friendly and committed in addressing issues that affect them. therefore, it is only by disclosing information, stakeholders will be informed on the level of commitment and effort put in place in addressing their various demand. csr help company to maintain good relationship with it various stakeholders which in the long run can affect the value of the company. disclosing information on csr involves extending the accountability of companies’ report beyond the traditional role of providing a financial reports to the owners of the capital (mukthar, 2016) thus, disclosure on csr contained financial and non-financial information of companies’ social activities. more so, information on csr cover many aspects of social activities carried out by the business operators. however, because of the increasing adverse effect of corporation on aspects of social life and the environment, many stakeholders call for investigation on corporate’s activities and the extent to which its affect their life and the environment. however, mukhtar (2016) asserted that failure to disclose information on csr is a signal for poor social performance. and the resulting effect will be loss of confidence by many stakeholders which is detrimental and will not only damage the good reputation of the company over the years but will result in loss of market share price and decrease in firm value. this study selected oil and gas industry because the nature of their activities have serious effects on the environment, as such oil and gas industry is one of the sectors that heavily invest on csr projects in nigeria, hence the need for this study. therefore, the objective of this paper is to examine the relationship between csrd and value of listed oil and gas companies in nigeria with the moderating effect of foreign ownership. the remainder of the paper is arranged as follows: section two provides literature review. section three presents methodology of the study. section four presents results and discussions while section five discusses, conclude and make recommendation. literature review there are quite number of studies that examine the relationship between csrd and firm value, foreign ownership and firm value as well as the interactions effect of foreign ownership on the relationship between csrd and firm value. the review of the empirical studies were categories under three sub headings. viz; csrd and firm value, foreign ownership and firm value and finally csrd, foreign ownership and firm value. csrd and firm value several researches have been conducted by numerous researchers across the globe on the effect of corporate social responsibility disclosure on firm value. some of these studies include the work of zraqat, zareigat, rawashdeh, and okour (2021) who determines the effect of csrd on market performance of amman stock exchange in jordan for the period of six years 2014-2019. the study used secondary data obtained from the annual reports of the sample companies and analyzed using multiple regression technique. the found that csrd has significant negative effect on market performance proxy by tobin’s q. implying that disclosing information on csr decreased the value of the firm and vice-versa. emeka-nwokeji (2019) examines the impact of corporate social responsibility disclosure on the market value of listed non-financial firms in nigeria from 2006 to 2015. secondary data were source from the annual report and account of 93 sample companies and were analysed using multiple regression technique. the study found that social donation and investment in human capacity building, employee heath safety and welfare has significant positive effect on market value while charitable/philanthropic gift and job creation has insignificant negative effect on market value. the finding further reveals that csrd as a whole shows significant positive effect on market value of non-financial firms in nigeria during the study period. similarly, sylvester (2019) examines the impact of corporate social responsibility disclosure on performance of some selected firms in nigeria. the study used secondary data extracted from the annual report and account of the sample companies for the period of 5 years from 2008-2012. ordinary least square were employed as a method of data analysis and the results reveals that csrd has positive and significant effect on performance. implying that stakeholders value companies that are socially responsible. nguyen, dang, vu, and houng (2018) examines the impact of social and environmental disclosure on firm performance in vietnam. secondary data were extracted from the annual report and accounts of the sample companies over the study period. the study employed regression analysis as a technique for data analysis and the result reveals that social and environmental disclosure has significant positive impact on firm performance of some selected firms in vietnam during the study period. kantudu et al., australian finance & banking review 7(1) (2023), 1-8 3 furthermore, salisu, sani, and lawan (2018) investigates the relationship between csrd and performance of listed conglomerate firms in nigeria for the period of ten years 2007-2016. secondary data were collected from the annual report and accounts of the sample companies and the study employed pool ols as a technique for data analysis. the study found that csrd has positive significant relation with the performance of listed conglomerate companies in nigeria during the study period. however, sopian and mulya (2018) examines the impact of csrd on the value of listed companies in indonesia. secondary data were source from the annual report and accounts of the sample companies and were analyzed using multiple regression technique. the study document significant negative effect on firm value. this implies that investors may see csr programme as a burden of the current year or in operating expenses and will have an impact directly with the decline of company’s revenue. from the above reviewed it can be summarized that studies on csrd and firm value have been documented in the literature, although the findings are mixed. this is because while some studies documented positive effect of csrd on firm value, others shows negative effect of csrd on firm value. in view of the above, we hypothesized that there is positive relationship between csrd and firm value foreign ownership and firm value empirical researches on ownership structure particularly foreign ownership have been conducted by many researchers both within and outside nigeria. this include study by dakhlallh, rashid, abdullah, and dakhlall (2021) who examines ownership structure and firm performance of selected firms in jordan for the period of nine years from 2009-2017 using a sample of 180 companies. secondary data were source from annual report of the sample companies data were analyse by using gmm and pool mean group estimate as a method of data analysis. the findings reveals that foreign ownership has insignificant positive effect on firm performance proxy by tobin’s q. oyedokun, isah, and awotomilusi (2020) examine the effect of ownership structure on firm value of quoted consumer goods companies in nigeria. secondary data were extracted from the annual report and accounts of the sample companies. the study employed multiple regression using panel data methodology as a technique for data analysis and the findings reveals that ownership structure proxies by foreign ownership and have positive and significant effects on the value of consumer goods companies in nigeria. furthermore, lawal, agbi, and mustapha (2018) examined the effect of ownership structure on performance of listed insurance companies in nigeria. data were extracted from the annual report and accounts of the sample companies for the period of the study. the study adopted multiple regression using panel data as a techniques for data analysis and the study documented positive significant effect of ownership structure on performance of the sample companies in nigeria. similarly, amin and hamdan (2018) examines the relationship between ownership structure and firm performance of 171 firms selected from the kingdom of saudi arabia. secondary data were source from the annual report and accounts of the sample companies and the study employ multiple regression using panel data methodology as a method of data analysis. the findings from the study reveals that ownership structure has significant positive effect on the performance of insurance companies in nigeria for the study period. from the foregoing reviewed, it is clear that the relationship between mgo and firm value have been documented in the extent literature. however, the finding are mixed or inclusive as some studies reported positive while others reported negative relationship between the two variables. in view of the above, we hypothesized that there is positive relationship between foreign ownership and firm value csrd, foreign ownership and firm value although, there are few studies on the moderating effects of ownership structure on the relationship between csrd and firm value but mostly conducted outside nigeria, some of these studies include the work of ishtiaq, latif, khan, and noreen (2017) examines the moderating effect of ownership structure on the relationship between csr and firm performance in pakistan. the study employ multiple regression as a technics for data analysis to test the hypothesis of the study and the findings reveals csrd has significant and positive effect on firm performance, the study also reveals that foreign ownership has moderate the relationship between csrd and firm performance. implying that foreign investors encourage management to engage in more csr activities which could affect the value of the firms in the long run. furthermore, kim, park, and lee (2018) examines the moderating effects of ownership structure on the relationship between csrd and firm value of selected firms in china. the study employed multiple regression as a technique for data analysis and the finding revealed that csr disclosure score is positively associated with the firm value. the study also documented that ownership structure has moderated the relationship between csrd and firm value of the sample companies by strengthening the existing relation between the two variables. similarly, ali, zhang, naseem, and ahmed (2019) investigated the moderating effect of ownership structure on the relationship between csrd and firm performance in china for the period of nine years from 2006-2014. regression analysis revealed that market base measure of performance proxy by tobin’s q have significant and positive effects on csrd. the result also reveals that foreign ownership moderated the relationship between firm’s performance and csrd. this implies that the introduction of foreign ownership as a moderating variables has strengthen the existing relationship between csrd and firm value of the sample companies. kantudu et al., australian finance & banking review 7(1) (2023), 1-8 4 from the foregoing, based on the reviewed of the available literature, different types of ownership and such as foreign ownership in particular have been proven to moderate the relationship between csrd and firm value. however, empirical studies on the moderating effect of foreign ownership on the relationship between stakeholder engagement and firm value are scanty especially in the nigeria context, therefore this call for urgent investigation on the subject matter. in view of the above, we hypothesized that foreign ownership strengthen the relationship between csrd and firm value. theoretical framework although different theories can be used to explain the relationship between csrd and firm value like the agency theory, stakeholder theory and signaling theory among others. however, stakeholder theory is best to explain this work because the theory focuses on the relationship between an organization and its stakeholders. the main idea behind the stakeholder theory is that the success of a company depends on the extent to which the company is able to relate well with its diverse stakeholder groups. the stakeholder theory focuses on the need to satisfied stakeholders demand which in the long run have effects on the performance of the organisation (ruf et al., 2001). the idea that the stakeholder theory is imbedded in csr has become widely accepted by many researches and thus become an alternative to shareholder theory. the term stakeholder explicitly represents a softening of (if not a fundamental challenge to) strict shareholder theory. this theory recognizes the fact that most, if not all firms have a large and integrated set of stakeholders to whom they have an obligation and responsibility. the stakeholder theory challenges the view that the shareholders have privilege over other stakeholders. in fact, the stakeholder theory is a theoretical response to financial theories that assert that firms should focus only on maximizing the economic interests of the shareholders, the real owners of the firm. it is argued that the shareholders are merely one of the several claimants on the firm. thus stakeholder theory embodies the need to balance the claims of shareholders with those of other stakeholders. according to kaler (2003), the stakeholder approach involves a basic reformist stance toward the shareholder theory, seeking to move it in the direction of greater equity and a less single-minded concentration on the owners’ interests rather than replacing it entirely. deck (1994) assert that the aim of business organization is to create wealth and share among investors. however, he does not limit investors to mere shareholders but includes other groups such as employees, the government and society who invest in organizations in the form of education, skills and infrastructure. materials and methods this study examine the moderating effect of foreign ownership on the relationship between csrd and value of the listed oil and gas companies in nigeria. a sample of ten companies out of the twelve listed oil and gas companies in nigeria were selected for the study. the criterion for the selection of which was basically based on data availability. the companies that made up the sample size are; forte plc, mrs plc, oando plc, mobil plc, total plc, conoil plc, eterna plc, rank unity petroleum compnay plc, anino international plc, and seplat development petroleum co. plc. data was collected from the annual reports and accounts of the sample companies covering four years period, 20182021. in analyzing the data collected, multiple regression technique using panel data methodology was applied. however, ols in panel data model is associated with the problem of autocorrelation, cross sectional dependence and heteroskedasticity. in order to overcome such challenges, the study employed the panel corrected standard error (pcse) approach for estimation. furthermore, the study used local sustainability guideline released by the nigerian stock exchange (nse) in 2018 as a framework for csr disclosure guideline in nigeria. the general model based on the variables of the study which is a modification of barron and kenny (1986) regression model as used by kim, park, and lee (2019). )(..........' 3210 iagelevcsrditsqtobin itititititit   )(..........' 3210 iagelevfrownitsqtobin ititititit   )(..........*' 543210 iiagelevfrowncsrdfrownitcsrditsqtobin itititititit   where, tobin’s q = tobin’s q csrd =stakeholder engagement disclosure frown = ownership structure csrd*frown= interaction of csrd with frown age = age of the firm lev = leverage β0 = parameters to be estimated β1– β7 = partial derivatives or the gradient of the independent variables. i = firm t = time 𝜀 ԑ = an error term assumed to satisfy the standard ols assumption variables and their measurement firm value is the dependent variable proxy by tobin’s q and is measured by kantudu et al., australian finance & banking review 7(1) (2023), 1-8 5 total market value of share x 100 book value of share where; market value = current market price of share x number of shares/ divided by number of outstanding shares book value= book value of equity csrd is the independent variable and is measured by taking the csrd index as total disclosure by company (i) x 100 total maximum disclosure score (21) foreign ownership (frown) = number of shares owned by foreign investors total number of outstanding shared control variables leverage (lev) = total debt. total asset age= year of listening in analyzing the data collected, ordinary least square (ols) regression technique is used to estimates the model. the robustness test was conducted in order to ensure the validity of all statistical inferences for the study, so as to assess the impact of distribution problems in addition to the problems of outliers before deciding on the appropriate statistical method to use. the robustness test gives concrete evidence that the regression data is free of regression errors capable of invalidating the research’s regression assumptions. this makes the regression estimates reliable and enhances its accuracy. the tests carried out include vif and heteroskedasticity test. results and discussions the descriptive results of all the variables are presented in table 1 below table 1. descriptive statistics of the variables variables mean std. dev min max obs tobin’s q 24. 11543 28.03628 0.035763 79.05293 40 csrd 0.77430 0.191895 0.46667 0.971905 40 frown 0.29587 0.322846 0 0.77809 40 lev 0.61597 0.19379 0.04485 0.842001 40 age 34.4 11.95462 4 45 40 source: generated using stata 12.0 table 1 shows that the average share value of the firms over the study period is n24.12 with a standard deviation of 28.03628 and a minimum and maximum value of 3k and n79 respectively. the results also shows that the average csr disclosure by firms are 77% which indicate that oil and gas companies discloses more information on csr during the period of the study. foreign ownership (fro) has a mean of approximately of 30% shares own by foreign investors in the listed oil and gas companies in nigeria with the minimum and maximum value of 0.and 78 % number of shares. leverage being a control variable has a means of 61% debt to equity ratio with minimum and maximum value of 4% and 84% respectively. age as second control variables have an average means of 34 years with the minimum and maximum of 34 and 45 years respectively. table 2. correlation matrix of dependent and independent variables correlation tobin’ q csrd frown age firmsize tobin’s q 1 csrd 0.3949 1 frown 0.1847 0.3355 1 lev 0.0217 0.0873 0.1489 1 age -0.1145 0.1572 0.05440 0.5061 1 source: generated using stata 12.0 table 2 shows the correlation between the dependent and explanatory variables. it shows a positive relationship between tobin’s q and csrd to the tune of 0.3949. the results also shows a positive relationship between tobin’s q and fro (0.1847), leverage and tobin’s q also shows positive sign (0.0217). however, a negative relationship exist between tobin’s q and age of the firm to the tune of -0.1145. the correlations are generally low, meaning there is no problem of collinearity. this is further buttressed by the results of the variance inflation factor (vif) test performance. the vif results are substantially lower than 5.0 as the value ranges from 1.03-1.37. this provides evidence that there is no collinearity. kantudu et al., australian finance & banking review 7(1) (2023), 1-8 6 table 3, shows the regression results of the dependent variable (tobin’s q) and the explanatory variables which shows the direct relationship between csrd and firm value, foreign ownership and firm value as well as age and firm size on firm value. below is the ols regression result for the first model of the study. table 3. panel corrected standard error regression result for model 1 tobin’s q coeff std,err t p>(t) csrd 61.7206 4.37634 14.10 0.000 lev 15.67601 12.97453 1.21 0.227 age 0.54627 0.11948 -4.57 0.000 cons 14.54023 5.59191 -2.60 0.009 r-square waid chi2 prob = 0.1957 204.91 0.0000 source: generated using stata 12.0 the regression results displayed in table 3 reveals the panel corrected standard error (pcse) estimation produces r2 of about 19.5% which shows the extent to which changes in tobin’s q of the listed oil and gas companies is accounted for by all the explanatory variables. the p value of the 0.0000, which is extremely significant, confirms the validity of the estimated model under the pcse. similarly, the wald chi2 is 204.91, implying that the model is fit and significant at 5% significant level considering the rule of the thumb. the regression results as displayed in table 3 shows that corporate social responsibly disclosure (csrd) has positive and significant effect on the value of listed oil and gas companies in nigeria. this is evidence by the value of the coefficient (34.31863) and p value (0.0000). this implies that, as the company discloses more information on community relation, the value of the company increases. therefore, the null hypothesis which stated that community relation disclosure does not significantly affect the value of listed oil and gas companies in nigeria should be rejected. the above findings is consisted with the work of nguyen, dung, vu, and houng (2018), salisu, sani, and lawan (2018) emeka-nwokeji (2019). however, it contradict the findings of sopian and mulya (2018). table 4. panel corrected standard error regression result for model 1l tobin’s q coeff std,err t p>(t) frown 33.14768 13.90577 2.38 0.017 lev 26.24191 15.47583 1.70 0.090 age 0.95964 0.293292 -3.27 0.001 cons 31.15546 5.81731 5.36 0.000 r-square waid chi2 prob = 0.1211 12.95 0.0047 source: generated using stata 12.0 the regression results displayed in table 4 reveals the panel corrected standard error (pcse) estimation produces r2 of about 12.1% which shows the extent to which changes in tobin’s q of the listed oil and gas companies is accounted for by all the explanatory variables. the p value of the 0.0047, which is extremely significant, confirms the validity of the estimated model under the pcse. similarly, the wald chi2 is 12.95, implying that the model is fit and significant at 5% significant level considering the rule of the thumb. the regression results as displayed in table 4 shows that foreign ownership (frown) has positive and significant effect on the value of listed oil and gas companies in nigeria. this is evidence by the value of the coefficient (33.14768) and p value (0.0017). this implies that, as the company discloses more foreign ownership, the value of the company increases. therefore, the null hypothesis which stated that foreign ownership does not significantly affect the value of listed oil and gas companies in nigeria should be rejected. the above is inconsistent with the findings of oyedokun, isah, and awolomiliki (2020); lawal, agbi, and mustapha (2018) who documented positive but insignificant relationship between foreign ownership and firm value. furthermore, the regression result as displayed in table 4 shows that leverage being a control variable has positive but insignificant effect on value of the listed oil and gas companies in nigeria. however, age of the firm shows negative but has significant effect on the value of listed oil and gas companies in nigeria. table 5. panel corrected standard error regression result for model 1ll tobin’s q coeff std.err. t p>(t) csrd 76.36626 11.37112 6.72 0.000 fro 167.3302 63.46606 2.64 0.008 csrdfrown 183.7496 67.31321 2.73 0.006 lev 24.30113 18.59942 1.31 0.191 age -0.83638 0.328317 2.55 0.011 cons -24.90132 10.68403 -2.33 0.020 kantudu et al., australian finance & banking review 7(1) (2023), 1-8 7 r-square wald prob = chi2 0.3198 61.26 0.0000 source: generated using stata 12.0 the regression results displayed in table 5 reveals the panel corrected standard error (pcse) estimation produces r2 of about 31.9% which shows the extent to which changes in tobin’s q of the listed oil and gas companies is accounted for by all the explanatory variables. the p value of the 0.0000, which is extremely significant, confirms the validity of the estimated model under the pcse. similarly, the wald chi2 is 61.26, implying that the model is fit and significant at 5% significant level considering the rule of the thumb. the regression results as displayed in table 5 shows that the interaction effect between corporate social responsibility disclosure and foreign ownership has a positive and significant effect on the value of listed oil and gas companies in nigeria. this is evidence by the value of the coefficient (183.7496) and p value (0.006). this implies that, companies with more foreign ownership tend to disclose more information on csr which could enhance the value of the firm. the likely reasons for this is that, foreign investors prefers to invest in companies that are more social responsible. hence, foreign investors encourage management to engage in more csr activities which could attract more foreign investors and at the same time other stakeholders like host communities and employees will have more confident on company and this will help the company to maintain its good reputation which have effect on the value of the firm. therefore, the null hypothesis which stated that the interaction effect of csrd and foreign ownership does not have significant effect on the value of the oil and gas companies in nigeria should be rejected. the above findings is consistent with the work of ali, zhang, naseem, and ahmed (2019). conclusions based on the findings of this study, it can be concluded that the success of every business organisation depends on the extent to which is able to manage its relationships with its diverse stakeholders. therefore, disclosing information on csr is very importance because is the only means by which corporate organisation will communicate to its various stakeholder on how it responded to their social and environmental challenges. furthermore, the introduction of foreign ownership as a moderating variable has strengthen the existing relationship between csrd and firm value. this is evidence by the increase in the coefficient and the significant of the p-value of 183.7496 and 0.006 respectively. finally, the study recommends that the management of oil and gas companies should diverse the means to attract more foreign investors in order to improve the value of their companies. author contributions: conceptualization, a.s.k., k.i.d., a.y., z.s.m. and b.a.s.; methodology, a.s.k.; software, a.s.k.; validation, a.s.k.; formal analysis, a.s.k., k.i.d., a.y., z.s.m. and b.a.s.; investigation, a.s.k.; resources, a.s.k.; data curation, a.s.k.; writing – original draft preparation, a.s.k., k.i.d., a.y., z.s.m. and b.a.s.; writing – review & editing, a.s.k., k.i.d., a.y., z.s.m. and b.a.s.; visualization, a.s.k.; supervision, a.s.k.; project administration, a.s.k.; funding acquisition, a.s.k., k.i.d., a.y., z.s.m. and b.a.s. authors have read and agreed to the published version of the manuscript. institutional review board statement: ethical review and approval were waived for this study, due to that the research does not deal with vulnerable groups or sensitive issues. funding: this research was supported by the tertiary education trust fund (tetfund) of nigeria (grant 117). acknowledgments: the authors wishes to acknowledge the role of tetfund for the funding of this ibr research. informed consent statement: informed consent was obtained from all subjects involved in the study. data availability statement: the data presented in this study are available on request from the corresponding author. the data are not publicly available due to restrictions. conflicts of interest: the authors declare no conflict of interest. references ali, s., zhang, j., naseem, m. a., & ahmad, f. 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(2019). nexus between corporate social responsibility disclosures and market value of listed nonfinancial firms in nigeria. international journal for innovative research in multidisciplinary field, 5(3), 247255. ishtiaq, m., latif, k., khan, a. n., & noreen, r. (2017). corporate social responsibility and firm performance: the moderating effect of ownership concentration. journal of managerial sciences, 11(3),353-386. kantudu et al., australian finance & banking review 7(1) (2023), 1-8 8 jensen, m. (2001). value maximisation, stakeholder theory, and the corporate objective function. european financial management, 7(3), 297-317. https://doi.org 110.1111//1468036x.00158 kaler, j. (2003). differentiating stakeholder theories. journal of business ethics, 46, 71-83. https://doi.org/10.1023/a:1024794710899 kim, w. s., park, k., & lee, s. h. (2018). corporate social responsibility, ownership structure, and firm value: evidence from korea. sustainability, 10(7), 2497. https://doi.org/10.3390/su10072497 lawal, o. d., agbi, e. s., & mustapha, l. o. (2018). effect of ownership structure on financial performance of listed insurance firms in nigeria. journal of accounting, finance and auditing studies, 4(3), 123-148. mukthar, j. (2016). corporate social responsibility disclosure and firm value of the listed conglomerate companies in nigeria, unpublished dissertation in partial fulfilment of the award of msc degree bayero university kano, nigeria nguyen, v., dang, h. n., vu, v.t.t., & hoang, h.t.v. (2018). impact of social responsibility information disclosure the financial performance of enterprises. international journal of accounting, 6(3). oyedokun, g. e., isah, s., & awotomilusi, n. s. (2020). ownership structure and firm value of quoted consumers goods firms in nigeria. jasf, 3(2), 214-228. ruf, b. m., muralidhar, k., brown, r. m., janney, j. j., & paul, k. (2001). an empirical investigation of the relationship between change in corporate social performance and financial performance: a stakeholder theory perspective. journal of business ethics, 32, 143-156. https://doi.org/10.1023/a:1010786912118 salisu, u., sani, s., & lawan, j. (2018). corporate social responsibility disclosure and the value of listed conglomerates firms in nigeria. asian journal of economics, business and accounting, 7(4), 1-8. sopian, a., & mulya, h. (2018). the impact of corporate social responsibility disclosure on firm v in indonesia. international journal of scientific research and management, 6(1), 813-823. https://doi.org/10.18535/ijsrm/v6i11.em01 sylvester, e. i. (2019). empirical study on : disclosure of corporate social responsibility on the financial perormance of public limited firms in nigeria. european journal of accounting, finance and investment, 5 (1), 37-52. tilikaisiri, k. (2012). corporate social responsibility and company performance. ph. d theses, victoria university, melbourne. werhane, p. h., & freeman, r. e. (1999). business ethics: the state of the art. international journal of management reviews, 1(1), 1-16. https://doi.org/10.1111/1468-2370.00002 zraqat, o., zureigat, q., al-rawashdeh, h. a., okour, s. m., hussien, l. f., & al-bawab, a. a. (2021). the effect of corporate social responsibility disclosure on market performance: evidence from jordan. the journal of asian finance, economics and business, 8(8), 453-463. publisher’s note: cribfb stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2023 by the authors. licensee cribfb, usa. this article is an open-access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). australian finance & banking review (p-issn 2576-1196 e-issn 2576-120x) by cribfb is licensed under a creative commons attribution 4.0 international license. http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ australian finance & banking review 6(1) (2022), 1-11 1 finance and banking afbr vol 6 no 1 (2022) p-issn 2576-1196 e-issn 2576-120x available online at https://www.cribfb.com journal homepage: https://www.cribfb.com/journal/index.php/afbr published by cribfb, usa financial literacy of financial institutions in bangladesh saleh ahmed jakaria (a)1 (a) deputy secretary, director, rajdhani unnayan kartipakkha (rajuk), bangladesh; e-mail: jakariads21@gmail.com a r t i c l e i n f o article history: received: 1st may 2022 revised: 30th june; 10th july 2022 accepted: 20th november 2022 published: 31st december 2022 keywords: financial literacy, financial institutions, bangladesh, collaborative efforts, risk management. jel classification codes: o16 g21, g28, i22 a b s t r a c t this research delves into the financial literacy landscape of diverse financial institutions in bangladesh. using a mixed-methods approach, the study assesses financial literacy levels, identifies influencing factors, and explores collaborative efforts. quantitative data gathered through surveys from 150 institutions reveal variations in financial literacy, with banks displaying higher scores (m = 75), followed by microfinance institutions (m = 62) and non-bank entities (m = 48). qualitative interview insights highlight effective collaborative initiatives between institutions, regulators, and educational bodies. the study contributes novelty by presenting a holistic view of financial literacy, its associations, and implications within the sector. findings resonate with previous research, linking financial literacy to risk management and ethical decision-making. the research underlines the need for tailored training programs and sustained collaborations. future research could explore evolving regulatory dynamics and technological impacts. this research augments our understanding of financial literacy's importance and potential to enhance the resilience and inclusivity of bangladesh's financial sector. © 2022 by the authors. licensee cribfb, usa. this article is an open-access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0). introduction financial literacy is a fundamental pillar of a resilient and well-functioning financial system, and its significance cannot be overstated in the context of bangladesh's evolving economy (asheq et al., 2021). this paper aims to address the critical issue of financial literacy within the spectrum of financial institutions operating in bangladesh (asheq et al., 2022). by examining the levels of financial literacy, identifying influencing factors, and discussing potential implications, this study contributes to the broader discourse on financial stability, inclusion, and economic development (akhter et al., 2020). bangladesh, as a developing nation, is undergoing rapid transformations in its financial landscape. financial institutions, ranging from traditional banks to microfinance entities, play a pivotal role in shaping the financial ecosystem. the level of financial literacy within these institutions directly influences their ability to make informed decisions, manage risks effectively, and contribute to the nation's economic growth. recognizing the gaps in understanding and practice, this paper delves into the subject to shed light on the extent of financial literacy among financial institutions in bangladesh (akhter et al., 2021; akhter et al., 2022; ; akhter et al., 2022; ahmed et al., 2022). the primary aim of this research is to comprehensively assess the current state of financial literacy within various types of financial institutions in bangladesh. by evaluating their knowledge of complex financial instruments, regulatory frameworks, risk management strategies, and ethical considerations, this study seeks to provide a nuanced understanding of the strengths and weaknesses present in the financial literacy landscape. to achieve the stated objective, a mixed-methods approach was employed. quantitative data were collected through structured surveys administered to a diverse sample of financial institutions, including banks, microfinance organizations, and non-bank financial entities. these surveys were designed to gauge the institutions' familiarity with key financial concepts and practices. in addition, qualitative insights were gathered through in-depth interviews with key stakeholders in the financial sector, including regulatory authorities, industry experts, and academic 1corresponding author: orcid id: 0009-0003-7811-9124 © 2022 by the authors. hosting by cribfb. peer review under responsibility of cribfb, usa. https://doi.org/10.46281/afbr.v6i1.2078 to cite this article: jakaria, s. a. (2022). financial literacy of financial institutions in bangladesh. australian finance & banking review, 6(1), 1-11. https://doi.org/10.46281/afbr.v6i1.2078 https://orcid.org/0009-0003-7811-9124 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/afbr.v6i1.2078 jakaria, australian finance & banking review 6(1) (2022), 1-11 2 researchers. these interviews provided valuable perspectives on the challenges, opportunities, and potential strategies for enhancing financial literacy within financial institutions (al-quraan et al., 2022; alhassan et al., 2021; alhassan, & islam, 2021a). by investigating the financial literacy of financial institutions in bangladesh, this study contributes to a deeper understanding of the challenges and opportunities in building a financially literate ecosystem. it also underscores the importance of collaborative efforts among financial institutions, regulatory bodies, and educational institutions to address these challenges and foster a culture of continuous learning and improvement (islam & karim miajee, 2017; islam, 2017a; islam, 2017b; islam, 2017c; islam, 2017d; islam, 2017e; islam, 2017f; islam, 2017g; islam, 2017h; islam, 2017i; islam, 2017j; islam & miajee, 2018a; islam & miajee, 2018b). literature review the literature review section offers a comprehensive analysis of recent research conducted between 2020 and 2022, focusing on financial literacy within financial institutions, both globally and in the context of bangladesh. this critical analysis serves to identify the strengths and weaknesses of existing literature while highlighting the unique contribution of this paper to the field. recent studies have underscored the pivotal role of financial literacy in promoting economic growth, stability, and financial inclusion. in the global context, researchers such as (alhassan, & islam, 2021b; alhassan, & islam, 2019; alhassan et al., 2019; ali et al., 2020; ali et al., 2021; ali et al., 2022) emphasize the positive correlation between financial literacy and effective risk management within financial institutions. similarly, abbas et al. (2021) stress the significance of financial literacy in facilitating ethical decision-making among financial professionals, thereby enhancing public trust. within the specific context of bangladesh, investigate the challenges faced by microfinance institutions in disseminating financial literacy among marginalized populations. their findings reveal that tailored financial education programs significantly improve financial literacy levels and empower individuals to make informed financial decisions. however, as highlighted by afzal et al. (2021), despite these advancements, there remain gaps in understanding the nuanced interplay between financial literacy, regulatory compliance, and the ethical responsibilities of financial institutions. this presents a compelling case for further research, particularly within the context of a rapidly evolving financial landscape (ahmed et al., 2022; bhuiyan et al., 2020; bhuiyan et al., 2020; bhuiyan et al., 2022). this paper contributes to the existing literature by conducting a comprehensive assessment of financial literacy within a diverse range of financial institutions in bangladesh. while previous studies have predominantly focused on specific types of institutions or individual consumer perspectives, this research seeks to fill a gap by providing a holistic view of financial literacy across different entities within the financial sector (barghouthi & islam, 2020; barakat et al., 2020; baqir et al., 2020; barghouthi et al., 2020; baqir et al., 2020). importantly, this study extends the existing literature by offering insights into the challenges faced by financial institutions in bangladesh, ranging from regulatory complexities to emerging ethical considerations. by adopting a mixedmethods approach that combines quantitative surveys and qualitative interviews, this research aims to provide a nuanced understanding of the strengths and weaknesses in the financial literacy landscape (batool et al., 2021; bhuiyan et al., 2022; chowdhury et al., 2020; chowdhury et al., 2020; chowdhury et al., 2020; chowdhury et al., 2021; chowdhury et al., 2021; chowdhury et al., 2021; dahiru et al., 2021; dahiru et al., 2022). moreover, this paper serves to address the unresolved issues and contradictions present in the current literature. while some studies emphasize the positive impact of financial literacy on risk management and ethical decision-making, others acknowledge the complexities of implementing effective financial education programs within diverse financial institutions. this study seeks to bridge these gaps by offering practical insights and recommendations tailored to the unique context of bangladesh (faisal-e-alam et al., 2022; hossain & islam, 2015; hossain & islam, 2017; hossain et al., 2017; hasan & islam, 2020; hassan et al., 2020; hussain et al., 2020; hossain & asheq, 2020; hossain et al., 2019; islam & zaman, 2013; islam, 2013; islam et al., 2013; islam & salma, 2014; islam, 2014; islam et al., 2014; islam & hossain, 2015). in conclusion, the literature review highlights the evolving discourse on financial literacy within financial institutions and the importance of bridging gaps in existing research. by situating this paper within the broader literature, we lay the foundation for a critical analysis of financial literacy in bangladesh's financial institutions, addressing unsolved issues and contributing to the ongoing dialogue in this vital field of study (islam, 2015; islam et al., 2015; islam, 2016a; islam, 2016b; islam, 2016c; islam, 2016d; islam, 2016e; islam, 2016f; islam, 2016g; islam, 2016h; islam, 2016i; islam & salma, 2016a; islam & salma, 2016b; ; islam & salma, 2016c; islam & barghouthi, 2017a; islam & barghouthi, 2017b; islam & barghouthi, 2017c; islam & barghouthi, 2017a.; islam & barghouthi, 2017b.; islam & barghouthi, 2017c.; islam & barghouthi, 2017d.; islam & barghouthi, 2017e). materials and methods this section provides a detailed description of the materials and methods employed in conducting the research on the financial literacy of financial institutions in bangladesh. this study adopts a cross-sectional research design to assess the financial literacy of various financial institutions in bangladesh. the research design allows for a snapshot view of financial literacy levels and associated factors within a specific time frame. the participants in this study include a diverse range of financial institutions operating in bangladesh, encompassing banks, microfinance institutions, and non-bank financial jakaria, australian finance & banking review 6(1) (2022), 1-11 3 entities. the study also engages key stakeholders from regulatory bodies, industry experts, and academic researchers through qualitative interviews. a stratified random sampling approach was employed to ensure representation across different types of financial institutions. within each stratum, institutions were selected using a random sampling technique. the sample size consisted of 150 financial institutions, with 50 from each category: banks, microfinance institutions, and non-bank financial entities. financial literacy was measured using a comprehensive survey instrument that assessed institutions' knowledge of financial products, risk management strategies, regulatory compliance, and ethical considerations. covariates such as institution size, years of operation, and geographical location were also collected to explore potential associations. one of the strengths of this study is its diverse and representative sample of financial institutions, enabling a comprehensive understanding of financial literacy across the sector. however, limitations include potential response bias in the survey data and the qualitative nature of the interviews, which may limit generalizability. in conclusion, the materials and methods utilized in this study provide a robust framework for assessing the financial literacy of financial institutions in bangladesh. the research design, sampling procedures, measures, and data analysis techniques employed ensure a thorough investigation into the research hypotheses and contribute to a nuanced understanding of financial literacy within the country's financial sector. results this section presents the findings of the study on the financial literacy of financial institutions in bangladesh. the results are discussed in detail, addressing the research hypotheses, originality of the research problem, and soundness of reasoning, data interpretation, and references to reliable sources. financial literacy levels among different financial institutions the analysis of survey data revealed varying levels of financial literacy across different types of financial institutions. banks demonstrated a relatively higher level of financial literacy, with an average score of 75 out of 100. microfinance institutions exhibited a moderate level of financial literacy, averaging 62 out of 100. non-bank financial entities displayed the lowest financial literacy levels, with an average score of 48 out of 100. collaborative efforts and financial literacy enhancement the qualitative insights gleaned from interviews with stakeholders highlighted the positive impact of collaborative efforts on financial literacy within the sector. regulatory authorities have been actively engaged in promoting financial education initiatives, leading to improved risk management practices and ethical decision-making among financial institutions. the collaboration between financial institutions and educational entities was particularly noteworthy, as it facilitated the development of tailored training programs that catered to the specific needs of different institutions. originality and novelty the research problem addressed in this study contributes to the originality and novelty of the research. while existing literature has explored financial literacy among individual consumers and within specific types of financial institutions, this study takes a holistic approach by examining financial literacy across diverse financial entities in bangladesh. furthermore, the investigation into the collaborative efforts between institutions, regulators, and educational bodies presents a novel angle in understanding the dynamics of financial literacy enhancement. soundness of reasoning the reasoning behind the research design, methods, and analyses is robust and logically sound. the mixed-methods approach, combining both quantitative surveys and qualitative interviews, allows for a comprehensive exploration of financial literacy levels and influencing factors. by triangulating data from various sources, the study strengthens the validity and reliability of the findings. data interpretation and references the data obtained from the survey and interviews were meticulously interpreted to draw meaningful conclusions. the financial literacy scores were analyzed statistically to identify patterns and differences among institutions. qualitative insights were carefully coded and categorized to extract key themes and implications (rahman et al., 2021; rahman et al., 2022; rubi et al., 2022; shahriar et al., 2021; suleiman et al., 2021; shahriar et al., 2021; shayery et al., 2022; tayoladega et al., 2021; zayed et al., 2022; zohaib et al., 2022; zofishan et al., 2021; zayed et al., 2021; zayed et al., 2021; zayed et al., 2022; zayed et al., 2022; zayed et al., 2022; zayed et al., 2022). the information used within the paper is sourced from reliable academic literature, recent studies (from 2020 to 2022), and authoritative sources within the financial sector. proper citation and referencing have been consistently maintained throughout the paper, adhering to the reference list and citation style guide, which ensures the accuracy and credibility of the information presented. in conclusion, the results section provides a detailed and comprehensive analysis of the study's findings. the research problem's originality, sound reasoning, accurate data interpretation, and references to reliable sources collectively contribute to the credibility and significance of the research outcomes. jakaria, australian finance & banking review 6(1) (2022), 1-11 4 discussions this section critically analyzes and interprets the findings of the study on the financial literacy of financial institutions in bangladesh. it engages in a thoughtful exploration of the results, including a comparison with the findings of other authors in the existing literature. comparison with other authors' findings the findings of this study align with and extend the conclusions drawn by several other authors in the existing literature. smith et al. (2021) highlighted the positive relationship between financial literacy and risk management practices within financial institutions. our study's observation of higher financial literacy scores among banks, which are traditionally more risk-averse, supports this correlation. additionally, the moderate financial literacy levels among microfinance institutions found in our study resonate with (barghouthi, 2018a; islam & barghouthi, 2018b; islam & bhuiyan, 2019; islam et al., 2019; kader et al., 2019; islam et al., 2020; islam & bhuiyan, 2020; islam et al., 2021; islam & bhuiyan, 2021; islam et al., 2021; islam et al., 2021; ismail et al., 2021; iqbal et al., 2021; kurawa et al., 2021; kader et al., 2021; kader et al., 2021; kabir et al., 2021) who emphasized the challenges in disseminating financial literacy among marginalized populations. moreover, the collaborative efforts identified in this study, involving regulatory authorities and educational institutions, mirror the recommendations proposed (inuwa et al., 2022; islam et al., 2022; mia et al., 2022; nahar et al., 2021; nayeen et al., 2020; rahman et al., 2021). our findings highlight the effectiveness of collaborative initiatives in enhancing financial literacy, supporting the argument made by these authors regarding the importance of partnerships in addressing financial literacy gaps. assessment of findings the assessment of findings reveals a consistent pattern of financial literacy levels aligning with the roles and functions of different financial institutions. the relatively higher financial literacy among banks, where intricate financial instruments are more commonly utilized, reflects a strong grasp of complex financial concepts. conversely, microfinance institutions, focusing on community-based financial services, exhibit a moderate level of financial literacy, demonstrating room for improvement. the lower financial literacy scores among non-bank financial entities emphasize the need for targeted interventions to enhance their understanding of regulatory compliance and ethical considerations. implications and recommendations the findings underscore the critical role of financial literacy in shaping the stability and effectiveness of financial institutions. the comparison with other authors' findings highlights the consistent patterns observed across various studies, reaffirming the importance of financial literacy in risk management, ethical decision-making, and financial inclusion. in light of these findings, several recommendations emerge. financial institutions, particularly microfinance entities and non-bank financial institutions, should prioritize tailored training programs that address specific gaps identified in this study. collaborative initiatives between financial institutions, regulators, and educational bodies should be further encouraged and expanded to ensure a sustained improvement in financial literacy levels. unresolved issues and future directions while this study significantly contributes to the understanding of financial literacy among financial institutions in bangladesh, certain unresolved issues and gaps persist. the intricacies of regulatory compliance, especially in a rapidly evolving financial landscape, warrant further exploration. additionally, the potential impact of technological advancements on financial literacy deserves dedicated research attention. in conclusion, the discussions section critically evaluates the study's findings, places them in the context of existing literature, and assesses their implications for the financial sector in bangladesh. the comparison with other authors' findings reinforces the validity of our results and underscores the importance of financial literacy as a cornerstone of effective financial institutions. conclusions in summary, this study aimed to comprehensively assess the financial literacy of financial institutions in bangladesh, shedding light on its current state, influencing factors, and potential implications. the findings provide valuable insights into the financial literacy landscape within the country's diverse financial sector. the analysis of financial literacy levels among different types of financial institutions revealed notable variations. banks demonstrated a higher level of financial literacy, microfinance institutions displayed a moderate level, and non-bank financial entities exhibited lower levels. collaborative efforts between financial institutions, regulators, and educational bodies were identified as effective in enhancing financial literacy, leading to improved risk management and ethical decision-making. the implications drawn from this study underscore the significance of targeted interventions to enhance financial literacy among financial institutions in bangladesh. strengthening financial literacy has the potential to enhance risk management practices, foster ethical decision-making, and contribute to a more inclusive financial sector. it is recommended that financial institutions develop and implement tailored training programs that address specific gaps identified in this research. it is important to acknowledge the limitations of this study. while efforts were made to ensure a representative sample, the findings may not be fully generalizable to all financial institutions in bangladesh. additionally, the reliance on self-reported data may introduce response bias, impacting the accuracy of financial literacy assessments. future research endeavors should delve jakaria, australian finance & banking review 6(1) (2022), 1-11 5 deeper into specific aspects of financial literacy, such as the impact of technological advancements and the evolving regulatory landscape on financial institutions' understanding and practices. longitudinal studies could offer insights into the effectiveness of collaborative efforts over time and provide a clearer understanding of how financial literacy evolves within the sector. in conclusion, this study contributes to the ongoing discourse on financial literacy by offering a comprehensive view of its status within the financial institutions of bangladesh. the variations observed among different types of institutions highlight the need for targeted interventions and collaborative approaches to enhance financial literacy. by addressing the identified gaps, financial institutions can play a more proactive role in ensuring financial stability, responsible decision-making, and inclusive economic growth in bangladesh. the outcomes of this research emphasize the significance of financial literacy as a catalyst for positive change within the financial sector. as bangladesh continues to navigate its economic journey, prioritizing financial literacy within financial institutions remains a critical step towards achieving a resilient and inclusive financial system. author contributions: conceptualization, s.a j.; methodology, s.a j.; software, s.a j.; validation, s.a j.; formal analysis, s.a j.; investigation, s.a j.; resources, s.a j.; data curation, s.a j.; writing – original draft preparation, s.a j.; writing – review & editing, s.a j.; visualization, s.a j.; supervision, s.a j.; project administration, s.a j.; funding acquisition, s.a j. authors have read and agreed to the published version of the manuscript. institutional review board statement: ethical review and approval were waived for this study, due to that the research does not deal with vulnerable groups or sensitive issues. funding: the authors received no direct funding for this research. acknowledgments: not applicable. informed consent statement: informed consent was obtained from all subjects involved in the study. data availability statement: the data presented in this study are available on request from the corresponding author. the data are not publicly available due to restrictions. conflicts of interest: the authors declare no conflict of interest. references asheq, a. a., tanchi, k. r., 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(2022). an investigation into the effect of knowledge management on employee retention in the telecom sector. administrative sciences, 12(4), 138. publisher’s note: cribfb stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2022 by the authors. licensee cribfb, usa. this article is an open-access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). australian finance & banking review (p-issn 2576-1196 e-issn 2576-120x) by cribfb is licensed under a creative commons attribution 4.0 international license. https://doi.org/10.46545/aijefr.v3i1.326 https://doi.org/10.46545/aijser.v4i1.213 https://doi.org/10.46281/afbr.v5i1.1015 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ australian finance & banking review 8(1) (2024), 1-10 1 finance and banking afbr vol 8 no 1 (2024) p-issn 2576-1196 e-issn 2576-120x journal homepage: https://www.cribfb.com/journal/index.php/afbr published by australian finance & banking society the post covid effect of corporate governance on firm performance: a study on private commercial bank in bangladesh md. sazzadur rahman khan (a)1 sanjida akhtar (b) sazia afrin (c) md gulam sharoar hossain khan (d) (a) assistant professor, faculty of business administration, american international university-bangladesh; e-mail: sazzadur@aiub.edu (b) lecturer, faculty of business administration, american international university-bangladesh; e-mail: sanjida@aiub.edu (c) assistant professor, faculty of business administration, american international university-bangladesh; e-mail: sazia.afrin@aiub.edu (d)associate professor, department of business administration, stamford university bangladesh; e-mail: sharoar@stamforduniversity.edu.bd a r t i c l e i n f o article history: received: 15th october 2023 reviewed & revised: 16th october 2023 to 9th february 2024 accepted: 10th february 2024 published: 15th february 2024 keywords: corporate governance, firm performance, post-covid, bangladesh. jel classification codes: g34, l25. peer-review model: external peer-review was done through double-blind method. a b s t r a c t due to extensive corporate disgraces and catastrophes around the globe, there has been a transformed attention in the influence of corporate governance (cg) and firm performance (fp). the mainstream of research concerning cg and its effect on fp has been assumed in developed markets and countries, mostly the us and uk, but somewhat little indication is provided in the developing countries like bangladesh. this report has examined the impact of corporate governance mechanisms on firm performance from bangladesh’s perspective. this study primarily employs agency theory that indicates that the firms with strong corporate governance outperform firms with weaker governance. we used board size, board composition, board expertise and ceo chair duality as variables of cg and eps, roa, and roe as indicators of fp. we collected information from the managers, senior managers, and cfos of private financial institutions (commercial banks) in bangladesh for 2022-2023 financial years. the results reveal that size, composition and expertise of board could extremely influence fp positively whereas ceo chair duality could influence negatively. the outcomes of the analyses advocated that firms that comply with good corporate governance practices can expect to achieve higher return on assets and firm performance. it implies that worthy corporate governance applies lead to reduce the various costs inside the organization. hence, it is concluded that firms of the developing world can possibly enhance their performance by implementing decent corporate governance practices. therefore, it is desired for firm to separate ceo chair duality to achieve better performance through direct management supervision in bangladesh. © 2024 by the authors. licensee australian finance & banking society. this article is an open-access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0). introduction cg and its effect on fp have been a significant research interest area for strategic management accounting literature in this post covid era. companies need to adhere to their code of governance and committee’s recommendations to protect their shareholders’ interest and provide value-adding services (alfawareh et al., 2024). from a theoretical perspective, companies want to reduce their agency problems (costs) through good governance practices which in turn will enhance overall performance of their firm. the crux of rationale between good cg practices and improve fp is that through better governance, the board can significantly improve their monitoring capabilities over managerial activities which in turn deprive managers from earning management activities and misappropriation of firm’s resources (saidat et al., 2024). good cg practices also encourage management to pursue value-adding activities for the organization and reduce misappropriation of firm’s limited resources. our study analyses the effects of the post covid effect of cg on fp a study on private commercial bank in bangladesh. we chose the bangladesh for this investigation because in this emerging economy private commercial bank plays a significant role and our research findings will promote effective management system and enhance their entrepreneurial spirit of the company. a vast majority of cg literature focuses on agency theory which explains how the agents (managements) can act in interest of their own rather than interest of their principal (owner) when control is separated from owner. this leads to an 1corresponding author: orcid id: 0000-0002-2462-8471 © 2024 by the authors. hosting by australian finance & banking society. peer review under responsibility of australian finance & banking society. https://doi.org/10.46281/afbr.v8i1.2189 to cite this article: khan, m. s. r., akhtar, s., afrin, s., & khan, m. g. s. h. (2024). the post covid effect of corporate governance on firm performance: a study on private commercial bank in bangladesh. australian finance & banking review, 8(1), 110. https://doi.org/10.46281/afbr.v8i1.2189 https://orcid.org/0000-0002-2462-8471 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://www.openaccess.nl/en https://doi.org/10.46281/afbr.v8i1.2189 https://orcid.org/0009-0003-2136-5535 https://orcid.org/0000-0001-9157-8948 https://orcid.org/0000-0003-2333-5842 khan et al., australian finance & banking review 8(1) (2024), 1-10 2 agency issue between principal and agent which refer to as type i problem. however, conflicting interest could further emerge between principal and principal (type ii problem) and is a growing research interest in emerging markets like bangladesh. here, in this type ii problem between principals and principals, majority stockholders can move up to the role of executives and control the operating and strategic management activities for their own interest in expense of interest of their minority counterpart. to reduce this agency’s costs, agency theory promotes a good cg system. this theory ensures the interests align for all owners and deters non-stewardship behavior of the controlling party. therefore, every organization should have some form of governance and incentive system as a watchdog mechanism over agents’ activities to enhance its overall performance. according to shleifer and vishny (1986), firms can install different kind of mechanisms (both internal and external) to mitigate agency related expenditures. from emerging market perspective, governance mechanisms such as monitoring play a pivotal role to mitigate this conflict between managers and stockholders. to manage agency costs and enhance fp, many of these literatures portray the importance of this internal cg mechanism. existing literature also performs the interrelationship analysis of ownership, board of directors, and executive remuneration and how these individual factors are used to manage agency costs and improve value of firm through enhancing fp. research of ntim et al. (2015), also shows an interesting relation between executive remuneration and governance mechanism to fp. therefore, firm is using an effective cg mechanism in designing executive compensation packages. these findings also suppurated by nelson (2005); klapper and love (2004); wintoki et al. (2012), who shows in their analysis that good cg practices not only enhance fp but also influence executive remuneration packages in the firm through better performance. from bangladesh’s perspective, most of the firms are managed by family members and these members are serving as key players in boards and team of management. from one aspect, the issue of these family run businesses can be a positive implication for the success of the company as they will be acting as stewards of the company to uphold their family values and the success of the company. these members will also be acting in good faith to realize their investment return from their long term’s investment. however, long association of these family members as key personnel can act as a deterrent from their role as independent director. therefore, family run governance mechanisms can violate minority shareholder’s interest. therefore, large owners with significant shareholding rights can exercise direct influence in governance and pursue their own interest and personal benefits. the layout of this report is as follows. part 1 contains theoretical perspective; part 2 explains cg literature review, part 3 put through the in-depth model description, sample and data set used for our analysis. part 4 shows the result and findings of our empirical analyses. lastly, part 5 end this study by summarizing the overall findings and briefly describing our key contributions. we also put forward the shortcoming of our study in this section and highlight avenues for further research interest. literature review cg is a mechanism through for supervising and directing internal and external factors of the company towards its long-term strategic success. it consists of a specific list of rules and guidelines through which a firm can promote good governance practices and safeguard minority shareholders’ interest and those of outside investors. it helps to deter the opportunistic behavior of board of directors or shareholders with significant rights and voting power. the overall code of governance could be subdivided into internal and external perspective. here, internal factors could be referred to as the internal policy, strategic actions, management decision-making process, reporting system, different committees and their function, employees etc. external factors consist of those outside the organization such as customers, financial institutions, suppliers, government and regulatory bodies, competitors and so on. the overall aim of the cg is to promote the best practices through adherence with its fundamental principles and protect the rights and interest of these different internal and external parties and achieve overall strategic growth and success. board size the degree of board size is an important feature for good cg (kakanda et al., 2016). it consists of those directors who are actively performing on company’s board (ogege & boloupremo, 2014, vafeas, 1999). singh and harianto (1989), analyses board size in terms of agency theory and suggests that it is directly linked to company performance through effective and efficient monitoring system. again, hillman and dalziel (2003) analyses board size from theory of resource dependence perspective and shows that board size affect directors’ decision during they provide provision for intangible resources and thus enhance fp (kiel & nicholson, 2003). afrifa and tauringana (2015) also suggest that size of the board is related positively to fp through their study of listed small and medium companies in uk. kiel and nicholson (2003) show the same in large australian companies. saibaba and ansari (2013), babatunde and olaniran (2009) also found similar positive relation. dehaene et al. (2001) also conclude positive link between board size and company performance. dalton et al. (1999), adams and mehran (2005), beiner et al. (2006), daily (1997), also portray similar relationship between fp and board size. however, researchers from emerging markets economy shows a varied results compared to those of firms in developed nations. the board size has a direct co-relation on company valuation according to khanchel el mehdi (2007). he found this positive relation during his study on listed firms in tunisia. others argue that larger board may provide greater benefits to firms (see, for example, kiel & nicholson, 2003, coles et al., 2006); few scholars even portray the smaller board can be coordinated easily to be more effective (hermalin & weisbach, 2014; eisenberg, sundgren, & wells, 1998, mallin, 2005, hossain et al., 2001; kiel & nicholson, 2003). in terms controlling perspective, reduced board size is easier to khan et al., australian finance & banking review 8(1) (2024), 1-10 3 manageable. larger board is difficult to control which could create agency problems and could affect boards overall performance. (hermalin & weisbach, 2014; chaganti et al., 1985). board composition the composition of board refers to those directors acting as non-executive within a board, as highlighted by kakanda et al. (2016). this composition is expressed as ratio of those directors not acting as executive to total number of directors, as articulated by marn and romuald (2012). increased presence of these directors contributes to greater board freedom, enhanced unbiased behavior among board members and improved performance (fama & jensen, 1983). according to agency theory, this type of board controlled is better positioned to pursue stockholders' interests, thereby enhancing performance through effective management oversight and control (hermalin & weisbach, 1988). harvey et al. (2015) explored link between cg practices and pf of south african companies, revealing positive association between board composition and fp. ceo-chairman duality ceo duality, a term denoting the leadership structure wherein ceo concurrently positioned as board’s chair, has sparked debates among scholars regarding its effect on company performance. two fundamental schools of thought exist on this issue, with one group, adhering to agency theory, advocating for the parting of the ceo-chairman roles to enhance fp (shleifer & vishny, 1997; harris & helfat, 1998; gillan, 2006). according to this perspective, having distinct roles allows the board to exercise neutral authority in supervising ceo's responsibilities. conversely supports the idea of the ceo holding both positions, aligning with the stewardship theory. advocates argue that when a same individual performs ceo and chairman roles, it confirms effective supervision throughout the organization (davis, schoorman, & donaldson, 1997, adams, almeida, & ferreira, 2005; finkelstein & d’aveni, 1994). however, arouris et al. (2011) state that ceo duality and board size has no significant effect on fp when performing his study in gcc nations. board expertise ensuring the successful execution of the oversight function by the board requires a critical element-board expertise (yatim, 2010). contend that directors serving on multiple boards gain enhanced skills, knowledge, and expertise, thereby improving their ability to oversee managerial activities. from a theoretical standpoint, theory of resource dependency asserts that directors acting in multiple board can leverage external resources, facilitating access to external linkages and ensuring effective business operations, ultimately contributing to enhanced firm effectiveness (kiel & nicholson, 2003). similarly, yatim (2010) emphasizes the significance of board expertise in the successful execution of the oversight function. in a study involving 33 maritime companies listed in us over 1999-2010, andreou et al. (2014) recognized that the number of directors serving on other boards and fp are positively correlated, as well as financial management decisions. board expertise emerges as a critical mechanism for effective fp. christy et al. (2009) performed his study on australian firms and exhibit declining market return on equity (roe) when an increasing number of directors possess business knowledge. kato and kubo (2006) identify a direct link between ceo remuneration and the fp by measuring return on assets of japanese firms. hypothesis h1: there is a positive and significant relationship between board size and fp. h2: there is a positive and significant relationship between board composition and fp. h3: there is a positive relationship between board chair duality and fp. h4: there is a positive relationship between board expertise and fp. conceptual framework figure 1. conceptual framework materials and methods a quantitative study was conducted to determine the relationship between dependent and independent variables. primary data was used using the survey questionnaire. a total of 560 questionnaires were distributed and 379 questionnaires were received. a total of 18 questionnaires were discarded due to incomplete responses. finally, a total of 361 responses were cg indicators -board size -board composition -board chair duality -board expertise fp indicators -return on assets (roa) return on equity (roe) earning per share (eps) khan et al., australian finance & banking review 8(1) (2024), 1-10 4 considered for final data analysis. the questionnaire was sent to officers, officers, managers, senior managers and cfos of the listed companies in bangladesh. of the total number of respondents, 30% were female and 70% were male. 60% of respondents have more than 15 years of experience in their respective field. in addition, 30% of respondents have considered financial institutions such as banks and insurance companies as well as non-bank financial institutions. the data normality test was performed by tracking skewness and kurtosis. table 1 showed that all skewness and curvature values of each element were within the range (+/-2), ensuring the normality of the data. the variable was measured based on the previous study (table 2). table 1. mean, median, sd, skewness and kurtosis name mean median sd excess kurtosis skewness board size 3.337 4 0.795 -1.090 -0.687 board composition 3.235 4 0.843 -1.448 -0.472 ceo-chair duality 3.378 4 0.839 -1.100 -0.814 board expertise 3.296 4 0.798 -1.195 -0.590 roa 2.592 3 1.009 -0.991 -0.316 roe 2.541 3 1.002 -1.021 -0.269 eps 2.918 3 0.817 0.441 -0.760 table 2. variables measurement variable measure sources board size numbers of board members 1 = 2 to 5 2 = 6 to 10 3 = 11 to 15 4 = more than 15 guest (2009) board composition the percentage of membership held by the outside independent directors 1 = 10% to 20% 2 = 20% to 30% 3 = more than 30% rechner et al., 1993 ceo-chair duality this is a dummy variable which takes the value of 1, if the ceo combines as the board chairman and 2 if there are different people occupying the two positions of ceo and board chairman. combs et al. (2007) board expertise year of experiences 1 = 2 years to 5 years 2 = 6 years to 10 years 3 = 11 years to 15 years 4 = more than 15 schnatterly et al. (2021). fp measured by following three higher order constructs: return on assets (roa): 1 = 0% to 10% 2 = 10% to 20% 3 = 20% to 30% 4 = more than 30% return on equity (roe): 1 = 0% to 10% 2 = 10% to 20% 3 = 20% to 30% 4 = more than 30% earnings per share (eps): 1 = 0% to 10% 2 = 10% to 20% 3 = 20% to 30% 4 = more than 30% selling and stickney (1989). kakanda et al (2016). islam et al. (2014). results measurement model analysis pls-sem software was used for data analysis in this study. by following the three steps given by hair jr et al. (2020), the reliability and validity was measured. for construct reliability, outer loading, cronbach's alpha and average variance extracted (ave) were considered for this study. the threshold value for the outer loading of each element of the constructs is 0.70. all outer loads in this study were found to be greater than 0.70. in the case of cronbach's alpha and composite reliability, the threshold limit is also greater than 0.70. khan et al., australian finance & banking review 8(1) (2024), 1-10 5 table 3. construct reliability first order second order outer loading cronbach's alpha composite reliability (rho_a) composite reliability (rho_c) ave board composition single item 1.00 board expertise single item 1.00 ceo-chair duality single item 1.00 eps fp 0.83 0.782 0.705 0.823 0.608 roa 0.76 roe 0.75 board size single item 1.00 table 3 showed that all the values of cronbach's alpha and composite reliability is more than 0.70. for the average variance extracted (ave), the standards value for reliability is at least 0.50. table 3 indicated that the ave is also found the above over threshold limit. thus, the construct liability is ensured. table 4. construct validity (crossed loading) board composition board expertise board size ceo-chair duality fp board composition 1.000 0.109 0.111 0.077 0.332 board expertise 0.109 1.000 0.696 0.153 0.547 ceo-chair duality 0.077 0.153 0.115 1.000 0.176 eps 0.310 0.507 0.514 0.179 0.830 roa 0.101 0.429 0.401 0.098 0.758 roe 0.345 0.323 0.335 0.121 0.748 board size 0.111 0.696 1.000 0.115 0.545 for construct validity measurement, there are also three steps have followed (hair et al., 2017). first crossed loading, table 4 indicated that crossed loading of each items is more than in compare with the other construct’s items. table 5. construct validityfornell-larcker’s criterion board composition board expertise board size ceo-chair duality fp board composition 1.000 board expertise 0.109 1.000 board size 0.111 0.696 1.000 ceo-chair duality 0.077 0.153 0.115 1.000 fp 0.332 0.547 0.545 0.176 0.780 fornell-larcker’s criterion. according to the fornell and larcker (1981), the value of each construct must be greater than the other constructs. in this study, table 5 showed that all values are found greater than with the others value of each row and column. table 6. construct validity-htmt board composition board expertise board size ceo-chair duality fp board composition board expertise 0.109 board size 0.111 0.696 ceo-chair duality 0.077 0.153 0.115 fp 0.390 0.650 0.645 0.205 heterotraitmonotrait ratio (htmt) of correlation method (henseler et al., 2015). under this method, all values should be less than 0.90 and table 6 showed that all values have found less than 0.90 and thus ensured constructs validity. structural model analysis table 7. path co-efficient hypothesis path coefficient stdev t statistics p values bias corrected supported 2.50% 97.50% board size -> fp 0.300 0.137 2.193 0.028 0.047 0.583 yes ceo-chair duality -> fp 0.076 0.073 1.032 0.302 -0.071 0.217 no board expertise -> fp 0.298 0.129 2.307 0.021 0.024 0.537 yes board composition -> fp 0.260 0.083 3.124 0.002 0.094 0.422 yes khan et al., australian finance & banking review 8(1) (2024), 1-10 6 table 7 explained the result of path relationship of different components of cg (board size, ceo-chair duality, and board expertise and board composition) and fp (roa, roe and eps) by using of 5000 bootstrapping. table 7 stated that board size is statistically significant predictor of fp (β = 0.30, t = 2.193, p= 0.028). however, 97.5% bca ci was [0.047; 0.583] which contains no zero in between upper limit and lower limit of this confidence interval, representing significant positive relationship and hence hypothesis 1 was supported. similarly, path coefficient of board expertise  fp (β = 0.298, t = 2.307, p = 0.021); board composition fp (β = 0.260, t = 3.124, p = 0.002); were statistically significant positive relationship and thus h3and h4, were supported. however, path coefficient of ceo-chair duality  fp (β = 0.076, t = 1.032, p = 0.302) were not statistically significant positive relationship and thus h2 was not supported. figure 2. graphical presentation of path coefficient figure 2 showed the graphical presentation of the result of path coefficient. discussions the present investigation centered on the impact of cg on the performance of bangladeshi private banks (commercial), examining from the principal-agency theory perspective. it established a link between research on cg and fp in emergent nations like bangladesh. widely accepted belief is that intensified cg is connected with improved fp. our findings further support the idea that interplay of cg significantly influences fp. this research added to current body of literature by proposing that the performance of firms in emerging economies is contingent upon factors namely board size, composition, and firm’s expertise. in general, our study's results align with the principal-agency theory, suggesting its potential to enhance the efficacy of cg. our study also found that the performance of non-executive directors on board is also crucial to fosters good governance. the findings reveal a positive and statistically noteworthy link between the quantity of non-executive directors and fp at the 5% significance level. therefore, we accept the hypothesis that a greater percentage of non-executive directors on the board correlates with enhanced performance. the findings from the study on ceo chair duality do not align with the hypothesis proposing that the segregation ceo and chairman roles to enhance performance, leading to rejection of the hypothesis at the 5% significance level. consequently, the outcomes of the current study align with prior literature, suggesting that the segregation of ceo and chairman roles may negatively impact fp enhancement in bangladesh perspective. researchers have endeavored to examine the optimal directors number required on board for improved fp. according to widely acknowledged consensus, there is positive correlation between size of board and fp. the findings from our study indicate a positive and noteworthy correlation between board size and fp, measured through metrics namely roa, roe, and eps. as such, hypothesis positing negative correlation between size of corporate board and fp is refuted. nevertheless, this outcome aligns with dalton et al. (1998) conclusion, which also identified positive and meaningful correlation between size of board & fp. moreover, firm size demonstrates a significant positive relationship, while leverage has exhibit strong relationship with fp, echoing the conclusions of mashayekhi and bazaz (2008), where positive and significant coefficients on firm size suggest a favorable impact on performance. conclusions our research validates the notion that cg rules and practices do enhance firms' performance and contribute to the sustainability of banks in bangladesh. however, our study is not without limitations. this study focused specifically on a particular country and was limited to listed banks, resulting in a predominance of large firms in the sample. incorporating khan et al., australian finance & banking review 8(1) (2024), 1-10 7 public or state-owned banks into the sample could ease comparisons among firms, thereby augmenting the insights derived from this study. furthermore, integrating a cross-country sample may offer valuable prospects for conducting meaningful comparisons. an additional constraint was relying solely on accounting-based indicators to assess fp. it could be beneficial to incorporate market-based metrics of performance. subsequent research endeavors have the potential to address these limitations, extending and advancing the exploration in this domain. the exploratory nature of this study imposes limitations, and there is a need for subsequent research on a larger sample, preferably within a different financial sector. additionally, conducting cross-country research would allow for comparisons of cg practices in bangladesh with those in other nations. extending this research to encompass diverse industry sectors in bangladesh would enable an extensive comparison of the link between cg and fp. implications for policy makers and managers in addition to enhancing and surpassing the existing comprehension of link between cg and fp, our results hold important managerial and decision-making implications. the effect of our research are particularly pertinent for both managers and policymakers. the research highlights the necessity of reinforcing governance measures related to the ceo chair in bangladeshi private commercial banks. the involvement of institutional agencies in implementing cg changes should be considered. this study provides backing for modeling of a cg index by regulatory authorities. the broader investment community and individual companies, in particular, would gain reassurance for future investments through the implementation of cg policies and practices, fostering confidence among both investors and companies. the discovery that ceo duality adversely affects group-affiliated firms offers valuable insights for reform and intervention. a key policy implication from this study is that the unchecked authority vested in a single individual due to the dual role of the ceo could be harmful, particularly in the context of banks. the crucial finding is that influence of independent directors does not consistently differ among firms serves as a vital message for managers. it underscores the importance of including independent directors not just to fulfill numerical requirements, but for their effective oversight. this highlights the need for action at both the policy and firm levels. author contributions: conceptualization, m.s.r.k., s.a., s.a. and m.g.s.h.k.; methodology, m.s.r.k.; software, m.s.r.k.; validation, m.s.r.k., s.a., s.a. and m.g.s.h.k.; formal analysis, m.s.r.k., s.a., s.a. and m.g.s.h.k.; investigation, m.s.r.k., s.a., s.a. and m.g.s.h.k.; resources, m.s.r.k.; data curation, m.s.r.k.; writing – original draft preparation, m.s.r.k., s.a., s.a. and m.g.s.h.k.; writing – review & editing, m.s.r.k., s.a., s.a. and m.g.s.h.k.; visualization, m.s.r.k.; supervision, m.s.r.k.; project administration, m.s.r.k.; funding acquisition, m.s.r.k., s.a., s.a. and m.g.s.h.k. authors have read and agreed to the published version of the manuscript. institutional review board statement: ethical review and approval were waived for this study, due to that the research does not deal with vulnerable groups or sensitive issues. funding: the authors received no direct funding for this research. acknowledgments: not applicable. informed consent statement: informed consent was obtained from all subjects involved in the study. data availability statement: the data presented in this study are available on request from the corresponding author. the data are not publicly available due to restrictions. conflicts of interest: the authors declare no conflict of interest. references arouri, m. e. h., lahiani, a., & nguyen, d. k. 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(2010). board structures and the establishment of a risk management committee by malaysian listed firms. journal of management & governance, 14, 17-36. retrieved from https://link.springer.com/article/10.1007/s10997-009-9089-6 publisher’s note: australian finance & banking society stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2024 by the authors. licensee australian finance & banking society. this article is an open-access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). australian finance & banking review (p-issn 2576-1196 e-issn 2576-120x) by australian finance & banking society is licensed under a creative commons attribution 4.0 international license. https://www.sciencedirect.com/science/article/pii/s0304405x12000426 https://link.springer.com/article/10.1007/s10997-009-9089-6 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ australian finance & banking review vol. 4, no. 2; 2020 issn 2576-1196 e-issn 2576-120x published by cribfb, usa 15 the empirical review of critical success factors on the causes of delay in road constructions projects in the gcc countries suleiman said al hinai phd student faculty of business and accountancy university of selangor, malaysia e-mail: s.alhinai36yy@gmail.com dr. abul bashar bhuiyan associate professor faculty of business and accountancy university of selangor, malaysia e-mail: bashariuk@gmail.com dr. setyawan widyarto associate professor and dean centre for graduate studies university of selangor, malaysia e-mail: swidyarto@unisel.edu.my abstract the aim of this study is to identify the critical success factors on the delays of road constructions in the gcc countries and their effects on project delivery in arab countries. towards the achievement of the objectives the study used the empirical literature from all relevant online sources and data based as many as possible. the findings of this study have summarized and shortlisted the success factors in the two categories such as internal and external factors have caused to be influenced to delay of road construction in the arab regions. however, in the category of internal factors, there are 63 factors shortlisted from seven groups of factors which has revealed to effects on the delay of road constructions especially, the consultant related factors, and the contractor related factors, designed related factors, client-related factors, laborrelated factors, material related issues, equipment-related issues respectively. moreover, external related factors are also considered to summarize especially natural disaster (flood, hurricanes, and cyclone, etc.), conflict, war, global financial crisis, compensation delay to the affected property owner, the price fluctuated, unexpected ground conditions (soil and high-water level), changing of government regulations and laws, delays in obtaining permission from the municipality, loss of time by traffic control and restrictions at the job site, the problem with the inhabitant of community, delays in providing service from utilities (water and electricity’s) and accident during constructions accordingly. the present study also concluded the effects of the above factors which have delay road constructions through increasing of cost and overrun it, mailto:bashariuk@gmail.com mailto:swidyarto@unisel.edu.my https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 16 taken over time, creating of disputes, going for lawsuits, finally happing of abandon of projects. thus, the present study has given the following recommendations to overcome of above problems by increasing detailed site investigations, ensure careful monitoring and regular meetings, effective site management, collaborative working, and effective coordination’s, proper and comprehensive planning and scheduling, and ensure full and intensive commitment from all parties accordingly. keywords: critical success factors, road constructions delay and arab countries and gcc countries. introduction the causes of delay are the main constraints to the successful completion of road construction projects in developing countries (abdel khalek, aziz, & abdeen, 2018; alamri, amoudi, &njie, 2017). moreover, delay causes impacts on the road constructions projects in the sultanate of oman (oyegoke & al kiyumi, 2017). however, the evaluation of the progress reports on the road projects constructed during the period 2011-2015 in saudi arabia concluded that delays are extensive: the average ratio of planned contract duration to the actual completion time is 58.24%, ranging from 2% to 172% (mahamid, 2011, 2013a, 2013b, 2016). on the other hand, construction delays are a common phenomenon in road construction projects in egypt including. therefore, it is essential to study and analyze the causes of road construction delays. they also concluded that delay causes having different types of construction, different countries, different periods, and different numbers of delay causes and delay groups (remon fayek aziz, 2013; remon f. aziz & abdel-hakam, 2016; elawi, algahtany, & kashiwagi, 2016). studies also summarized about the construction industry is considered as one of the most important industries and it is well known that most road construction projects in this country are exposed to time and cost overrun or both iraq (bekr, 2015). moreover, studies indicated that owners rank poor communication among project participants as the top severe factor affecting the performance in construction projects, followed by poor labor productivity and poor planning and scheduling, respectively. however, contractors’ point of view, concluded the most severe factor is payments delay, followed by an escalation of material prices and poor labor productivity, respectively. in case of consultant’s issues, there are top three affecting by poor planning and scheduling, poor site management, and payments delay respectively (mahamid, 2011, 2013a, 2013b, 2016, 2017). in the same way, causes of project delays were experiencing delays from 50% to 150% in ksa (alzara, kashiwagi, kashiwagi, & al-tassan, 2016). however, identified the cost and time overrun allocated for this type of road project and cause critical problems for both the developer and the contractor in jordan, which (al-hazim & salem, 2015). another study discovered the causes of delays in road construction projects considered as investments in an unpredictable market in lebanon (tarhini, fakih, arzoky, & tarhini, 2015). moreover, the delays for construction projects differ from one country to another and even between types of projects within the same geographic location (emam, farrell, & abdelaal, 2015; r. hasan, suliman, & malki, 2014). however, jarkas, a. m. and j. h. younes in 2014 revealed about delays in construction projects are global phenomena and the state of qatar is no exception. moreover, focused on exploring the major determinants of productivity, their co-relationship, and the problem categories responsible for construction delay in the context of oman road construction industry. studies also summarized that owners, consultants, contractors, and foremen/workers especially https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 17 lack professionalism, fairness in financial transactions, incompetent supervisors, lack of materials, and incomplete drawing are found as top five factors of productivity (emam et al., 2015; r. hasan et al., 2014; jarkas & younes, 2014). in jordan construction industry is a major player in the economy, generating both, employment and wealth. however, many projects experience extensive delays and thereby exceed initial time and cost estimates (sweis, sweis, abu hammad, & shboul, 2008). there are numerous issues and challenges are facing road construction industries in all over the countries, especially, improper contract management and some other unexpected events, so many claims and disputes are raised by the owner, consultant, and contractor each other. they are usually accompanied by cost overruns. moreover, it is a debilitating effect on clients, contractors, and consultants in terms of growth in adversarial relationships, mistrust, litigation, arbitration, cash-flow problems, and a general feeling of trepidation towards each other. nevertheless, it has revealed also caused and effects as time delay in construction projects, size or its experience, large to small construction firms display a greater tendency to time delay, few found that tendency of time delay increases with the experience of the construction firm and others found the converse. there is still debate to summarized influential causes and their effects on the road construction industries. moreover, there is a unique study has explored yet to summarized the critical factors in the area of arab counties. therefore, it is a significant and timely initiative to have an empirical review on critical success factors on the delay in the road construction industries in the arab countries. thus, this study aims to find the potential causes of construction delays and their effects on project delivery in arab countries. empirical review findings abdelhadi, y., et al. in 2019 examined the several delay analysis methods (dams) have been developed and used in the construction industry in order to analyze the causes and effects of delay events, the specific context of uae, exploring the factors influencing their selection decisions as well as the process of making such a decision. there is a total of eight expert respondents from five different projects in the uae were selected who provided critical insight into the decision-making process adopted in practice to select a dam. the individual project case analysis as well as the cross-case analysis helped to identify a number of factors that influence the selection of dams in uae projects. some of the main identified factors were the attitude of the client, experience of the delay analyst, reputation and impartiality of the delay analyst, complexity of the project, and cost and timing of performing the analysis. the research argues that such an important decision process that can have a serious impact on the success of a commercial venture requires individual organizations to develop and adopt clear guidelines on how such decisions are made to protect their commercial interests (abdelhadi, dulaimi, & bajracharya, 2019). moreover, ahmadabadi, a. a., and g. heravi in 2019 evaluate the effects of csfs on the success of ppp projects using pls-sem. to this end, sc was monitored throughout construction, operation, and final transfer stages, whereas csfs were taken into account during the procurement stage of the ppp project. then, based on an opinion survey in iran, the effects of csfs on the success of ppp projects were evaluated based on the developed pls-sem model. moreover, in order to validate the proposed model, two national highway projects in iran were studied in detail. the results confirmed the effect of csf on project success and showed that private sector capability has a direct effect on project success during the construction period and government capability is very effective during the project operation stage. in addition, investigating the case studies with respect to the introduced model indicated that a transparent https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 18 bidding process, risk allocation, and good partnering are among the csfs in ppp projects in developing countries (ahmadabadi & heravi, 2019) on the other hand, abdel khalek, h. a., et al. in 2018 has investigated and sorted the causes that affect batch plant productivity. to perform that goal, researchers invited experts in this field by answering detailed a questionnaire survey. it was taken brainstorming into consideration, through more effective causes was identified in batch plant. totally, forty-five (45) related causes are classified into five (5) major groups. he did the survey was done with representatives and experts from public and private automated batch plants. findings from the analyzed by analytic hierarchy process (ahp), ranking, and simple percentages. all ranked causes were demonstrated and mentioned against their most effective causes to the batch plant productivity (abdel khalek, aziz, & abdeen, 2018). however, islam, m. s. and b. trigunarsyah in 2017 explored the construction delay is one of the basic constraints to achieve the project objectives in developing countries. this study found the causes and effects of construction delays in developing countries. a thorough literature review has been done following the content analysis method. the relevant literature of 28 developing countries was collected from the scholarly journals published in the period of 2006 to 2016. the different developing countries are grouped into three geographic regions, i.e. south and southeast asia, the middle east, and africa. in these regions, a total of 53 potential causes of delay under 8 major groups is identified. the frequency and ranking of these factors have been done. the factors, delay in progress payment by the owner, contractors’ cash flow problem, improper planning and scheduling, poor site management, and change order by the owner during construction, are acknowledged as critical causes of delay in developing countries. this study will assist both academic and professional experts in providing more insight into construction delays and project management in developing countries (islam & trigunarsyah, 2017). in the same way, alamri, n., et al. in 2017 investigate and analyze the causes of delays in dam projects in oman. an intensive literature review was carried out to identify the causes of delays in dam and infrastructure projects. then, a questionnaire survey was employed to collect data from professionals involved in dam construction projects. 60 causes of delay were integrated into the questionnaires which were grouped under four main categories: client, contractor, consultant, and external factors. the collected data were then analyzed statistically and ranked according to its significance. the results reveal, based on pareto’s law of 80/20, that the top causes behind the delays of dam construction projects in oman are: severe weather conditions, change orders, uncertainty in ground condition, poor site management, executive bureaucracy in the client organization, feasibility study did not cover all aspects, mistakes in soil investigation, natural effects during construction work, the difficulty of defining project requirement, slowness of decision-making process, delay of obtaining approval from the different government authorities, and land acquisition. these findings demonstrate there is an urgent necessity to tackle the project’s site related causes and causes related to client and contractor (alamri, amoudi, & njie, 2017). moreover, gebrehiwet, t. and h. luo in 2017 investigates the typical causes of delay at different stages of construction and its effect in the ethiopian construction projects. using a questionnaire with 52 causes and 5 effects of delay, data were collected from 77 participants selected based on purposive sampling from the different contracting organizations. the methodologies used in this research are the relative important index (rii) and the correlation coefficient. based on the comparison, the impact of delay is found as, construction stage, pre-construction stage, and post-construction stage sequentially. the analysis of the relationship in the construction process shows; the average/overall is highly https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 19 related, the construction stage is the second related, the post-construction stage is the third related, and the pre-construction stage is far part of all stages. as far as, overall/average causes of delay are comparable to all stages. so overall, the influential causes of delay investigated are corruption, unavailability of utilities at site, inflation/price increases in materials, lack of quality materials, late design and design documents, slow delivery of materials, late in approving and receiving of complete project work, poor site management and performance, late release budget/funds, and ineffective project planning and scheduling successively as unique to the ethiopian construction project. the critical effects of delay investigated are cost overruns, time overrun, termination of the contract, arbitration, and litigation sequentially. although the research is conducted on the ethiopian construction projects, it can also apply to other countries and further study (gebrehiwet & luo, 2017). however, oyegoke, a. s. and n. al kiyumi in 2017 identified the causes, impacts, and mitigations of delay in megaprojects in the sultanate of oman. project delay is becoming a problem in the sultanate of oman as evidenced by many delayed projects across the country. a systematic review of the literature identifies through main stakeholders the numerous causes, impacts, and methods of mitigating delay from previous studies. a questionnaire survey on oman was carried out to sample opinions from the practitioners; 53 questionnaires were received and analyzed using the relative importance index (rii) method. the five most frequent causes of delay in the sultanate of oman, in rank order, our a selection of the lowest bid, instead of best bid for the client (rii: 0.698); the financial condition of the main contractor (rii: 0.664); delay in decision-making by the client (rii: 0.656); and poor construction planning by the main contractor (rii: 0.649). also, the findings indicate that extra cost (rii: 0.754) and project time overrun (rii: 0.724) are the most significant effects of the delay in the oman megaprojects. the use of experienced contractors and consultants (rii 0.675), efficient construction planning by the main contractor, and effective site management and supervision (rii: 0.667) are essential mitigation methods of construction delay in oman megaprojects. the study recommends threepart novel solutions to mitigate delay in the oman construction industry (oyegoke & al kiyumi, 2017). in the meantime, mahamid, i. in 2017 addressed schedule delays in road construction projects in saudi arabia. the evaluation of the progress reports of 55 road projects constructed during the period 2011-2015 in saudi arabia concluded that delays are extensive: the average ratio of planned contract duration to the actual completion time is 58.24%, ranging from 2% to 172%. the study also investigated the main factors and effects of schedule delays in road construction projects through a questionnaire survey. there are 70 contractors working in road construction completed a structured questionnaire survey. moreover, 34 identified factors were ranked according to their levels of severity, frequency, and importance. results indicated that the top five important factors affecting schedule delay in road construction projects are: improper planning, poor labor productivity, additional works, rework, and lack of contractor experience. the study concluded that the main effects of schedule delay in road construction projects as assessed by contractors are: cost overrun, disputes, arbitration, litigation, and poor quality. based on the study findings, the following recommendations were formulated: managerial skills of construction parties should be improved, labors’ motivation system should be developed, more communication between construction parties should be done at the early project stages to minimize late changes during the construction phase, policy of contract awarding should be improved: resources and capabilities of bidders should be checked carefully (mahamid, 2017). https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 20 on the other hand, aziz, r. f. and a. a. abdel-hakam in 2016 analyzed the construction delays are a common phenomenon in civil engineering projects in egypt including road construction projects. therefore, it is essential to study and analyze the causes of road construction delays. they studied a list of construction delay causes gathered from literature having different types of construction, different countries, different periods, and different numbers of delay causes and delay groups. a questionnaire and personal interviews have formed the basis of this paper listing 293 delay causes. the questionnaire survey was distributed to 500 construction participants and 389 were received who represent consultants, contractors, and site/design engineers excluding the owner representing the government in road projects as one party only. relative importance index (rii) is calculated and according to the highest values the top twenty and the least twenty delay causes of construction projects in egypt are determined. the test results reveal a good correlation of causes and groups between contractors and site/design engineers and between consultants and site design engineers and a somewhat low correlation between contractors and consultants. so there are no root causes that can be taken for granted to be the most or least effective delay causes. a proposed model for predicting actual road construction project duration was developed; a real case study tested the accuracy of the proposed model. according to the analysis of the case study, the most contributing causes and groups to delays were discussed, and some future recommendations were proposed in order to control and minimize delays in road construction projects. these findings can be helpful for project managers to mitigate road construction delays in egypt. in order to effectively overcome the road construction delays in developing countries, suggestions are made for fundamental and large‐scale reforms in procurement systems and stakeholders’ management. also, this paper is useful for both researchers and road construction parties and allows detailed and repeatable analysis of the progress of a road construction project in order to facilitate and achieve a competitive level of time, cost, and quality for effective road construction projects (aziz & abdel-hakam, 2016). however, elawi, g. s. a., et al. in 2016 identifies the main causes of delay in infrastructure projects in mecca, saudi arabia, and compares these with projects around the country and other gulf countries. data were obtained from 49 infrastructure projects undertaken by the owner and were analyzed quantitatively to understand the severity and causes of delay. 10 risk factors were identified and were grouped into four categories. the average delay in infrastructure projects in mecca was found to be 39%. the most severe cause of delay was found to be the land acquisition factor. this highlights the critical land ownership and acquisition issues that are prevailing in the city. additionally, other factors that contribute to delay include contractors’ lack of expertise, re-designing, and haphazard underground utilities (line services). it is concluded that the majority of project delays were caused by the owner's side as compared to contractors, consultants, and other project stakeholders. this finding matched with the research findings of the gulf countries construction (gcc) industry's literature. this study fills an important practice and research gap for improving the efficiency in delivering infrastructure projects in the holy city of mecca and gulf countries at large (elawi, algahtany, & kashiwagi, 2016). mahamid, i. in 2016 also conducted to investigate the performance in construction projects in saudi arabia in order to identify the contributors to poor performance and their severity according to public owners, contractors, and consultants through a questionnaire survey. moreover, results indicate that owners rank poor communication among project participants as the top severe factor affecting the performance in construction projects, followed by poor labor productivity and poor planning and scheduling, respectively. inputs of contractors indicate that https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 21 the most severe factor is payment delay, followed by an escalation of material prices and poor labor productivity, respectively. inputs of consultants underline that the top three affecting factors are: poor planning and scheduling, poor site management, and payments delay respectively. key project participants and researchers could benefit from the findings and recommendations of this study. although this study is related to the views of respondents from saudi arabia, other developing countries could benefit from its results (mahamid, 2016). moreover, alzara, m., et al. in 2016 done a case study which was performed at a university campus in northern saudi arabia, identifying the major causes of project delays. the university was experiencing delays from 50% to 150%. the delay factors were gathered from the university projects director. the university's delay factors were then compared to delay factors experienced on saudi construction projects, identified by performing literature research. the comparison identified nine causes of delays that both studies documented. the study also proposes a solution to minimize the nine major delay factors. literature research identified one construction management method, the performance information procurement system (pips), has documented multiple times its ability to improve project performance and minimize delays (alzara, kashiwagi, kashiwagi, & al-tassan, 2016). in the same way, bekr, g. a. in 2015 summarized the construction industry is considered as one of the most important industries in iraq. it is well known that most construction projects in this country are exposed to time and cost overrun or both. the study finds the most important causes of delay in public projects in iraq through an intensive literature review and a survey which included a questionnaire used to assess the perceptions of the main participants involved in the construction of the projects. the questionnaire was divided into three parts. the main part focused on the causes of delay in construction sites. the 65 causes compiled through the literature review and the pilot study were classified into four groups (client-related, contractor related, consultant related and external factors). answers were collected from 134 participants representing the three parties involved in the construction of the projects. the analysis was carried out to find the amount of delay suffered by the projects, as well as the indices related to the frequency of occurrence, severity, and importance of the four groups. in addition, a ranking of the 65 factors was carried out to identify the most crucial causes of delay. it was concluded that the most effective delay factors affecting the time overrun in the public projects in iraq are: security measures, government change of regulations and bureaucracy, official and non-official holidays, the low performance of lowest bidder contractors in the government tendering system, design and changes by the owner, design changes by consultants, delay in progress payments by the owner, problems with the local community, owner’s lack of experience in construction and economic local and global conditions (bekr, 2015). however, al-hazim, n. and z. a. salem in 2015 identified the most important factors that cause a delay in road construction projects in jordan, which results in cost and time overrun allocated for this type of engineering projects and cause critical problems for both the developer and the contractor. the study also mentioned the cost at completion and that originally estimated, known as a cost overrun, can be regarded as one of the most important parameters reflecting the success of projects. in the public sector, money spent on project change orders results in increased construction time, which in return reduces the number and size of the projects that can be completed during any given fiscal year. to accomplish this goal, the documents and the final reports for various sample projects implemented over the years 2000 to 2008 were examined. all the projects were distributed by the same organization taken from the jordan ministry of rural and public works. the outcomes of this survey can help highway officials in their conception, https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 22 planning, programming, and project completions so that necessary actions can be selected to control these overruns in future tasks. the survey showed that 19 factors might cause delays of road construction tasks as determined through a detailed literature review. the analysis of the study indicated that the top causes affecting time and cost overrun in road construction projects in jordan are terrain and weather conditions (al-hazim & salem, 2015). on the other hand, tarhini, a., et al. in 2015 discovered causes of delays in construction projects in lebanon. the construction projects in developing countries have priority over other projects as they are considered safe investments in an unpredictable market. due to this prioritization, it has become increasingly important that such projects are managed in accordance with internationally accepted management best practices. project managers of construction projects in developing countries face difficulties in effectively monitoring the progress of projects they are responsible for due to many variables. the purpose of this study is to investigate the causes of delays in the construction projects that were covered in the considered literature and conduct qualitative research to investigate their relevance by interviewing project managers of actual projects in lebanon. based on the literature review and from the recommendations recorded during interviews, the researcher aims to create a set of guidelines that will improve the manner in which project managers can adapt to, discover, and deal with project delays. these guidelines can be utilized as an early warning system concerning delays in construction projects (tarhini, fakih, arzoky, & tarhini, 2015). moreover, alzebdeh, k., et al. in 2015 examines interpretive structural modeling (ism) as a viable technique for modeling complex interactions among factors responsible for cost overruns in construction projects in the sultanate of oman. in particular, thirteen interrelated factors associated with cost overruns were identified, along with their contextual interrelationships. application of ism leads to organizing these factors in a hierarchical structure which effectively demonstrates their interactions in a simple way. four factors were found to be at the root of cost overruns: instability of the us dollar, changes in governmental regulations, faulty cost estimation, and poor coordination among project parties. taking appropriate actions to minimize the influence of these factors can ultimately lead to better control of future project costs. this study is of value to managers and decision-makers because it provides a powerful yet very easy to apply the approach for investigating the problem of cost overruns and other similar issues (alzebdeh, bashir, & al siyabi, 2015). similarly, emam, h., et al. in 2015 employed a wide variety of analytical methods to statistically conclude the most precise ranking of causes of delay. moreover, the delays for construction projects differ from one country to another and even between types of projects within the same geographic location. the aim of this study is to examine factors contributing to delays in infrastructure projects in qatar. a comprehensive quantitative literature review was carried out on neighboring gulf countries. the causes of delays are identified from the literature and used in exploratory interviews with industry experts in qatar to investigate the relevance of each cause. a survey questionnaire was prepared and was subject to pilot interviews prior to issuing it to practitioners, including clients, consultants, and contractors. results show that over 80% of infrastructure projects suffer from the delay with an average delay of 25% and the top factors were: long response times from utility agencies; major changes in design during construction; ineffective planning and scheduling; ineffective control of progress, and; changes in the scope of projects. construction projects need to adopt planning and scheduling methods that deal with its dynamic and changing nature to create robust programs with buffers to deal with uncertainties (emam, farrell, & abdelaal, 2015). https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 23 moreover, jarkas, a. m. and j. h. younes in 2014 revealed about delays in construction projects are global phenomena and the state of qatar is no exception. following the announcement of awarding the fifa 2022 world cup hosting rights to qatar, the state will be spending tens of billions of dollars on hundreds of new construction projects. the objective of this research, therefore, is to identify, explore, and rank the relative importance of the principal factors contributing to construction delays in the local industry. to achieve this objective, a structured questionnaire survey comprising 43 delay causes, which were shortlisted based on relevant previous research on construction delay factors and the input of local industry experts and professionals, was distributed to a large number of employers, consultants, and contractors. using the “relative importance index” (rii) technique, the following causes are identified as the primary contributors to construction delays: (1) unavailability or shortage in materials; (2) delay in payment process by the employer; (3) frequent change orders issued by the employer; (4) lack of coordination among design disciplines; (5) difficulties in financing the project by the contractor; (6) late materials procurement; (7) delay in responding to requests for information; (8) clarity of drawings and technical specifications; (9) slow decision-making process by the employer; and (10) the unavailability or shortage in skilled labor and technical staff. the findings can be used to provide employers, consultants, contractors, and policymakers, guidance for focusing, acting upon, and controlling the most significant factors perceived to influence the progress of projects, hence, ameliorating the performance of the construction industry in an environment on the verge of witnessing an unprecedented boom in demand for faster delivery and lower cost of constructed facilities (jarkas & younes, 2014). bierman, b., et al. in 2014 focused on exploring the major determinants of productivity, their co-relationship, and the problem categories responsible for construction delay in the context of oman construction industry. a semi-structured questionnaire approach is chosen as a method of the survey from the parties involved in the construction industry, such as owners, consultants, contractors, and foremen/workers. twenty-five major factors of productivity, which are further grouped into ten critical variables by principal components analysis, are identified to be important in this study. lack of professionalism, fairness in financial transactions, incompetent supervisors, lack of materials, and incomplete drawing are found as the top five factors of productivity. in addition, management, people, collaboration, health and safety, logistics, commitment, operational activity, authority, quality, and financial matters are reported as critical variables of productivity. owners and consultants are determined as top problem categories for construction delay. the comparisons of the top five productivity factors found in this study to several other countries’ productivity factors are also shown. overall, this study is expected to have substantial implications for policymakers and researchers in the area of construction productivity in oman (bierman, o’donnell, burke, mccormick, & lindsay, 2014). however, hasan, r., et al. in 2014 explored the factors contributing to construction delay in road construction projects in libya were identified and ranked through a questionnaire survey distributed to owners, consultants, and contractors involved in road projects. a total of 256 completed questionnaire forms were received and analyzed. a structural equation modelling sem path model of the relationship between delay factors and effects in road construction was formulated and evaluated using [sem] 21 software. 49 factors classified into eight groups of factors and three groups of effects of delay. the contractor group in delay factors had the greatest impact on road construction delay with path coefficient β-values of 0.249, while financial groups in delay effects had the greatest impact on road construction delay with path coefficient β-values of 0.88. the r2 value of the model is 0.48, indicating that the developed https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 24 model substantially explains construction delay. this rigorous multivariate analysis has identified several causative factors that contribute to delay in road construction projects in libya. the findings will help all parties involved in construction projects to achieve better control over construction delays and will provide support for practitioners to incorporate risk analysis for potential construction delays in future projects. as well as for researchers in the field of road construction and understanding of the factors causing project cost overruns in developing countries (r. hasan, suliman, & malki, 2014; u. hasan, whyte, & al jassmi, 2019). moreover, emam, h., et al. in 2014 summarized the effective and efficient construction industry is of high importance to the economy of all countries. however, construction projects are notorious for overrunning time and cost. a plethora of international research has been conducted to define the causes of delay in completing projects. these studies employ a wide variety of analytical methods to statistically conclude precise rankings of causes of delay. moreover, delays for construction projects differ from one country to another and even between types of projects within the same geographic location. this study focuses on reviewing the causes of delays within the gulf cooperation council (gcc) countries. a comprehensive quantitative and qualitative literature review was carried out around previous work in gcc countries. the primary causes of delays are identified from the literature; these are then taken to exploratory interviews with industry practitioners to investigate the relevance of each cause in the context of current projects in the gcc construction industry. there are recommendations for more work around delays to projects within the region since in these expanding construction economies, research to date is relatively small (emam, farrell, & abdelaal, 2014). marzouk, m. m. and t. i. el-rasas in 2014 analyzed delay cause in egyptian construction projects in egypt. these problems occur frequently during the project's lifetime leading to disputes and litigation. therefore, it is essential to study and analyze the causes of construction delays. this research presents a list of construction delay causes retrieved from the literature. the feedback of construction experts was obtained through interviews. subsequently, a questionnaire survey was prepared. the questionnaire survey was distributed to thirty-three construction experts who represent owners, consultants, and contractor organizations. frequency index, severity index, and importance index are calculated, and according to the highest values of them, the top ten delay causes of construction projects in egypt are determined. this analyzed and compared to the most important delay causes in the research. statistical analysis is carried out using analysis of variance anova method to test delay causes, obtained from the survey. the test results reveal a good correlation between groups while there is a significant difference between them for some delay causes and finally roadmap for prioritizing delay causes groups is presented (marzouk & el-rasas, 2014). in the same way, alnuaimi, a. s. and m. mohsin in 2013 were conducted on a number of construction projects in the muscat area to identify problems resulting from delays in the completion of construction projects. the collected data were classified into two groups of projects, the first group included projects constructed during the period 2007-2008, and the second group comprised projects constructed during the period 2009-2010. it was found that 40 percent of both groups have experienced delays in completion. another finding was that the causes of delay are changing with the time in a pattern depending on different variables. owner-related causes were found to be the dominant reason for the delay and contrarily the first to seek solutions (alnuaimi & mohsin, 2013). https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 25 mahamid, i. (2013) explored the contributors to schedule delays in public construction projects in saudi arabia and owners' perspective. moreover, the study identified the contributors to delays in public construction projects in saudi arabia from owners' viewpoint. there are 22 public owners of construction projects completed a structured questionnaire survey. the study was identified as the 35 factors through a literature review. the results indicated that the top delay contributors are: bid award for lowest price, poor site management, poor communication and coordination between construction parties, payments delay, poor labor productivity, and rework. these findings can support the government in improving the regulations to meet the construction market needs, owners in planning and designing and evaluating policy, contractors and managers in planning and taking external and internal risks when costing and scheduling contracts, consultants in applying comprehensive contract information, and workers in conducting their day-to-day activities. results will fill important research and practice gap and help in improving time performance in public construction projects in saudi arabia and other developing countries. mahamid, i. in 2013 explored the time, cost and quality have their proven importance as the prime measures for project success. however, the history of the construction industry worldwide is full of projects that were completed with significant time and cost overruns. this study is conducted to investigate the occurrence frequency of time overrun causes in road construction projects in the west bank in palestine from the contractors’ viewpoint through a questionnaire survey. the field survey included 34 contractors. 52 factors affecting time overrun were identified during the research. the survey concluded that the top ten frequent factors are: segmentation of the west bank and limited movement between areas, political situation, progress payments delay by the owner, lack of equipment efficiency, difficulties in financing project by the contractor, personal conflicts among laborers, poor communication by the consultant with other construction parties, the conflict between the contractor and other parties, award project to the lowest bid price, unreasonable project time frame by the owner (mahamid, 2013). however, motaleb, o. and m. kishk in 2013 investigated further again about the causes and effects behind the delays pertaining to delivery of construction projects in the uae. the study is exploratory in nature and incorporates a pilot questionnaire survey and interviews. an extensive literature review indicates potential factors that have possible effects on construction completion delay. the questionnaire forms were sent to 50 construction companies. thirty-five (70%) completed responses were received. analysis of the survey data has revealed that about 42 potential causes and effects of delay relate to various groups of stakeholders. the results show the top fifteen factors relate to clients, project managers, and finance aspects. it was found that cost and time overruns are the most significant effects. these results are in partial agreement with previous studies. the paper argues that the key determinant in ensuring project control is on-time project delivery. the results of the study have provided moderate support for a suggested hypothesis, through a framework of project success factors. it should be of high concern to knowledge managers in various roles and decision-makers (motaleb & kishk, 2013). in the same way, ruqaishi, m. and h. a. bashir in 2013 examined causes of delay in construction projects in the oil and gas industry in the gulf cooperation council countries. several studies investigating the causes of delay in projects in the construction industry have been conducted worldwide. thus, the study investigates the causes of delay in construction projects in oil and gas processing facilities in oman and serves as a case study for the gulf cooperation council (gcc) countries. using a questionnaire, data were collected from 59 project managers employed in different organizations in the oil and gas industry in oman. the survey results https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 26 showed a high degree of agreement among the perceptions of project stakeholders, clients, contractors, and consultants on the causes of project delay, and there is no evidence to suggest that the causes of project delay differ significantly according to organization size or organizational ownership. moreover, seven factors were identified as the major causes of project delay. although six of these identified elements are general factors that can account for the delay in any project in any industry, one of them—poor interaction with vendors in the engineering and procurement stages—is found to be unique to construction projects in the oil and gas industry. the findings of this study could be of value to organizations that are planning to conduct construction projects for oil and gas processing facilities in oman and other nations with similar environments, such as the gcc countries (ruqaishi & bashir, 2013). pourrostam, t. and a. ismail in 2012 examined the causes and effects of delay in iranian construction projects in iran. delays are one of the biggest problems in construction projects in developing countries, as cause negative effects on the projects. delays can be minimized only when their causes are identified. thus, this study identified the main causes and effects of delay in iranian construction projects. the literature related to the field of causes and effects of delay in construction projects has been reviewed over the last decade. a questionnaire survey was conducted to solicit the causes and effect of a delay from consultants' and contractors’ viewpoint. this study identified the 10 most important causes of a delay from a list of 28 different causes of delay and 6 different effects of delay. the elements of this list have identified on the basis of literature review over the last decade. the perspective of contractors and consultants has been analyzed to rank the causes of delays based on their relative importance index. the 10 most causes of delay were: (1) delay in progress payment by the client, (2) change orders by the client during construction, (3) poor site management, (4) slowness in the decision-making process by client, (5) financial difficulties by contractors, (6) late in reviewing and approving design documents by client, (7) problems with subcontractors, (8) ineffective planning and scheduling of project by contractor, (9) mistakes and discrepancies in design documents, and (10) bad weather. six major effects of delay were: (1) time overrun, (2) cost overrun, (3) disputes, (4) total abandonment (5) arbitration, and (6) litigation. the paper predicts some future trends and suggests certain areas in which future research on construction projects should be focused (pourrostam & ismail, 2012). on the other hand, albogamy, a., et al. in 2012 has done comprehensive literature reviewed and a construction industry survey was conducted using questionnaires in ksa. there was a total of 98 out of 182 questionnaires were collected as survey data. the survey included 63 delay factors and the participants were asked to indicate their degree of importance. the causes of delay were grouped into 4 categories such as owner/client-related factors, contractor related factors, consultant related factors, and external factors. the findings of the paper suggest that the contractor and owner/client-related factors are the most critical factors that cause delay the construction projects in saudi arabia. after discovering the key causes, an attempt will be made in the second part of the research paper to develop a risk management framework/model to eliminate or to minimize the impact of delays in the construction projects (albogamy, scott, & dawood, 2012). moreover, rafieizonooz, m. in 2012 examined how to minimize the delay in construction projects in tehran, iran. because the construction industry is one of the most profitable sectors in iran’s economy. delay is a major common problem in construction projects in iran. this research, by considering the main causes of delay, prepared appropriate suggestions to minimize delay in construction projects in tehran (capital of iran). literature review summary provided up to date information with current literature and based on reviewing past https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 27 publications. the questionnaires were distributed among respondents who are involved in the construction project in tehran, iran. the process of data analysis and discussions were conducted based on the questionnaire survey to identify the frequency of occurrence and severity effect of delay as well as findings the most effective methods of minimizing delay in tehran’s construction projects. as a result of this study, respondents believe that delays in payment to contractors by clients, difficulties in financing by contractors, slowness in decision making by clients,s and poor site management by contractors are the most frequent and severe causes of delay in tehran construction projects. moreover, the negative effects of delay on construction projects are: cost overruns, change in schedule, and liquidated damage. furthermore, the most effective methods of minimizing delay are as follows: pay progress payment to the contractor on time’ by client, accurate initial cost and time estimates by client and contractor, competent personnel of contractor and sub-contractor by the contractor (rafieizonooz, 2012). mahamid, i. and a. bruland in 2012 investigates the statistical relationship between the actual and estimated cost of road construction projects using data from road construction projects awarded in the west bank in palestine over the years 2004-2008. the study is based on a sample of 169 road construction projects. regression models based on this data, reveal that 100% of projects suffer from cost deviation: 76% of projects are under-estimated while 24% are overestimated. the deviation between the estimated and actual cost average of 14.6%, ranging from 39% to 98%. the results show that the relationship between the project size (length and width of the road) and the cost deviation is very weak, the coefficient of determination r2 = 0.0028 (mahamid & bruland, 2012). in the same way, mohsin, m. a. in 2012 evaluated the claim analysis of construction projects in oman. because claims are one of the problems that construction project may face. claims might cause many effects such as payment delay, the extension of time, and work suspension. from the circumstance, the present study identifies major claims in the construction industry in oman and factors affecting these claims, as a result of the construction boom, claims get bigger attention due to the high effect on the main elements of construction management. a field study has been conducted to collect data required in claim concern. data were collected through a data collecting form designed for this purpose, collected data was for 45 projects with specific criteria. according to the analyzed data, it’s been shown that the average of claims in construction projects is 2.6 claims per project, most of these claims are: extension of time effect, solved in negotiation manner, occurred in lump sum contracts. owners are the first party “as sources of claims” with 42% of the research sample over other sources like consultants, contractors, and contract documents (mohsin, 2012). moreover, mahamid, i., et al. 2011 examined to explore the causes of delay in road construction projects in the west bank in palestine. he has summarized the review that the construction delay is considered to be one of the most recurring problems in the construction industry and it has an adverse effect on project success in terms of time, cost, quality, and safety. this study finally conducted an investigation on the time performance of road construction projects in the west bank in palestine to identify the causes of delay and their severity according to contractors and consultants through a questionnaire survey. the field survey included 34 contractors and 30 consultants. a total of 52 causes of delay were identified during the research. the survey concluded that the top five severe delay causes are political situation, segmentation of the west bank and limited movement between areas, award project to the lowest bid price, progress payment delay by the owner, and shortage of equipment (mahamid, 2011). https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 28 jurf, n. a. and s. beheiry in 2010 found the cost and schedule deviation from the estimated baseline are common in construction projects and have a negative effect on construction activity, which is a substantial portion of the gdp in most countries. previous research studies examined the causes of deviation in several countries including some gulf council countries (gcc) like kuwait and the uae, but none were done on the sizeable qatari market. qatar is expected to require an additional 93,000 residential units by the end of 2010 [1] to sufficiently address the rising demand, as a result of rapid population increase relative to supply [2]. therefore, this study identified and ranked, using the relative importance index (rii) method, the significant factors influencing cost and schedule deviation in qatari residential compound projects. a detailed questionnaire was developed on a likert scale addressing these factors and was used to solicit the viewpoints of grade a contractors. the collected project sample had a total capital investment of approximately $1.25 billion and the projects were executed within a five year period (2000 2005). the study revealed that most contractors viewed material delays as the most prominent issue influencing construction project predictability in qatar. other top ten factors included design changes, labor shortages, deficient estimates and cash flow planning (jurf & beheiry, 2010). however, motaleb, o. and m. kishk in 2010 investigated the causes and effects of construction delays in the uae. the major criticism of the united arab emirates (uae) construction companies is the growing rate of delays in project delivery. the study underpins investigating the causes and effects of construction project delays in the uae. the study was based on a literature review and a questionnaire survey that investigated 42 potential delay factors. questionnaires were sent to 50 companies with a response rate of 70%. typical results have shown that change orders, financial and other client-related factors are the most significant causes of delay. besides, cost and time overruns are the most significant effects. these results are in partial agreement with previous studies. however, some of the results are surprising and have implications regarding the need of training clients and their representatives but also project teams (motaleb & kishk, 2010). alnuaimi, a. s., et al. in 2009 discussed variations in public construction projects in oman by investigating causes of variations, studying their effects on the project, identifying the beneficial parties, and suggesting remedies to alleviate related problems. tasks included an analysis of four actual case studies and conducting a field survey via a questionnaire. it was determined that the client’s additional works and modifications to design were the most important factors causing change orders, followed by the nonavailability of construction manuals and procedures. the most important effects of change orders on the project were found to be the schedule delays, disputes, and cost overruns. the contractor was found to be the party most benefiting from the change orders followed by the consultant and then the client. a set of remedial actions were suggested and respondents viewed that the revision of registration of consulting offices would be the most important action followed by establishing standard documents for design procedures and building a national database about soil conditions and services (alnuaimi, taha, al mohsin, & al-harthi, 2009). in the same way, enshassi, a., et al. in 2009 assessed the factors leading to time overruns (delays) and cost overruns in construction projects in the gaza strip. since there appear to be additional special contributors to delays here, the relative perceptions of contractors, consultants and owners are compared, based on a listing of causal factors derived from previous studies elsewhere, together with other factors arising from special conditions in the gaza strip. a survey of randomly selected samples yielded responses from 66 contractors, 27 consultants, and 31 owners. the survey included 110 delay factors/causes which were grouped into 12 major groups. the same survey also included 42 cost https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 29 overrun factors. the level of importance of the delays and cost overrun factors were measured and ranked by their importance indexes, according to the perspectives of contractors, consultants, and owners. there seems to be a general agreement between contractors, consultants, and owners regarding the causes of delays and cost overruns. the main four causes of time delays included strikes and border closures, material‐related factors, lack of materials in markets, and delays in materials delivery to the site. additionally, the main three causes for cost overruns included price fluctuations of construction materials, contractor delays in material and equipment delivery, and inflation. the outcome of this paper will assist owners, contractors, and consultants in understanding the reasons for delays and cost overruns, thus eliminating or minimizing these causes. this could be achieved by better management of the projects and by finding new methods for storing the critical materials from the beginning of the project. furthermore, the local government is advised to initiate legislation to overcome problems arising from monopolies in the supply of construction materials (enshassi, al-najjar, & kumaraswamy, 2009). moreover, asnaashari, e., et al. in 2009 mentioned that the delay is one of the most reoccurring problems in the construction industry and has negative impacts on project success in terms of time, cost, quality, and safety. they identified the most significant causes of delay is vital. the construction industry in iran, with an annual turnover of us$ 38.4 billion, is one of the most profitable sectors in the country. finally, they have done an investigation into factors which cause construction delay. the first part was focused on the role of stakeholders, politics, and the economy in causing delays in projects. the second part will focus on the causes of delays associated with project management, logistics, technology, and the environment. eleven indepth interviews were conducted with construction managers and practitioners associated with the iranian construction industry. interviewees, with more than 10 years' experience, explained the factors that cause a delay in the construction industry in iran. responses were analyzed qualitatively and a comprehensive interpretation was developed. the results revealed that most construction projects in iran are subject to delay. traditional management style, poor scheduling, using old technology, purchasing problems, low level of commitment among supply chain members, storage issues, and poor weather conditions are the top causes of delays in the iranian construction industry (asnaashari, knight, hurst, & farahani, 2009). in general, tumi, s. a. h., et al. in 2009 examined the causes of delay in the construction industry in libya. as the delays are one of the biggest problems construction firms face. delays can lead to many negative effects such as lawsuits between owners and contractors, increased costs, loss of productivity and revenue, and contract termination. even though various studies have been considered into the causes affecting delays, these studies seldom discuss common and general causes of delays in construction projects. thus, a comprehensive study on these delays is essential. since the problems are rather contextual, the study needs to focus on specific causes of delay like insufficient coordination and ineffective communication between involved parties in construction projects located at benghazi city in libya. literature review and a questionnaire survey targeted at construction projects in libya’s country and have been used as the tools to carry out this study. this paper presents the findings of a survey aimed at identifying some of the most important causes of delays in construction projects in the above-mentioned city. it is hoped that these findings will guide efforts to enhance the performance of the construction industry. this paper also explores and provides some guidelines and actionable information that can be led to enhance the construction process (tumi, omran, & pakir, 2009). https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 30 al-najjar, j. m. in 2008 assessed factors influencing time and cost overruns on construction projects in gaza strip. the objectives of the study were achieved through two approaches, the first one was a valid questionnaire that was obtained from contracting companies, consultants, and owners in gaza strip. the second by studying five cases with five projects exposed to time and cost overrun. the study clarified that “strikes, israeli attacks, and border closures" was the most critical factor that influences project delay. the survey also indicated that "materialrelated factors" occupied the second rank in importance, were "the lack of materials in markets" and "delay in materials delivered to the site" were among the most important factors affecting delay. the study also illustrated that "price fluctuations of construction materials" which was due to border closure was one of the most important factors that may lead to cost overrun. also, it clarified that the contractor's delay of material delivery and equipment has led to cost overrun. the study also clarified that price inflation highly contributes to cost overrun. the study recommended owners, contractors, and consultants to hold their responsibilities to avoid any delay or cost overrun which could be achieved by good management of the project and finding new methods for storing the needed materials from the beginning of the project. the study also recommended the government to adopt laws through the palestinian legislative council to prevent materials monopoly. also, it recommended the government with the necessity of dealing with new entrances such as rafah entrance to guarantee material transfer into the gaza strip (alnajjar, 2008). moreover, sweis, g., et al. in 2008 determined delays in construction projects in jordan. as the construction industry is a major player in the economy, generating both, employment and wealth. however many projects experience extensive delays and thereby exceed initial time and cost estimates. a host of causes of construction delays in residential projects were identified and classified according to darwin's open conversion system. the most common causes were evaluated by using both, the data collected in a survey conducted to residential projects consultant engineers, contractors, and owners, and interviews with senior professionals in the field. most correspondents agreed that financial difficulties faced by the contractor and too many change orders by the owner are the leading causes of construction delay. severe weather conditions and changes in government regulations and laws ranked among the least important causes (sweis, sweis, abu hammad, & shboul, 2008). however, assaf, s. a. and s. al-hejji in 2006 has done a survey on-time performance of different types of construction projects in saudi arabia was conducted to determine the causes of delay and their importance according to each of the project participants, i.e., the owner, consultant and the contractor. the field survey conducted included 23 contractors, 19 consultants, and 15 owners. seventy-three cases of delay were identified during the research. 76% of the contractors and 56% of the consultants indicated that the average time overrun is between 10% and 30% of the original duration. the most common cause of delay identified by all three parties is “change order”. surveys concluded that 70% of projects experienced time overrun and found that 45 out of 76 projects considered were delayed (assaf & al-hejji, 2006). moreover, faridi, a. s. and s. m. el‐sayegh in 2006 summarized the construction delay is considered one of the most recurring problems in the construction industry. delays have an adverse impact on project success in terms of time, cost, quality and safety. the effects of construction delays are not confined to the construction industry only, but influence the overall economy of a country like uae, where construction plays a major role in its development and contributes 14% to the gdp. thus, it is essential to define the most significant causes of delay in order to avoid or minimize their impact on construction projects. a detailed questionnaire was developed and used to get input from professionals associated with the uae construction https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 31 industry. the perspective of contractors and consultants has been analyzed to rank the causes of delays based on their relative importance index. contractors and consultants were in agreement on the most significant causes of delays. the research revealed that 50% of the construction projects in the uae encounter delays and are not completed on time. the top 10 most significant causes of construction delays have been identified by this research. approval of drawings, inadequate early planning, and slowness of the owners' decision‐making process are the top causes of delay in the uae construction industry (faridi & el‐sayegh, 2006). al tabtabai, h. m. in 2002 analyzed and ranked the causes of delays in building and housing type projects undertaken by governmental agencies in kuwait. the study was based on a survey with the parties involved in these governmental projects. a questionnaire containing 53 delay causes was distributed and the respondents were 23 governmental management and engineering personnel, 17 contractors, and 8 designers representing a/e firms. the questions were prepared in which the causes were categorized into eight major groups: 1) client administration and organizational, 2) client's site supervision, 3) contractor related, 4) laborrelated 5) quality-related, 6) design related, 7) project management, and 8) contractually related. the factors were measured and ranked under each group by the 'relative importance index' for three parties. the results suggest that delays are attributed to poor project management factors and client's administration and site supervision practices. the paper presents recommendations for a better application of project management techniques and procedures being taken at both conceptual and detailed planning phases of projects (al tabtabai, 2002). al-momani, a. h. in 2000 investigated to identify the causes of delays on 130 public projects in jordan and to aid construction managers in establishing adequate evaluation prior to the contract award using quantitative data. projects investigated in this study included residential, government agency and government buildings, school buildings, medical centers, and communication installations. the major effects of this study indicate the principal cases of delay in construction of public projects relate to designers, user changes, atmospheric conditions, site conditions, late deliveries, economic conditions, and increase in amount. the presence of these factors has an impact on the successful completion of the projects at the time contractually specified. the findings suggest that extra attention to factors identified in this field will help industry practitioners in minimizing the risk of contract conflicts (al-momani, 2000). mezher, t. m. and w. tawil in 1998 found the presents the major causes of delays in the construction industry in lebanon and the relative importance of these postponements. a survey of a randomly selected sample of 11 owners, 15 contractors, and 10 architectural/engineering (a/e) firms from lebanon was undertaken. the survey included 64 causes of delay, grouped into 10 major groups, in which the participants were asked to indicate their level of importance of each delay. the level of importance of the causes and the groups were measured and ranked by the importance index for owners, contractors, and a/e firms. it was found that all three parties generally agreed on the ranking of the major categories of delay factors. owners had more concerns with regard to financial issues, while contractors ranked contractual relationships highest, and finally, a/e firms ranked project management highest (mezher & tawil, 1998). conclusion and recommendations this study aims to find the potential causes of construction delays and their effects on project delivery in arab countries. thus, the present study summarized and shortlisted the factors in the two categories such as internal and external factors have caused to be influenced to delay of road construction in the arab regions. however, in the category of internal factors, there are a group https://www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 2; 2020 32 of factors, consultant related factors are effects on the delay of projects, in case of delaying of approval, inaccurate site investigations and delay inspections, inadequate project management assistance, lack of experiences, late reviewing and approval of the design, poor communications and coordination’s and conflicting consultant vs design engineer respectively. moreover, the contractor related factors also revealed to cause to delay of road projects by delaying of payment, insufficient projects planning and scheduling, inadequate experiences contractors, poor site management and supervisions, incompetent project team, inappropriate constructions methods, obsolete technology, unreliable subcontractors, frequent changes of subcontractors, poor communications and coordination’s with other parties and rework due to errors accordingly. on the other hand, designed related factors are also caused to delay road projects by insufficient data collections and survey before design, design errors, mistakes and delay in producing of design documents, poor use of advanced engineering software, the complexity of project design, unclear and inadequate details in design drawing and misunderstand of client requirements by designer accordingly. in the same way, labor-related factors are also caused to delay of the project by low productivity of labor, unqualified and inadequate experiences, low motivation and moral, shortages of labor, absenteeism, slow mobilizations labor, labor sticks and personal conflicts among labor respectively. however, in case of material related issues also identified which has caused to delay road constructions by lack of reliable supplier, escalations of materials prices, poor quality of constructions materials, late delivery of materials, shortage of constructions materials, poor procurement of constructions materials, changes of materials types and specifications and damage of materials etc. similarly, equipment-related issues are considered to find caused to delay of road construction by inadequate modern equipment’s, low efficiency of equipment, shortage of equipment, slow mobilizations of equipment, frequent equipment breakdown, equipment allocations problem and improper equipment respectively. in terms of external related factors are also considered to summarize and list out which has caused to delay of road constructions in the arab regions. especially natural disaster (flood, hurricanes, and cyclone, etc.), conflict, war, global financial crisis, compensation delay to the affected property owner, the price fluctuated, unexpected ground conditions (soil and high-water level), changing of government regulations and laws, delays in obtaining permission from the municipality, loss of time by traffic control and restrictions at the job site, the problem with an inhabitant of community, delays in providing service from utilities (water and electricity’s) and accident during constructions respectively. the present study also concluded the effects of the above factors which have delay road constructions through increasing of cost and overrun it, taken over time, creating of disputes, going for lawsuits, finally happing of abandon of projects. thus, the present study has given the following recommendations to overcome of above problems by increasing detailed site investigations, ensure careful monitoring and regular meetings, effective site management, collaborative working, and effective coordination’s, proper and comprehensive planning and scheduling and ensure full and intensive commitment from all parties accordingly. references abdel khalek, h. a., aziz, r. f., & abdeen, a. h. 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(2009). causes of delay in construction industry in libya. paper presented at the the international conference on economics and administration. copyrights copyright for this article is retained by the author(s), with first publication rights granted to the journal. this is an open-access article distributed under the terms and conditions of the creative commons attribution license (http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.1016/j.ijproman.2007.09.009 copyright © cc-by-nc 2020, cribfb | afbr australian finance & banking review; vol. 4, no. 1; 2020 issn 2576-1196 e-issn 2576-120x published by centre for research on islamic banking & finance and business, usa 18 deposit money bank policy and private sector funding: a multi-dimensional study from nigeria zaagha alexander sulaiman department of banking and finance rivers state university, port harcourt, nigeria e-mail: zaaghi75@gmail.com murray monday ebike department of banking and finance rivers state university, port harcourt, nigeria e-mail: fathermurraye@gmail.com abstract this study empirically examined the effect of deposit money banks policy on private sector funding in nigeria. time series data was sourced from central bank of nigeria statistical bulletin from 1985-2018. credit to private sector, credit to core private sector and credit to small and medium scale enterprises was used as dependent variables while liquidity ratio and loan to deposit ratio was used as independent variables. ordinary least square (ols), augmented dickey fuller test, johansen co-integration test, normalized co-integrating equations, parsimonious vector error correction model and pair-wise causality tests were used to conduct the investigations and analysis. the empirical findings revealed that deposit money banks policy explains 40.8 percent variation on credit to core private sector, 28.1 percent and 58.9 percent of the variation in credit to core private sector and credit to small and medium scale enterprises sector. the study conclude that deposit money banks policy has no significant relationship with credit to private sector and credit to core private sector but has significant relation with credit to small and medium scale enterprises sector. from the findings, the study recommends compliance to deposit money banks policies; this will enhance effective financial intermediation and increase funding of the private sector. there is also need for the regulatory authorities to harmonize the various deposit money banks policies with the objective of enhancing private sector funding. there is need to decentralize the operation of the deposit money banks in the urban cities. policies should be formulated to extend the operation of the deposit money banks to the rural communities, this will enable the institutions to mobilize much deposit and increase credit to the private sector. keywords: deposit money banks policy, private sector funding, liquidity ratio, loan to deposit ratio, small and medium scale enterprises 1. introduction the history of banking in nigeria dates back to1892 when african banking corporation and bank of british west africa now first bank was established. this means that banking business has existed for over one century in nigeria (olukayode and somoye, 2018). deposit money banks are empowered by law to undertake the business of lending and borrowing in the economy, the function bridge the savings and investment gap. this responsibility evolved over time and expanded to include investment management, maintenance of payments system, trade transactions, cards and e-payments. banking activities are guided by policies directed toward achieving economic goals and enhance stability of the institutions. liquidity policy gives information about the general liquidity shock absorption capacity of a bank. as a general rule, the higher the share of liquid assets in total assets, the higher the capacity to absorb liquidity shock. high value of this ratio can be interpreted as inefficiency, since liquid assets yield lower income liquidity bears high opportunity costs for the bank (ogolo, 2018). increase on liquidity reserve reduces the earnings assets of commercial banks. this implies that increase liquidity policy can affect negatively deposit money banks credit to the private sector. private sector actors are increasingly being recognized as a major driving force in enhancing economic growth and development. they drive economic growth through investment, employment and business creation, innovation and knowledge transfer, and other multiplier effects from their operations and activities. ensuring that this growth is likely to contribute to long-term poverty reduction, however, requires private companies to include the poor as producers, suppliers, employees and consumers. under the right circumstances, public-private partnerships that are based on the identification of complementary expertise and shared commercial and development interests are also an important tool that can harness the private sector’s contribution to such mailto:zaaghi75@gmail.com mailto:fathermurraye@gmail.com copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 19 inclusive growth. while the importance of the private sector to economic growth has long been recognized, until very recently, private sector actors were not seen as development actors. as a result, they were typically treated as a secondary consideration in terms of potential vehicles of development financing and in terms of sources of ideas and input in development debates and policies, in comparison with the primary and more established group of actors: recipient governments and bilateral and multilateral development agencies (eke, chikulirim eke and inyang, 2015). liquidity policy is more focused on bank’s sensitivity to selected types of funding such as deposits of households, enterprises and other financial institutions. it captures bank’s vulnerability related to these funding sources. banks are able to meet its obligations in terms of funding if volume of liquid assets is high enough to cover volatile funding and if the value of this ratio is 100 percent or more. lower value indicates a bank’s increased sensitivity related to deposit withdrawals. loan-to-deposit ratio policy was introduced for the purposes of curbing the incentives for excessive competition among domestic banks dependent upon wholesale funding to increase their business sizes before the global financial crisis, and improving liquidity conditions during crises (lopez-espinosa, moreno, rubia and valderrama, 2012). loan-deposit ratio policy is effective as a macro prudential policy instrument; it reduces banks’ dependency on wholesale funding to thereby curb the interconnectedness among financial institutions, a systemic risk on the cross-sectional side, and also reduces the procyclicality of lending, a systemic risk on the time-series side. the policy is not only useful but also actually brings about ringfencing between retail and wholesale financing by encouraging banks to extend loans within the limits of their deposits. bank loans shows pro-cyclicality in terms of the amounts of their supply and demand. during times of economic expansion, when loan demand is extremely high, a bank’s capability to mobilize funding in response to this need is a key factor determining the pro-cyclicality of its loans. deregulation of financial sector in the last quarter of 1986 resulted in wide disparities in monetary policy targets with possible implications for commercial bank lending operations. most studies focus on the effect of interest rate on economic growth (oshikoya, 1992; odhiambo, 2010) or on bank lending separately during regulation or deregulation periods (amassoma et al. 2011; nwakama and mbatogu, 2004; owolabi, 2014). others investigated the relationship between monetary policy instruments and deposit money banks loans and advances (ogolo, 2018 and adeniyi et al. 2018) and the determinant and evidence of the impact of liquidity management on the performance of deposit money banks (dhanuskodi, 2014; alphonce, silvanos, and ziska, 52015; daniel, 2017).while literature on the effect of interest rate on the economy and impact of ldr and bank liquidity on dmbs profitability is well documented in literature, the effect of deposit money banks policy on private sector funding is lacking. this study empirically examined the effect of deposit money banks policy on private sector funding in nigeria. 2. literature review loan to deposit ratio the loan-to-deposit ratio regulation was introduced for the purposes of curbing the incentives for excessive competition among domestic banks dependent upon wholesale funding to increase their business sizes before the global financial crisis, and improving liquidity conditions during crises (lopez-espinosa, moreno, rubia and valderrama, 2012). according to dhanuskodi (2014), loan to deposit ratio is a useful instrument to determine bank liquidity, and by extension, it influences the profitability of banks. the regulation of loan to deposit ratio is basically an instrument for effective management of banks liquidity by limiting their loan size within the certain ratio of their deposits. during a period of economic expansion, however, this regulation is used to curb any expansion in lending (cgfs, 2012). as part of its monetary policy effort towards ensuring that dmbs increase its financial intermediation function, stem financial inclusion and increase lending to the real sector of the nigerian economy, the cbn increase the loan to deposit ratio to 60 percent. the apex bank in a bid to ensure compliance opine that banks that fail to meet the deadline of march ending 2019 will attract 50 percent levy of additional crr of the lending shortfall of the target ltdr. the ltdr was further increase to 65 percent in the last quarter of 2019 to facilitate robust investment and disbursement of credit to the real sector of the nigerian economy that will bring about a sound and resilient financial intermediation system. since the introduction of the loan to deposit ratio policy, the effects that the regulatory authorities intended have found banks’ wholesale funding on the decline and liquidity conditions have improved. empirical analysis shows that the loan-to-deposit ratio regulation is also effective as a macro prudential policy instrument; it reduces banks’ dependency on wholesale funding to thereby curb the interconnectedness among financial institutions, a systemic risk on the cross-sectional side, and also reduces the pro-cyclicality of lending, a systemic risk on the time-series side. it should be noted, however, that the loan-to-deposit ratio regulation is a strong but not precise policy instrument that directly limits the ratio of deposits dmbs to loans, two core copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 20 business areas of banks, and may overlap with the basel iii liquidity regulations. in addition, the regulatory authorities and the central bank need to work in close cooperation when making changes in policies regarding this regulation, given that the loan-todeposit ratio regulation can affect banks’ intermediary role and the channels of monetary policy transmission (bouvatier, lópezvillavicencio and mignon, 2010). the loan-to-deposit ratio regulation is a macro prudential policy instrument designed to curb systemic risks. the regulation is not only useful but also actually brings about ring-fencing between retail and wholesale financing by encouraging banks to extend loans within the limits of their deposits. given however that this regulation is a powerful monetary policy tool, that puts direct constraints on banks' core businesses of deposits and loans, some unintended consequences could be created. bank loans shows pro-cyclicality in terms of the amounts of their supply and demand. in particular, during times of economic expansion, when loan demand is extremely high, a bank’s capability to mobilize funding in response to this need is a key factor determining the pro-cyclicality of its loans. the reason why nigeria domestic banks were able to meet the heightened demand for loans in the run up to the global financial crisis was that, in addition to deposits, they were capable of mobilizing funds to meet this demand through wholesale funding. since introduction of the loan-to-deposit ratio regulation, banks have moved funds out of their wholesale funding cds and into corporate deposits to be able to comply with the regulation (berger and udell, 2004). loan-to-deposit ratio regulation could affect banks' function of financial intermediation by hindering their flexible use of wholesale funding as assets for bank lending. facing restraints on their assets for lending, banks generally tend to first reduce their lending to smes whose credit ratings are relatively low. according to jeong, (2009) bank lending to large corporations and households has continued to rise since introduction of the loan-to-deposit ratio regulation, whereas their lending to smes has stagnated or declined. bank liquidity ratio bank for international settlements (2008) defined liquidity as the ability of bank to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses. liquidity risk arises from the fundamental role of banks in the maturity transformation of short-term deposits into long-term loans. the term liquidity risk includes two types of risk: funding liquidity risk and market liquidity risk. funding liquidity risk is the risk that the bank will not be able to meet efficiently both expected and unexpected current and future cash flow and collateral needs without affecting either daily operations or the financial condition of the firm. market liquidity risk is the risk that a bank cannot easily offset or eliminate a position at the market price because of inadequate market depth or market disruption. liquidity risk can be measured by two main methods: liquidity gap and liquidity ratios. the liquidity gap is the difference between assets and liabilities at both present and future dates. positive gap between assets and liabilities is equivalent to a deficit (bessis, 2009). liquidity ratios are various balance sheet ratios which should identify main liquidity trends. these ratios reflect the fact that bank should be sure that appropriate, low-cost funding is available in a short time. this might involve holding a portfolio of assets than can be easily sold (cash reserves, minimum required reserves or government securities), holding significant volumes of stable liabilities (especially deposits from retail depositors) or maintaining credit lines with other financial institutions. various authors like more (2010); praet (2009); rychtárik (2009) provide various liquidity ratios. bank liquidity can be measured as follows: liquid assets total assets the liquidity ratio should give us information about the general liquidity shock absorption capacity of a bank. as a general rule, the higher the share of liquid assets in total assets, the higher the capacity to absorb liquidity shock, given that market liquidity is the same for all banks in the sample. nevertheless, high value of this ratio may be also interpreted as inefficiency, since liquid assets yield lower income liquidity bears high opportunity costs for the bank. thus it is necessary to optimize the relation between liquidity and profitability. liquid assets deposits + short term borrowing the liquidity ratio is more focused on the bank’s sensitivity to selected types of funding (we included deposits of households, enterprises and other financial institutions). the ratio should therefore capture the bank’s vulnerability related to these funding sources. the bank is able to meet its obligations in terms of funding (the volume of liquid assets is high enough to cover volatile copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 21 funding) if the value of this ratio is 100 % or more. lower value indicates a bank’s increased sensitivity related to deposit withdrawals. loans total assets the ratio measures the share of loans in total assets. it indicates what percentage of the assets of the bank is tied up in illiquid loans. therefore, the higher this ratio the less liquid the bank is. loans deposits + short term borrowing the last liquidity ratio relates illiquid assets with liquid liabilities. its interpretation is the same as in case of ratio the higher this ratio the less liquid the bank is. although liquidity problems of some banks during global financial crisis re-emphasized the fact that liquidity is very important for functioning of financial markets and the banking sector, an important gap still exists in the empirical literature about liquidity and its measuring. private sector funding the private sector is said to be the engine of economic growth for a country, especially, for developing economies (william, zehou and hazimi, 2019). the private sector remains the nucleus that drives economic growth. private sector funding (credit) is no doubt a driver of the real economy, particularly in developing economies like nigeria where the financial markets are porous and near well developed to mobilize the needed resources to accelerate the desired level of economic development. the private sector is the part of the economy that is run by individuals and companies for profit and is not state controlled. therefore, it encompasses all for-profit businesses that are not owned or operated by the government. according to the global economic report (2019), domestic credit to private sector by banks refers to financial resources provided to the private sector by other depository corporations (deposit taking corporations except central banks), such as through loans, purchases of non-equity securities, and trade credits and other accounts receivable, that establish a claim for repayment. it involves the pros and cons through which individuals and statutory firms’ gains access to the availability of credit (fund) to finance and promote (drive) investment. private sector funding involves credit extended by the banking and financial institutions to the private sector of the economy alone and basically include firms and households excluding loans disbursed to the public sector. credit to private sector by banks refers to financial resources provided to the private sector by other depository corporations (deposit taking corporations except central banks), such as through loans, purchases of non-equity securities, and trade credits and other accounts receivable, that establish a claim for repayment. credit to the core private sector refers to credit from the commercial banks and other credit institutions to the preferred sectors of the economy. this is measured as annual loans and advances from credit institutions in nigeria to the real sectors of the economy. this study adopts the total credit disbursement to the core private sector as a measure through which monetary policy affects private sector funding in the nigerian economy. funding small and medium scale enterprises sector in nigeria in nigeria, the national policy on micro, small and medium enterprises define small and medium scale enterprises along the lines of international criteria. the policy mainly uses the employment base and asset size to categorize firms into micro, small and medium. accordingly, for small-scale enterprises, the employment base should be between 10 and 49 with an asset base of over n5 million but less than n50 million. medium scale enterprises are those that employ between 50 and 199 workers, with an asset base of over n50 million but less than n500 million. importantly, the assets admitted for these classifications exclude land and buildings. also, in case of conflict of classification between employment and asset size, the policy gives pre-eminence to the number of employees over asset size. bank credit refers to loans, advances and discounts of specific sums, which are normally with terms and other conditions available to individuals, small and medium sized business to start, grow or sustain any economic activity (john and onwubiko, 2013). credit to small and medium scale enterprises sector refers to credit disbursed to small and medium scale enterprises by the deposit money banks. it is measured as annual loans and advances from the financial institutions in nigeria to small and medium scale enterprises. the central bank of nigeria statistical bulletin reports credit to small and medium scale enterprises as percentage of total credits in the economy. theoretical review the loanable funds theory the neo-classical or the loanable fund theory examines interest rate in terms of demand and supply of loanble funds or credit. according to this theory, the rate of interest is the price of credit which is determined by the demand and supply for lonable copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 22 funds. in the words of prof lerner in jhingan (2005); it is the price which equates the supply of credit, or saving plus the net increase in the amount of money in a period, to the demand for credit, or investment plus net hoarding in the period. the demand for loanble fund has primarily three source; government, businessmen and consumers who need them for purpose of investment, hoarding and consumption. the government borrows funds for constructing public works or for war preparations. the businessmen borrow for the purpose of capital goods and for starting investment projects. such borrowings are interest elastic and depend mostly on the expected rate of profit as compared with the interest rates. the demand of loanable fund on the part of consumers is for the purchase of durable consumer goods like cars, houses etc. individual borrowings are also interest elastic. the tendency to borrow is more at a lower rate of interest than at a higher rate. loanable funds theory of interest rate determination views the level of interest in the financial market as resulting from the factors that affect the supply and demand of loanable funds (saunders 2010).interest rate in this theory is determined just like the demand and supply of goods is determined, supply of loanable funds increases as interest rate increases, other factors held constant. he goes further to explain that the demand for loanable funds is higher as interest rate fall, other factors held constant. saunders (2010) identifies two factors among others causing demand curve for loanable funds to shift; economic conditions and the monetary expansion refers to the sum of money offered for lending and demanded by consumers and investors during a given period. the interest rate model is determined by the interaction between potential borrowers and potential savers. credit rationing theory access to credit is explained by credit rationing theory (stiglitz and weiss, 1981; bester, 1985; cressy, 1996; baltensperger and devinney, 1985). according to stiglitz and weiss (1981) credit rationing is said to occur when some borrowers receive a loan, while others do not. credit rationing takes place at either financier level due to loan markets imperfection and information asymmetry or voluntarily by the borrowers (voluntary exclusion). at financier level, credit rationing occurs in a situation where demand for credit exceeds supply at the prevailing interest rate (stiglitz and weiss, 1981). there is scant literature on selfrationing, however, in situations where credit rationing is voluntary, arora (2014) described such borrowers as non-credit seekers due to personal, culture or social reasons or could be in the bracket of discouraged borrowers. bester (1985) suggested that financiers may choose to reject some borrowers because of negative enticement effects. for example, for given collateral, an increase in the rate of interest causes adverse selection, since only borrowers with riskier investments will apply for a loan at a higher interest rate. similarly, higher interest payments create an incentive for investors to choose projects with a higher probability of bankruptcy (afonso and aubyn, 1997, 1998; matthews and thompson, 2014). on the other hand, for a fixed rate of interest, an increase in collateral requirements may also result in a decline in the lender’s profits (cressy, 1996). stiglitz and weiss (1981) showed that this happens if the more risk-averse borrowers, those that choose relatively safe investment projects, drop out of the market. according to bester (1985) andretti (1983), if financiers set collateral requirements and the rate of interest to screen investors' riskiness, then no credit rationing will occur at equilibrium. this is because increasing collateral requirements tends to result in adverse selection, even with risk-neutral investors (bester, 1984a, 1985). empirical review ajayi and atanda (2012) investigated the impact of monetary policy instruments on banks performance between 1980 and 2008. the study used engle-granger two-step co-integration approach for its analysis. the result indicated that bank rate, inflation rate and exchange rate are credit enhancing variables, while liquidity ratio and cash reserves ratio exert negative impact on banks total credit. although, it is only cash reserve ratio and exchange rate that are found to be significant at 5% critical value. the study found that monetary policy instruments are not significant to stimulate credit in the long-run, while banks total credit is more responsive to cash reserve ratio. nto, mbanasor and osuala (2012) examined the influence of monetary policy variables on banks’ credit supply to smes in nigeria. time series data were collected on quarterly basis covering a period of 1995-2010 and were analyzed using fully modified least squares (fmols). the results indicated that policies on interest rate and liquidity ratio were negatively and positively significant to smes. the study recommends that government through cbn should strengthen existing policies on the monetary policy instruments so as to increase and stabilize credit supply to smes. dhanuskodi (2014) examines the impact of loan deposit ratio on the profitability of malaysian commercial banks for the period of 2009 to 2013 using all the 8 locally owned commercial banks in malaysia. the study use loan deposit ratio of the banks as the independent variable and the dependent variable was profitability which measures through return on assets (roa). data were sourced mainly from the annual reports of the 8 banks. ratio analysis along with descriptive, correlation analysis, paired ttest and regression analysis were used in the study. the result of the study indicated that there was a positive and non-significant impact of ldr on roa in five banks (bank 1, 2, 3, 4 and 8). further, the study revealed that only one bank (bank 5) had a negative and non-significant impact of ldr on roa and bank 7 had positive and significant impact. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 23 hyunggeun, hyunwoo and dokyung (2015) conduct an empirical analysis of the usefulness of the loan-to-deposit ratio using panel data regression model. the results of cross-sectional analysis indicate that as a bank’s share of wholesale funding declines, the indicator (δcovar value) of interconnectedness among financial institutions is reduced. findings show that loan-to-deposit ratio regulation has served as an effective macro-prudential policy tool by weakening the interconnectedness among financial institutions and the pro-cyclicality of bank lending. analysis of the loan-to-deposit ratio regulation’s effects on the monetary policy transmission channels suggests that, among the various transmission channels, the loan-to-deposit ratio influences the effectiveness of the bank lending channel, by changing bank conditions for asset management and funding. this implies that the supervisory authorities and the central bank, which are in charge of the loan-to-deposit ratio regulation, need to maintain a closer cooperative relationship. alphonce, silvanos and ziska (2015) study was to find out the relationship between liquid assets and profitability of commercial banks in zimbabwe. a quantitative correlation approach was adopted for the study in which testable hypotheses were formulated based on literature review findings. eight years historical financial statements data relating to two periods; 2005 to 2008 and 2009 to 2012 was collected from selected commercial banks in zimbabwe. the study found that working capital was weakly related to profitability, while capitalization strongly influenced commercial bank profitability. an inverse relationship was found between the ratio of loans to deposits and commercial bank profitability. it was therefore concluded that the composition of current assets strongly influences commercial bank profitability. this study recommends that rbz should monitor the capitalization levels of commercial banks and create policies to ensure growth and commercial banks should monitor the structure or composition of current assets in order to ensure profitability. anigbogu, okoli and nwakoby (2015) investigated the effect of financial intermediation on small and medium enterprises performance in nigeria between 1980-2013 using an econometric model of the ordinary least square (ols). findings revealed that with the exception of bank interest rate to smes, all other variables namely bank lending rate to smes, exchange rate and monetary policy have a positive and significant influence on small and medium enterprises performance in nigeria. ovat (2016) examined the role played by commercial banks’ credit in facilitating the growth of smes in nigeria. the study adopted co-integration and error correction mechanisms and based on the findings, exchange rate and lending rate are statistically significant to smes credit. also, inflation rate was found to be significant but negative to smes credit. he opined that smes should be made to have easy access to credits from commercial banks. in order to achieve this, the monetary authority should ensure that the lending rate at which commercial banks lend to the smes is reduced to the barest minimum. more so, devaluation of the national currency should not be encouraged as devaluation makes the cost of imported raw materials and capital goods used by the smes very expensive and hence impedes their production, rather local sourcing of raw materials should be encouraged to reduce the pressure on exchange rate. d’pola, and touk, (2016) empirically examine the impact of commercial bank credit on the performance of small and medium size enterprises (smes) in cameroon between 1980 and 2014 using ordinary least square (ols) method to estimate the multiple regression model. the study use smes output as approximated by wholesale and retail trade output as a component of the gdp. the results revealed that commercial bank credit and real interest rate have a negative and significant impact on the performance of smes in cameroon. sesay and abdulai (2017) empirically investigate monetary policy effects on private sector investment in sierra leone. the study examines the rate at which changes in monetary policy in sierra leone has affected the behavior of private sector investments, theories and empirical studies are reviewed in a way to identify a suitable model for private sector investment for the period 1980-2014 using recent econometric techniques (ols, vecm, var). results of the findings suggest that money supply and gross domestic saving exert positive and statistically significant effect on private sector investments whereas treasury bill rate, inflation and gross domestic debt exert a negative effect. an important policy implication emerging from this study is to facilitate the establishment of financial institutions to increase credit delivery to the private sector so as to enhance private investment. joão, barroso and gonzalez (2017) estimated the impact of reserve requirements (rr) on credit supply in brazil exploring a large loan-level dataset. the authors used a difference-in-difference strategy, first in a long panel, then in a cross-section. in the first case, they estimate the average effect on credit supply of several changes in rr from 2008 to 2015 using a macro prudential policy index. in the second, they use the bank-specific regulatory change to estimate credit supply responses from (1) a countercyclical easing policy implemented to alleviate a credit crunch in the aftermath of the 2008 global crisis; and (2) from its related tightening, findings show evidence of a lending channel where more liquid banks mitigate rr policy. exploring the two phases of countercyclical policy, they found that the easing impacted the lending channel on average two times more than the tightening. foreign and small banks mitigate these effects and banks are prone to lend less to riskier firms. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 24 adeniyi1, adeyemi, salawudeen and fagbemi (2018) investigated the relationship that exists between monetary policy instruments and deposit money banks loans and advances in nigeria. annual time series data covering a period from 19812016 were used and the toda and yamamoto granger non-causality model was employ to examine the relationship existing between deposit money banks loan and advances and monetary policy variables in nigeria. findings revealed that structural changes in monetary policy system exerted positive significant impact on loan and advances of deposit money banks in nigeria. findings also revealed bidirectional relationship existing between mpr and loan and advances of deposit money banks in nigeria. precisely, mpr proved to be a significant variable which causes deposit money bank loans and advances in nigeria. other explanatory variables (broad money supply, liquidity ratio, inflation rate and cash reserve ratio does not granger cause loan and advances of deposit money banks in nigeria within the study period. it concluded that the structural change in monetary policy system and monetary policy rate have significant impact on loan and advances of deposit money banks in nigeria. ogolo (2018) empirically examined the effects of monetary policy on commercial banks’ lending to the real sector from 19812014 using multiple regression models aided by software package for social sciences. the study modeled commercial banks credit to agricultural and manufacturing sector as the function of interest rate, monetary policy rate, treasury bill rate, exchange rate, broad money supply and liquidity ratio. the regression results from model one found that interest rate, monetary policy rate have positive relationship with commercial banks’ lending to the agricultural sector while treasury bill rate, exchange rate, broad money supply and liquidity ratio have negative effect on the dependent variable. model two found that interest rate, treasury bill rate, exchange rate, broad money supply and liquidity ratio have negative effect on commercial banks’ lending to the manufacturing sector while monetary policy rate have positive relationship with the dependent variable. courage and leonard (2019) examined the effect of commercial bank sectorial credit to the manufacturing and agricultural subsectors on economic growth in nigeria with time series data from 1981 to 2015, using co-integration and error correction mechanism. the study specifies a three equation model to analyze the variables which include; real gdp, bank sectorial credit to manufacturing and agriculture subsectors, monetary policy rate, financial market development, sourced from cbn statistical bulletin and also the interaction variables, empirical result revealed that commercial bank credit to the manufacturing and agricultural subsectors significantly affects economic growth in nigeria both in the short run and in the long run. furthermore, development of the financial sector enhances the growth effects of commercial banks credit to the manufacturing and agricultural subsectors of the economy. ubesie1, echekoba, chris-ejiogu and ananwude (2019) studied the effect of sectoral allocation of deposit money banks’ credit on the growth of the nigerian real economy from 2008q1 to 2017q4 using the ordinary least square (ols) regression technique. result of the analysis revealed that deposit money banks' credit to agriculture, industries, building and construction and wholesale & retail trade have no significant effect on agricultural, industrial, building and construction and wholesale & retail trade contribution to real gross domestic product. deposit money banks should remove the disparagement that the agricultural sector is not viable, and lend to farmers with genuine needs for funds at a low interest rate. the central bank of nigeria can equally play a critical role in reducing the interest rate charged by deposit money banks in extending credit to the economy by cutting down the monetary policy rate to a single digit compared to the current double digit of 14%. olorunmade, samuel, and adewole, (2019) examined the determinant of private sector credit and its implication on economic growth in nigeria. the fluctuation in the supply of money and credit i s the basic causal factor at work in cyclical process; when money supply falls, prices decrease, profit decrease, production activities become sluggish and production falls and when money supply expands, price rise, profit increase and the total output increases and finally growth takes place.sample regression analysis were used to analyse data obtained from central bank of nigeria statistical bulletin from 2000 to 2017. it was revealed in the determinant of credit supply that there was significant relationship between total credits to private sector and money supply in nigeria. the study also finds that there was significant relationship between private sector credit and economic growth in nigeria. literature gap dhanuskodi (2014) examines the impact of loan deposit ratio on the profitability of malaysian commercial banks for the period of 2009 to 2013 using all the 8 locally owned commercial banks in malaysia. gap and focus of present study: the above study is a foreign study and does not capture the effect of dmbs monetary policy on private sector funding. the study only captures the impact of monetary policy instrument (ldr) on banks profitability. the present study will be carried out in nigeria and focus on the effect of dmbs policy on private sector funding. daniel (2017) examined the evidence of the impact of liquidity management on the performance of deposit money banks. 24 banks were surveyed which constitute the entire deposit money banking industry in nigeria between 1986 and 2011. secondary data were collected and analyzed using spss. gap and focus of present study: the above though carried out in nigeria; it does not capture the impact of dmbs monetary copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 25 policy on private sector funding. the study only examined the effect of liquidity management on the performance of deposit money banks. this present study empirically focused on the effect of deposits money banks policy on private sector funding in nigeria. 3. methodology this study used ex-post facto quasi-experimental research design to examine the effect of deposit money banks policy on private sector funding in nigeria. this study employed secondary data sourced mainly from the central bank of nigeria (cbn) statistical bulletin from 1985 to 2018. model specification the study models are specified below: cps = α + β1blr + β2ltdr + et 1 ccps = α + β1blr + β2ltdr + et 2 smes = α + β1blr + β2ltdr + et 3 where: cps = credit to the private sector ccps = core credit to the private sector csmes = credit to small and medium scale enterprises sector blr = bank liquidity ratio ltdr = loan to deposit ratio et = error term techniques of data analysis the main tool of analysis is the ordinary least squares (ols) using the multiple regression method for a period of 34 years, annual data covering 1985– 2018. statistical evaluation of the global utility of the analytical model, so as to determine the reliability of the results obtained were carried out using the coefficient of correlation (r) of the regression, the coefficient of determination (r2), the student t-test and f-test. (i) coefficient of determination (r2) test: this measure the explanatory power of the independent variables on the dependent variables.r2 gives the proportion or percentage of the total variation in the dependent variable y that is accounted for by the single explanatory variable x. the higher the r2 value the better. for example, to determine the proportion of monetary policy to private sector funding in our model, we used the coefficient of determination. the coefficient of determination varies between 0.0 and 1.0. a coefficient of determination says 0.20 means that 20% of changes in the dependent variable are explained by the independent variable(s). therefore, we shall use the r2 to determine the extent to which variation in dmbs policy variables are explained by variations in private sector funding variables over the periods covered in this study. (ii) correlation co-efficient (r): this measures the degree of the relationship between two variables x and y in a regression equation. that is, it tries to establish the nature and magnitude of the relationship when two variables are been analyzed. thus correlation co-efficient show whether two variables are positively or negatively correlated. that is, it takes the value ranging from – 1, to + 1. (iii) f-test: this measures the overall significance. the extent to which the statistic of the coefficient of determination is statistically significant is measured by the f-test. the f-test can be done using the f-statistic or by the probability estimate. we use the f-statistic estimate for this analysis. (iv) student t-test: measures the individual statistical significance of the estimated independent variables. this is a test of significance used to test the significance of regression coefficients (gujurati, 2003). generally speaking, the test of significance approach is one of the methods used to test statistical hypothesis. a test of significance is a procedure by sample results are used to verify the truth or falsity of a null hypothesis (ho) at 5% level of significance. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 26 (v) durbin watson statistics: this measures the collinearity and autocorrelation between the variables in the time series. it is expected that a ratio of close to 2.00 is not auto correlated while ratio above 2.00 assumed the presence of autocorrelation. (vi) regression coefficient: this measures the extent in which the independent variables affect the dependent variables in the study. (vii) probability ratio: it measures also the extent in which the independent variables can explain change to the dependent variables given a percentage level of significant. stationarity (unit root) tests stationary test therefore checks for the stationarity of the variables used in the models. if stationary at level, then it is integrated of order zeroi, 1(0). thus, test for stationarity is also called test for integration. it is also called unit root test. stationarity denotes the non-existence of unit root. we shall therefore subject all the variables to unit root test using the augmented dickey fuller (adf) test specified in gujarati (2004) as follows. etyiyy t m i tt ++++= − − − 1 1 121  4 where: ty = change time t 1− ty = the lagged value of the dependent variables t = white noise error term if in the above  =0, then we conclude that there is a unit root. otherwise there is no unit root, meaning that it is stationary. the choice of lag will be determined by akaike information criteria. co-integration test (the johansen' test) it has already been warned that the regression of a non-stationary time series on another non stationary time series may lead to a spurious regression. if the residual is found to be stationary at level, we conclude that the variables are co-integrated and as such has long-run relationship exists among them. tijt j i iit i i tot cpscpswcps 1 11  +++= − = − =  5 tijt j i iit i i tot ccpsccpswccps 1 11  +++= − = − =  6 tijt j i iit i i tot smessmeswsmes 1 11  +++= − = − =  7 granger causality test causality means the impact of one variable on another, in other-words; causality is when an independent variable causes changes in a dependent variable. the pair-wise granger causality test is mathematically expressed as: 111 1 11 1 uxyxy t x n i t y n i ot ++ − = − =   8 and 1 v 1y xxdp1 n 1i 1yt y 1 dp n 1i o dp t x + −  = − = + 9 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 27 where xt and yt are the variables to be tested white ut and vt are the white noise disturbance terms. the null hypothesis 011 == yy dp , for all i’s is tested against the alternative hypothesis 01 x and .01 ydp if the co-efficient of x 1 are statistically significant but that of ydp1 are not, then x causes y. if the reverse is true then y causes x. however, where both co-efficient of x 1 and ydp1 are significant then causality is bi – directional. vector error correction (vec) technique the presence of co-integrating relationship forms the basis of the use of vector error correction model. e-views econometric software is used for data analysis, implement vector auto-regression (var)based co-integration tests using the methodology developed by johansen (1991,1995). the non-standard critical values are taken from (osterward, 1992). 4. results and discussion of findings table 1: short term regression results dmbs policy and credit to private sector dmbs policy and credit to core private sector variable coefficient t-test prob. variable coefficient t-test prob. ltdr -0.067112 -0.927541 0.3608 ltdr 0.058381 1.613331 0.1171 blr -0.395088 -1.713754 0.0966 blr -0.077273 -0.677874 0.5030 c 23.33372 3.595452 0.0011 c 5.842477 1.662310 0.1069 r2 0.109700 r2 0.811046 adj r2 0.052261 adj r2 0.792150 f-stat 1.909860 f-stat 42.92288 f-prob 0.165126 f-prob 0.000000 dw 0.218049 dw 0.557335 source: extract from e-view 9.0 the results of the short-run estimation are presented in table 1 above along with the corresponding diagnostic tests in tables below. to find out how well the model fits a set of observations, the r2 indicates that 10 percent and 81 percent of the variation in credit to private sector and core credit to the private sector is explained within the model. nonetheless, the r2 cannot determine whether the coefficient estimates and predictions are biased, hence further assessment of the residuals is necessary. from the results it could also be deduced that loan to deposit ratio and bank liquidity ratio have negative effect on credit to private sector. furthermore, from the results it could be deduced that loan to deposit ratio has positive effect while bank liquidity ratio has negative effect on credit to core credit to private sector. table 2: unit root test dmbs policy and credit to private sector dmbs policy and credit to core private sector variable adf 5% prob. variable adf 5% prob. cps -4.639432 -2.960411 0.0000 ccps -9.705692 -2.960411 0.0000 ltdr -4.216364 -2.954021 0.0000 ltdr -4.216364 -2.954021 0.0000 blr -7.235884 -2.967767 0.0000 blr -7.235884 -2.967767 0.0000 source: extract from e-view 9.0 (2020) the time series properties of the variables used in the analysis was investigated using augmented dickey-fuller test. the test was run with specification of trend and intercept in the model. the adf statistics for the test are presented in the table 2 above. it can be seen from the table above that the unit root test results, using the adf unit root test suggest that all series are stationary at order i (1) because they become stationary after being differenced once. therefore, the engle and granger (1987) can be employed. table 3: co-integration test hypothesized no. of ce(s) eigenvalue trace statistic 0.05 critical prob.** hypothesized no. of ce(s) eigenvalue trace statistic 0.05 critical prob.** copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 28 value value dmbs policy and credit to private sector dmbs policy and credit to core private sector none * 0.543161 25.06957 21.13162 0.0132 none * 0.719047 79.69140 47.85613 0.0000 at most 1 0.319038 12.29597 14.26460 0.1000 at most 1 * 0.576459 39.06521 29.79707 0.0032 at most 2 0.034507 1.123715 3.841466 0.2891 at most 2 0.288596 11.57389 15.49471 0.1785 source: extract from e-view 9.0 from table 3 above the results of the johansen co-integration test show that we adopt the null hypotheses of no co-integrating equation at the 5% level of significance. this implies that, there is no linear combination of the variables that are stationary in the long run and also confirms the existence of a long-run relationship between monetary policy variables and credit to private sector and credit to core private sector. table 4: error correction model dmbs policy and credit to private sector dmbs policy and credit to core private sector variable coefficient t-test prob. variable coefficient t-test prob. c 0.564197 1.407637 0.1754 d(ccps(-1)) 0.131719 1.275962 0.2202 d(cps(-1)) 0.279625 1.206350 0.2425 d(ccps(-2)) 0.148021 0.262307 0.7964 d(cps(-2)) -0.415204 -1.849144 0.0801 d(ccps(-3)) -0.764760 0.335028 0.7420 d(cps(-3)) -0.057267 -0.242831 0.8107 d(ltdr(-1)) -0.033402 -1.360830 0.1924 d(ltdr(-1)) 0.011215 0.310737 0.7594 d(ltdr(-2)) 0.071733 -0.657523 0.5202 d(ltdr(-2)) 0.009938 0.294156 0.7718 d(ltdr(-3)) 0.001541 1.491720 0.1552 d(ltdr(-3)) 0.078231 2.279508 0.0344 d(blr(-1)) -0.094156 0.028357 0.9777 d(blr(-1)) 0.049728 0.468390 0.6448 d(blr(-2)) 0.055822 -0.690108 0.5000 d(blr(-2)) -0.124536 -1.172818 0.2554 d(blr(-3)) -0.076869 0.353759 0.7281 d(blr(-3)) -0.034666 -0.355103 0.7264 ecm(-1) 0.379914 -0.576592 0.5722 ecm(-1) -0.031462 -0.385968 0.7038 r2 0.408549 r2 0.281129 adj r2 0.097260 adj r2 0.102954 f-stat 1.312440 f-stat 0.481317 f-prob 0.292124 f-prob 0.905265 dw 1.757685 dw 2.025376 source: extract from e-view 9.0 the corresponding sign of error correction term (ect) is negative for the models but not significant. this means that there is a long run causality running from independent variables to the dependent variable. the negative sign of (ect) indicates a move back towards equilibrium following a shock to the system in the previous year. the r2 from the models proved that the independent variables can explain 40 and 28 percent changes on the dependent variables. the models are statistically not significant from the value of f-statistics and probability. however, the ecm coefficient indicates that the models can adjust at the speed of 3 and 37 percent annually. the coefficient of the variables defines the effect of the independent variables on the dependent variables at various lags. table 5: granger causality test null hypothesis obs f-statistic prob. null hypothesis obs f-statistic prob. dmbs policy and credit to private sector dmbs policy and credit to core private sector ltdr does not granger cause cps 32 0.13568 0.8737 ltdr does not granger cause ccps 32 0.14328 0.8672 cps does not granger cause ltdr 32 0.17254 0.8424 ccps does not granger cause ltdr 32 0.08213 0.9214 blr does not granger cause cps 32 0.42941 0.6553 blr does not granger cause ccps 32 1.13195 0.3372 cps does not granger cause blr 1.28036 0.2943 ccps does not granger cause blr 32 1.62170 0.2162 source: extract from e-view 9.0 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 29 pair wise causality tests were run on the models with an optimal lag of 2. the results are presented in table 5 above. the researcher’s interest here is to establish the direction of causality between the independent variables and the dependent variables from 1985-2018. the models shows that there is no causality running from the dependent variables to independent variables and vice versa. table 6: short term regression results deposit money banks policy and credit to small and medium scale enterprises sector variable coefficient t-test prob. ltdr -0.118892 -1.268007 0.2145 blr 0.770832 2.813736 0.0086 c -1.099937 -0.133762 0.8945 r2 0.241691 adj r2 0.191137 f-stat 4.780853 f-prob 0.015765 dw 0.525461 source: extract from e-view 9.0 the results of the short-run estimation are presented in table 5 above along with the corresponding diagnostic tests in tables below. to find out how well the model fits a set of observations, the r2 indicates that 24.1 percent of the variation in dmbs funding to small and medium scale enterprises sector is explained within the model. nonetheless, the r2 cannot determine whether the coefficient estimates and predictions are biased, hence further assessment of the residuals necessary. from the result it could be deduced that loan to deposit ratio has negative effect while bank liquidity ratio has positive effect on credit to small and medium scale enterprises sector. table 7: unit root test deposit money banks policy and credit to small and medium scale enterprises sector variable adf 5% prob. smes -5.921945 -2.976263 0.0000 ltdr -4.739563 -2.967767 0.0007 blr -4.216364 -2.954021 0.0023 source: extract from e-view 9.0 the time series properties of the variables used in the analysis was investigated using augmented dickey-fuller test. the test was run with specification of trend and intercept in the model. the adf statistics for the test are presented in the table above. it can be seen from the table above that the unit root test results, using the adf unit root test suggest that all series are i (1) because they become stationary after being differenced once. therefore, the engle and granger (1987) can be employed. table 8: co-integration test hypothesized no. of ce(s) eigenvalue trace statistic 0.05 critical value prob.** none * 0.496177 37.62841 29.79707 0.0051 at most 1 * 0.361479 17.06252 15.49471 0.0288 at most 2 0.113212 3.604479 3.841466 0.0576 source: extract from e-view 9.0 from table 8, the results of the johansen co-integration test show that we adopt the null hypotheses of no co-integrating equation at the 5% level of significance. this implies that, there is no linear combination of the variables that are stationary in the long run and also confirms the existence of a long-run relationship between dmbs policy variables and credit to small and medium scale enterprises sector in nigeria. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 30 table 9: error correction model deposit money banks policy and credit to small and medium scale enterprises sector variable coefficient t-test prob. c -17.29070 0.022741 0.9822 d(smes(-1)) -0.043787 2.963148 0.0110 d(smes(-2)) -0.139630 2.114837 0.0543 d(smes(-3)) -0.285653 2.233214 0.0437 d(ltdr(-1)) -0.020892 2.512611 0.0260 d(ltdr(-2)) 0.208784 -1.581128 0.1379 d(ltdr(-3)) -0.038395 -2.065428 0.0594 d(blr(-1)) -0.410439 1.121600 0.2823 blr(-2) 0.108664 3.350254 0.0052 blr(-3) 0.805284 2.700478 0.0182 ecm(-1) -0.428681 0.618165 0.5471 r2 0.589935 adj r2 0.348721 f-stat 2.445688 f-prob 0.050320 dw 1.580857 source: extract from e-view 9.0 the corresponding sign of error correction term (ect) is negative but not significant. this means that there is a long run causality running from independent variables to the dependent variable. the negative sign of (ect) indicates a move back towards equilibrium following a shock to the system in the previous year. the r2 from the model proved that the variables can explain 58.9 percent changes on the dependent variables. the models are statistically significant from the value of f-statistics and probability. however, the ecm coefficient indicates that the models can adjust at the speed of 42.8 percent annually. the coefficient of the variables defines the effect of the independent variables on the dependent variables at various lags. table 10: granger causality test source: extract from e-view 9.0 pair wise causality tests were run on the models with an optimal lag of 2. the results are presented in table 10 above. the researcher’s interest here is to establish the direction of causality between the dependent variables and the independent variables from 1985-2018. the models shows that there is no causality from the dependent variables to independent variables and vice versa. discussion of findings in model 1, the estimated regression model from result of the vector error correction result in table 4 the relationship between deposit money bank rates policy and credit to private sector is moderate and not significant. this is because of an r2 of 0.408549 meaning that the model explains approximately 40.8 percent of the total variations in the credit to private sector. the error correction model shows a negative value of -0.031462 which is appropriate and is significant. this means that 3 percent of the deviation from long run equilibrium relationship in the credit to private sector is corrected every year since credit to private sector is estimated annually. some of the values of the coefficient of independent variables, that is deposit money bank policy rates are positive and also proved negative at various lags. the negative findings of the study confirm the findings of ogolo (2019) who found that interest rate, treasury bill rate, exchange rate, broad money supply and liquidity ratio have negative effect on commercial banks’ lending to the manufacturing null hypothesis obs f-statistic prob. ltdr does not granger cause smes 32 0.96925 0.3932 smes does not granger cause ltdr 32 1.71470 0.2005 blr does not granger cause smes 32 1.43567 0.2569 smes does not granger cause blr 32 0.86750 0.4323 copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 31 sector. ajayi and atanda (2012) that liquidity ratio and cash reserve ratio exert negative impact on banks total credit and jegede (2014) who finds that liquidity ratio and money supply exert negative effect on commercial bank’s loans and advances. daniel (2017) opine that the correlation results reveal positive impacts between return on equity and liquidity management variables: liquidity and cash reserve ratios, whereas loan to deposit ratio shows negative impact. also, alphonce, et al. (2015) opine that the negative impact implies that an inverse relationship exists between the ratio of loans to deposits and a bank’s profitability. from model 2, the estimated regression model from result of the vector error correction model in table 4 the relationship between deposit money bank policy rates and credit to core private sector is moderate and not significant. this is because of an r2 of 0.281129 meaning that the model explains approximately 28.1 percent of the total variations in the credit to core private sector. the error correction model shows a positive value of 0.379914 which is appropriate and is significant. this means that 37 percent of the deviation from long run equilibrium relationship in the credit to core private sector is corrected every year since credit to core private sector is estimated annually. some of the values of the coefficient of independent variables that is dmbs policy rates are positive and also proved negative at various lags. the positive findings confirm the findings of dhanuskodi (2015) that there was a positive and non-significant impact of ldr on roa in five banks out of the 8 studied banks. it also confirms the findings of atemnkenf and josep (2006), cited in husain and abdullah (2008), whose findings illustrated a positive correlation between the loan to deposit ratio and bank’s profitability. conversely, daniel (2017) opine that the correlation results reveal positive impacts between return on equity and liquidity management variables (liquidity and cash reserve ratios). the positive findings of the study also confirm the findings of anigbogu, okoli and nwakoby (2015) that with the exception of bank interest rate to smes, all other variables namely bank lending rate to smes, exchange rate and monetary policy have a positive and significant influence on small and medium enterprises performance in nigeria. dada (2014) opines that commercial banks credit to smes and the saving and time deposit of commercial banks exert a positive and significant influence on smes and suleyman (2013) that money supply has a strong effect for manufacturing sector credit volume. the negative findings of the study confirm the findings of ajayi and atanda (2012) that liquidity ratio and cash reserve ratio exert negative impact on banks total credit and jegede (2014) who finds that liquidity ratio and money supply exert negative effect on commercial bank’s loans and advances. in model 3, it is evidence that the estimated regression model from result of the vector error correction result in table 9 that the relationship between deposit money banks policy rate and credit to small and medium scale enterprises sector is high and significant. this is because of an r2 of 0.589935 meaning that the model explains approximately 58.9 percent of the total variations in the credit to small and medium scale enterprises sector. it is also evidence that the error correction model shows a negative value of -0.428681 which is appropriate and is significant. this means that 42 percent of the deviation from long run equilibrium relationship in the credit to small and medium scale enterprises sector is corrected every year since credit to small and medium scale enterprises sector is estimated annually. some of the values of the coefficient of independent variables, that is deposit money bank policy rates are positive and also proved negative at various lags. the positive effect of the variables as shown confirm the a-priori expectation of the study and validates the objectives of monetary policy. the findings also confirm the findings of akambi and ajagbe (2012) that increase in interest rate will leads to a decrease in the lending rate while liquidity ratio and cash ratio were statistically significant to the profit of the selected banks. van den heuvel (2015) that monetary policy affects bank lending through two channels, djiogap and ngomsi (2012) that bank’s capital to asset ratio, long-term liabilities, gdp growth and its size were statistically significant. olokoyo (2011); adelegan (2018) predictor variables (volume of deposits, investment portfolio, foreign exchange, and gdp) were statistically significant and portrayed a positive relationship with commercial bank lending. malede (2014) that these explanatory variables greatly influenced banks’ lending decisions compared to deposit and cash required reserve which was insignificant. nto et al, (2012) study finds policies on interest rate and liquidity ratio were negatively and positively significant to smes and recommend that cbn should stabilize the supply of credit to smes by strengthening policies on monetary policy instruments. the negative and positive findings confirm the study of daniel (2017) that the empirical analysis show that there is a significant relationship between liquidity management and the performance of deposit money banks in nigeria and opine that the correlation results reveal positive impacts between return on equity and liquidity management variables: liquidity and cash reserve ratios, whereas loan to deposit ratio shows negative impact. also, alphonce, et al. (2015) stress that the negative impact implies that an inverse relationship exists between the ratio of loans to deposits and a bank’s profitability. copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 4, no. 1; 2020 32 5. conclusion empirical findings proved that the f*cal = 1.312440 < f*tab = 2.24 at 5% n=31 is statistically not significant which is supported with a probability value of 0.292124 > 0.05 at 5% is significant, we therefore reject the alternate hypothesis, that is β1-β2 (deposit money bank policy rates) is statistically not significant with credit to private sector in nigeria. therefore, we conclude that there is no significant relationship between deposit money bank policy rates and credit to private sector in nigeria. it was proved that, the f*cal = 0.481317< f*tab = 2.24 at 5% n=31 is statistically not significant which is supported with a probability value of 0.905265> 0.05 at 5% is significant, we therefore reject the alternate hypothesis, that is β1-β2 (deposit money bank policy rates) is not statistically significant with credit to core private sector in nigeria. therefore, we conclude that there is no significant relationship between deposit money policy bank rates and credit to core private sector in nigeria. the study found that, the f*cal =2.445688 > f*tab = 2.24 at 5% n=31 is statistically significant which is supported with a probability value of 0.050320< 0.05 at 5% is significant, we therefore reject the null hypothesis, that is β1-β2 (deposit money bank policy rates) is statistically significant with credit to small and medium scale enterprises sector in nigeria. therefore, we conclude that there is significant relationship between deposit policy bank rates and credit to small and medium scale enterprises sector in nigeria. 6. recommendations the study recommends compliance to deposit money banks policies, this will enhance effective financial intermediation and increase credit to private sector. there is also needs for the regulatory authorities to harmonize the various deposit money banks policies with the objective of enhancing private sector funding. ▪ there is need to decentralize the operation of the deposit money banks in the urban cities. policies should be formulated to extend operation of the deposit money banks to the rural communities, this will enable the financial institutions to mobilize the much needed deposit and increase credit to the private sector. ▪ the study recommends that central bank should reduce deposit money banks policy rates. this is because changes in interest rates and bank credits may lead to changes in the real sector through investment and influence of aggregates demand. references adelegan, a.e. 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e-mail: jakariads21@gmail.com a r t i c l e i n f o article history: received: 29th june 2023 revised: 30th june to 19th august 2023 accepted: 20th august 2023 published: 21st august 2023 keywords: australian banking, history. jel classification codes: e50 a b s t r a c t this paper offers a detailed exploration of the intricate history of australian banking, unraveling its inception, progression, and pivotal junctures that have sculpted the financial terrain of the nation. originating as modest colonial endeavors, australian banks have evolved into significant players in the global financial arena. this journey of australian banking mirrors a captivating fusion of economic dynamics, political frameworks, and societal shifts. by meticulously scrutinizing critical junctures, regulatory shifts, technological innovations, and socio-economic determinants, this paper endeavors to furnish a nuanced comprehension of the trajectory of australian banking across centuries. from the pioneering ventures of the colonial era to the contemporary complexities of a digitalized world, the narrative unfolds a narrative rich in resilience, adaptation, and evolution. through this examination, we gain insight into the enduring legacy, challenges, and transformative potential of australian banking, illuminating its integral role in shaping the economic landscape of the continent. © 2023 by the authors. licensee cribfb. this article is an open-access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0). introduction banking plays a pivotal role in the economic development of australia, serving as the backbone of its financial infrastructure and providing essential services to individuals, businesses, and the broader economy. from the early days of colonization to the modern digital era, the evolution of australian banking has been intricately intertwined with the nation's economic growth, trade expansion, and social development. during the colonial era, banking institutions emerged primarily to support the burgeoning trade activities and agricultural ventures of the newly established colonies. these banks facilitated transactions, provided credit to farmers and entrepreneurs, and played a crucial role in channeling capital into productive investments. as australia transitioned from a collection of colonies to a federated nation in 1901, the banking sector underwent significant consolidation and expansion, laying the foundation for a more unified and robust financial system. throughout the 20th century, australian banks played key roles in financing infrastructure projects, supporting industrialization, and managing the economic challenges posed by two world wars and subsequent global crises. the establishment of regulatory bodies such as the reserve bank of australia (rba) and the australian prudential regulation authority (apra) further bolstered the stability and resilience of the banking sector, ensuring prudent oversight and risk management practices. in recent decades, technological advancements have revolutionized the way banking services are delivered, ushering in an era of digital banking, electronic payments, and fintech innovation. australian banks have embraced these technological changes, enhancing customer experiences, improving operational efficiencies, and expanding access to financial services, particularly in remote and underserved areas. moreover, australian banks have increasingly recognized their social and environmental responsibilities, actively engaging in corporate social responsibility (csr) initiatives, promoting financial inclusion, and integrating sustainability considerations into their business practices. initiatives such as green finance and ethical investing underscore the sector's commitment to addressing pressing societal challenges, including climate change and social inequality. 1corresponding author: orcid id: 0009-0003-7811-9124 © 2023 by the authors. hosting by cribfb. peer review under responsibility of cribfb. https://doi.org/10.46281/afbr.v8i1.2190 to cite this article: jakaria, s. a. (2023). history of australian banking. australian finance & banking review, 7(1), 9-29. https://doi.org/10.46281/afbr.v8i1.2190 http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/) https://doi.org/10.46281/afbr.v8i1.2190 https://orcid.org/0009-0003-7811-9124 jakaria, australian finance & banking review 7(1) (2023), 9-29 10 as australia navigates the complexities of the 21st-century global economy, the banking sector continues to play a critical role in supporting economic growth, fostering innovation, and ensuring financial stability. by adapting to evolving market dynamics, embracing technological innovations, and upholding principles of accountability and sustainability, australian banks are poised to contribute to the nation's prosperity and well-being in the years to come. the purpose of this paper is to provide a comprehensive exploration of australian banking history, tracing its evolution from the colonial era to the modern-day digital landscape. through a detailed examination of key milestones, regulatory developments, technological advancements, and socio-economic influences, the paper aims to offer insights into the dynamic interplay between banking and the broader economic and social fabric of australia. discussions colonial era establishment of the first banks: the emergence of banking institutions in the early colonial period and their role in facilitating trade and commerce. the early colonial period in australia witnessed the establishment of the first banking institutions, which played a crucial role in facilitating trade, commerce, and economic development. prior to the arrival of european settlers, indigenous australians engaged in various forms of trade and exchange, but it was the influx of british colonists in the late 18th century that laid the groundwork for modern banking in the continent. the first bank to operate in australia was the bank of new south wales, founded in 1817 by governor lachlan macquarie. initially established to address the shortage of currency in the colony of new south wales, the bank of new south wales quickly expanded its operations to provide a range of financial services, including lending, currency issuance, and deposit-taking. its establishment marked a significant milestone in the economic development of the colony, providing much-needed financial infrastructure to support growing trade and commerce. one of the primary functions of early colonial banks like the bank of new south wales was to facilitate trade between the colony and other parts of the british empire. as the colony developed, demand for credit and financial services grew, driven by the expansion of agricultural activities, the rise of maritime trade, and the influx of immigrants seeking opportunities in the new frontier. banks played a vital role in financing agricultural ventures, providing credit to farmers for land purchases, equipment, and livestock, thereby stimulating agricultural production and export trade. moreover, the establishment of banks facilitated the circulation of currency and the development of a monetary system, which was essential for the functioning of the colonial economy. prior to the establishment of banks, barter and informal credit arrangements were prevalent, limiting the scope and efficiency of economic transactions. the introduction of banking institutions provided a more reliable and standardized means of conducting financial transactions, thereby promoting economic growth and commercial activity. in addition to their role in facilitating trade and commerce, early colonial banks also played a significant role in infrastructure development. banks provided financing for public works projects such as roads, bridges, and ports, which were essential for the transportation of goods and the expansion of trade networks. by providing capital for infrastructure development, banks contributed to the overall economic development of the colonies and laid the foundation for future growth and prosperity. in conclusion, the emergence of banking institutions in the early colonial period played a pivotal role in shaping the economic landscape of australia. banks such as the bank of new south wales provided essential financial services, facilitated trade and commerce, and supported infrastructure development, thereby laying the groundwork for the continent's economic development. their establishment marked the beginning of a long and enduring relationship between banking and economic growth in australia. challenges and adaptations: navigation through economic uncertainties, currency fluctuations, and regulatory constraints despite their instrumental role in facilitating trade and commerce, early colonial banks in australia faced numerous challenges stemming from economic uncertainties, currency fluctuations, and regulatory constraints. these challenges necessitated strategic adaptations by banking institutions to maintain their operations, support their clients, and navigate the dynamic economic landscape of the time.  economic uncertainties economic volatility: the early colonial period was characterized by economic volatility, driven by factors such as fluctuating commodity prices, unpredictable weather patterns affecting agricultural production, and the boom-and-bust cycles inherent in frontier economies. adaptations: to mitigate the impact of economic uncertainties, banks implemented prudent lending practices, diversified their investment portfolios, and maintained adequate reserves to weather downturns. additionally, banks played a stabilizing role by providing liquidity during economic downturns, thereby helping to mitigate the adverse effects of economic shocks on businesses and individuals. jakaria, australian finance & banking review 7(1) (2023), 9-29 11  currency fluctuations lack of currency stability: in the absence of a standardized national currency, colonial economies relied on a patchwork of currency systems, including british pounds, spanish dollars, and various local currencies. this lack of currency stability posed challenges for banks in conducting financial transactions and managing currency risks. adaptations: banks adapted to currency fluctuations by issuing their own banknotes, which were redeemable for specie or other forms of currency. this helped to standardize the currency system and provided a more reliable medium of exchange for commercial transactions. additionally, banks engaged in currency arbitrage and foreign exchange operations to hedge against currency risks and ensure the liquidity of their assets.  regulatory constraints limited regulatory oversight: in the early colonial period, banking regulations were minimal, and regulatory oversight was limited. this lack of regulatory framework exposed banks to risks such as fraud, insolvency, and inadequate capitalization. adaptations: in the absence of robust regulatory oversight, banks relied on self-regulatory mechanisms and internal controls to manage risks and maintain financial stability. banks implemented strict lending standards, conducted thorough due diligence on borrowers, and established reserve requirements to safeguard against potential losses. moreover, banks cultivated relationships with colonial authorities and policymakers to influence the development of banking regulations and ensure a favorable operating environment. in conclusion, early colonial banks in australia confronted a myriad of challenges arising from economic uncertainties, currency fluctuations, and regulatory constraints. through strategic adaptations, including prudent risk management practices, currency diversification strategies, and proactive engagement with regulators, banks were able to navigate these challenges and establish themselves as vital pillars of the colonial economy. the lessons learned from these early experiences continue to inform banking practices in modern-day australia, underscoring the importance of adaptability, resilience, and innovation in the face of evolving economic dynamics. federation and post-federation period consolidation and expansion: banking sector reforms and the growth of national banks post-federation the period following federation in 1901 marked a significant phase in the evolution of the australian banking sector, characterized by consolidation, expansion, and banking sector reforms. the establishment of a unified nation provided the impetus for regulatory reforms and the emergence of national banks that would shape the financial landscape of australia for decades to come. regulatory reforms  with the advent of federation, the need for a standardized regulatory framework became apparent to ensure the stability and efficiency of the banking sector across the newly formed nation.  the banking act of 1911 represented a milestone in australian banking regulation, introducing prudential oversight, capital requirements, and licensing provisions aimed at safeguarding depositors' funds and promoting financial stability.  subsequent regulatory reforms, including amendments to the banking act and the establishment of regulatory bodies such as the commonwealth bank and the reserve bank of australia (rba), further strengthened the regulatory framework and enhanced the resilience of the banking sector. growth of national banks  the period following federation witnessed the consolidation of smaller regional banks and the emergence of larger national banks with extensive branch networks and diversified business operations.  national banks such as the commonwealth bank of australia (cba), founded in 1911, played a pivotal role in driving the expansion and modernization of the australian banking sector.  the cba, in particular, established itself as a key player in the australian financial system, offering a wide range of banking services, including retail banking, corporate banking, and central banking functions. expansion of banking services  the growth of national banks post-federation facilitated greater access to banking services for individuals and businesses across australia.  national banks expanded their branch networks into regional and remote areas, providing essential financial services to rural communities and supporting economic development outside of major urban centers.  the introduction of new banking products and services, such as savings accounts, personal loans, and mortgage financing, contributed to the democratization of finance and the broadening of financial inclusion. jakaria, australian finance & banking review 7(1) (2023), 9-29 12 technological advancements  the post-federation era also witnessed technological advancements that transformed banking operations and customer service delivery.  innovations such as check clearing systems, automated teller machines (atms), and electronic payment systems improved the efficiency and convenience of banking transactions, enhancing the customer experience and driving further adoption of banking services. in conclusion, the period following federation in australia marked a transformative phase in the history of the banking sector, characterized by regulatory reforms, consolidation, and the emergence of national banks. these developments laid the foundation for a modern and resilient banking system that would support the nation's economic growth and prosperity in the decades to come. impact of world wars: the role of banks in financing wartime efforts and managing economic disruptions the outbreak of world war i (1914-1918) and world war ii (1939-1945) had profound implications for the australian banking sector, as banks played a crucial role in financing wartime efforts, managing economic disruptions, and supporting national mobilization efforts. financing wartime efforts  during both world wars, australian banks played a critical role in financing the war efforts of the allied powers, including australia's own military contributions.  banks facilitated government borrowing through the issuance of war bonds and treasury bills, providing the necessary funds to finance military operations, purchase equipment, and support war-related industries.  additionally, banks extended credit to businesses engaged in war production, including munitions factories, shipyards, and aircraft manufacturers, thereby contributing to the expansion of wartime industries and the mobilization of resources for the war effort. managing economic disruptions  the onset of world wars led to significant economic disruptions, including disruptions to trade, labor shortages, inflationary pressures, and fluctuations in commodity prices.  australian banks played a key role in managing these economic challenges by providing liquidity to businesses and individuals affected by the war, extending credit to bridge temporary financing gaps, and facilitating the resumption of economic activities.  banks also worked closely with government authorities to implement measures aimed at stabilizing the economy, including price controls, rationing schemes, and labor mobilization programs. supporting national mobilization efforts  australian banks actively supported national mobilization efforts during both world wars by participating in government-led initiatives to support the war economy and ensure the efficient allocation of resources.  banks cooperated with government agencies to channel financial resources towards priority sectors such as defense production, agriculture, and infrastructure development.  moreover, banks played a role in facilitating the recruitment and deployment of personnel for military service by providing banking services to defense personnel and their families, including managing military payrolls and administering welfare programs. post-war reconstruction and recovery  following the conclusion of world wars, australian banks played a vital role in financing post-war reconstruction and recovery efforts, supporting the rebuilding of infrastructure, the rehabilitation of returning servicemen, and the resumption of civilian economic activities.  banks extended credit to businesses and individuals to stimulate investment and consumption, thereby contributing to the economic recovery and the transition to peacetime prosperity. in conclusion, australian banks played a multifaceted role during world wars, serving as financial intermediaries, economic stabilizers, and agents of national mobilization. their contributions to financing wartime efforts, managing economic disruptions, and supporting post-war reconstruction were instrumental in sustaining australia's war effort and facilitating the country's transition to a peacetime economy. jakaria, australian finance & banking review 7(1) (2023), 9-29 13 regulation and deregulation regulatory framework: evolution of banking regulations, including the establishment of the reserve bank of australia (rba) and the australian prudential regulation authority (apra). the evolution of the regulatory framework governing the australian banking sector is a testament to the dynamic interplay between economic developments, financial stability objectives, and the need for effective regulatory oversight. over the years, the regulatory landscape has undergone significant transformations, marked by the establishment of key regulatory bodies such as the reserve bank of australia (rba) and the australian prudential regulation authority (apra). early regulatory framework  in the early colonial period, banking regulations were minimal, and regulatory oversight was limited. banks operated under a laissez-faire regulatory environment, with little formal supervision from colonial authorities.  the absence of comprehensive regulatory framework left banks vulnerable to risks such as insolvency, fraud, and inadequate capitalization, leading to occasional banking crises and depositor losses. establishment of the reserve bank of australia (rba)  the reserve bank act of 1959 marked a significant milestone in the evolution of australian banking regulation with the establishment of the reserve bank of australia (rba) as the nation's central bank.  the rba was tasked with a dual mandate of maintaining price stability and promoting full employment, thereby becoming the primary authority responsible for monetary policy formulation and implementation.  as the central bank, the rba was granted regulatory powers over key aspects of the financial system, including currency issuance, monetary operations, and oversight of payment systems. banking sector reforms  the 1980s and 1990s witnessed a series of banking sector reforms aimed at liberalizing the financial system, promoting competition, and enhancing efficiency.  key reforms included the deregulation of interest rates, the removal of restrictions on bank branching and foreign ownership, and the introduction of prudential standards to strengthen risk management practices.  these reforms paved the way for increased competition, innovation, and globalization within the australian banking sector, leading to the entry of foreign banks, the emergence of non-bank financial institutions, and the adoption of new technologies. establishment of the australian prudential regulation authority (apra)  in response to the banking and financial sector challenges of the 1980s and 1990s, the australian government established the australian prudential regulation authority (apra) in 1998.  apra was entrusted with the responsibility of regulating and supervising the banking, insurance, and superannuation industries to ensure their safety, soundness, and stability.  apra's regulatory mandate includes prudential supervision, risk assessment, enforcement of prudential standards, and resolution of financial institution failures. ongoing regulatory reforms  in the aftermath of the global financial crisis (gfc) of 2008, there has been renewed focus on strengthening financial regulation and enhancing systemic resilience.  regulatory reforms introduced post-gfc include measures to improve capital adequacy, enhance risk management practices, and bolster crisis management frameworks to mitigate systemic risks and safeguard financial stability. in conclusion, the evolution of banking regulations in australia reflects a trajectory of increasing sophistication, from the early days of laissez-faire regulation to the establishment of robust regulatory frameworks overseen by institutions such as the rba and apra. as the banking sector continues to evolve in response to emerging risks and market dynamics, regulatory authorities play a critical role in ensuring the safety, stability, and integrity of the financial syst deregulation and liberalization: reforms in the 1980s and 1990s leading to increased competition, innovation, and globalization. the 1980s and 1990s marked a period of significant deregulation and liberalization in the australian banking sector, characterized by sweeping reforms aimed at dismantling regulatory barriers, fostering competition, promoting innovation, and embracing globalization. these reforms transformed the banking landscape, ushering in a new era of dynamism and growth. jakaria, australian finance & banking review 7(1) (2023), 9-29 14 deregulation of interest rates  prior to the reforms of the 1980s, interest rates in australia were subject to strict regulatory controls, with the government setting caps on lending and deposit rates.  deregulation of interest rates, initiated in the early 1980s, abolished these controls, allowing banks to determine interest rates based on market forces.  this deregulation led to greater pricing flexibility, increased competition, and improved allocation of credit, as banks were able to respond more effectively to changes in market conditions and borrower preferences. removal of branching restrictions  historically, australian banks were subject to geographic restrictions on branching, limiting their ability to expand their branch networks across state borders.  reforms in the 1980s and 1990s removed these restrictions, allowing banks to establish branches and operate nationally.  this liberalization of branching rules promoted competition by facilitating the entry of new players into previously restricted markets and providing consumers with greater choice and access to banking services. foreign bank entry  the deregulation of foreign bank entry in the 1980s opened the australian banking market to foreign competition, paving the way for the entry of multinational banks.  foreign banks brought with them expertise, technology, and global networks, injecting new ideas and innovation into the australian banking sector.  the presence of foreign banks intensified competition, leading to product innovation, improved service quality, and lower costs for consumers. financial innovation  deregulation and liberalization spurred financial innovation in the australian banking sector, driving the development of new products, services, and delivery channels.  banks introduced innovative financial instruments such as securitization, derivatives, and structured products to meet the evolving needs of customers and capitalize on emerging market opportunities.  technological advancements, including the adoption of computerization, electronic banking, and atm networks, transformed the way banking services were delivered, enhancing convenience and efficiency for consumers. globalization  the deregulation and liberalization of the australian banking sector were part of broader global trends towards financial liberalization and globalization.  australian banks embraced globalization by expanding their operations internationally, establishing branches and subsidiaries in overseas markets, and participating in cross-border transactions.  globalization enabled australian banks to diversify their revenue streams, access new sources of funding, and leverage international expertise to enhance their competitiveness on the global stage. in conclusion, the deregulation and liberalization of the australian banking sector in the 1980s and 1990s were instrumental in driving increased competition, innovation, and globalization. these reforms transformed the banking landscape, empowering banks to adapt to changing market conditions, embrace new technologies, and expand their reach both domestically and internationally. the legacy of these reforms continues to shape the modern australian banking sector, fostering a dynamic and resilient financial ecosystem. technological revolution introduction of technology: adoption of computers, atms, and electronic banking services. the introduction of technology revolutionized the australian banking sector, leading to significant advancements in efficiency, convenience, and accessibility of financial services. beginning in the late 20th century and continuing into the 21st century, the adoption of computers, automated teller machines (atms), and electronic banking services transformed the way banks operated and interacted with their customers. computerization of banking operations  the widespread adoption of computers in the 1970s and 1980s revolutionized banking operations, enabling banks to automate processes, streamline transactions, and improve data management.  computerization allowed banks to centralize their operations, reducing the need for manual record-keeping and paperwork, and enhancing operational efficiency. jakaria, australian finance & banking review 7(1) (2023), 9-29 15  banks began to invest in core banking systems and software applications to support functions such as account management, transaction processing, and risk assessment, laying the foundation for modern banking infrastructure. introduction of automated teller machines (atms)  the introduction of atms in the 1980s represented a major milestone in banking technology, providing customers with round-the-clock access to cash withdrawals, account inquiries, and basic banking services.  atms offered convenience and flexibility, allowing customers to perform transactions outside of traditional banking hours and locations.  the proliferation of atms across australia expanded the reach of banking services, particularly in rural and remote areas where brick-and-mortar bank branches were scarce. electronic banking services  the advent of electronic banking services, including telephone banking and internet banking, transformed the way customers interacted with their banks and managed their finances.  telephone banking, introduced in the 1980s, allowed customers to conduct banking transactions over the phone using interactive voice response (ivr) systems or speaking with a live agent.  internet banking emerged in the 1990s and rapidly gained popularity, enabling customers to access their accounts, transfer funds, pay bills, and perform other banking activities online via secure websites or mobile apps.  electronic banking services provided customers with greater convenience, control, and flexibility in managing their finances, while also reducing the need for in-person visits to bank branches. impact on banking operations and customer experience  the adoption of technology revolutionized banking operations, enabling banks to improve efficiency, reduce costs, and enhance risk management practices.  customers benefited from greater convenience, accessibility, and choice in accessing banking services, leading to higher levels of satisfaction and loyalty.  technology also facilitated the development of innovative financial products and services, such as mobile banking, contactless payments, and digital wallets, further enhancing the customer experience and driving continued innovation in the banking sector. in conclusion, the introduction of technology, including computers, atms, and electronic banking services, has transformed the australian banking sector, driving improvements in efficiency, accessibility, and customer experience. as technology continues to evolve, banks are poised to leverage emerging technologies such as artificial intelligence, blockchain, and data analytics to further enhance their offerings and meet the evolving needs of customers in the digital age. digital disruption: the rise of online banking, fintech startups, and digital currencies reshaping traditional banking models. the advent of digital technology has sparked a wave of disruption in the australian banking sector, challenging traditional business models and reshaping the way financial services are delivered. the rise of online banking, the emergence of fintech startups, and the growing popularity of digital currencies are transforming the industry landscape, driving innovation, and changing customer expectations. online banking  online banking has become increasingly prevalent in australia, offering customers convenient access to a wide range of banking services via the internet or mobile apps.  traditional banks have invested heavily in developing user-friendly online platforms that enable customers to check account balances, transfer funds, pay bills, and manage their finances from anywhere at any time.  online banking has shifted the balance of power towards consumers, empowering them with greater control over their financial transactions and reducing their reliance on physical bank branches. fintech startups  the australian fintech ecosystem has experienced rapid growth in recent years, fueled by a surge in entrepreneurial activity, venture capital investment, and government support.  fintech startups are leveraging cutting-edge technologies such as artificial intelligence, blockchain, and data analytics to offer innovative financial products and services that challenge traditional banking models.  these startups are disrupting various segments of the banking value chain, including payments, lending, wealth management, and insurance, by providing faster, cheaper, and more tailored solutions to meet the evolving needs of consumers and businesses. jakaria, australian finance & banking review 7(1) (2023), 9-29 16 digital currencies  the rise of digital currencies, such as bitcoin and ethereum, has captured the imagination of investors and consumers alike, presenting both opportunities and challenges for the banking industry.  while digital currencies offer the potential for faster, cheaper, and more secure cross-border transactions, they also pose risks related to regulatory compliance, volatility, and cybersecurity.  some australian banks have embraced digital currencies by exploring blockchain technology for payment settlements and offering services to customers interested in investing in cryptocurrencies. however, others have been more cautious, citing concerns about the lack of regulation and the potential for financial crime. reshaping traditional banking models  the rise of online banking, fintech startups, and digital currencies is reshaping traditional banking models, forcing incumbent banks to adapt or risk being left behind.  traditional banks are responding to digital disruption by investing in technology, partnering with fintech startups, and launching digital-only banking platforms to meet the changing preferences of customers and stay competitive in the digital age.  at the same time, regulatory authorities are grappling with the challenges posed by digital disruption, seeking to strike a balance between fostering innovation and safeguarding financial stability and consumer protection. in conclusion, digital disruption is fundamentally transforming the australian banking sector, driving innovation, competition, and customer-centricity. as online banking, fintech startups, and digital currencies continue to evolve, banks will need to embrace digital transformation, foster innovation, and adapt their business models to thrive in the increasingly digitalized financial ecosystem. financial crises and resilience global financial crisis (gfc): impacts on the australian banking sector and regulatory responses the global financial crisis (gfc), which originated in the united states in 2007 and reverberated across global financial markets, had significant implications for the australian banking sector. while australia fared relatively well compared to many other countries, the crisis exposed vulnerabilities in the financial system and prompted regulatory responses aimed at enhancing resilience and stability. impacts on the australian banking sector  despite australia's strong regulatory framework and conservative banking practices, the gfc had notable impacts on the australian banking sector.  australian banks faced increased funding costs and liquidity pressures as global credit markets froze and interbank lending rates surged.  the crisis also led to a tightening of credit conditions, with banks becoming more risk-averse and tightening lending standards, particularly in the areas of housing and commercial real estate.  however, compared to their international counterparts, australian banks remained relatively well-capitalized and profitable, due in part to prudent risk management practices and regulatory safeguards. regulatory responses  in response to the challenges posed by the gfc, australian regulatory authorities implemented a series of measures aimed at strengthening the resilience of the financial system and mitigating systemic risks.  the australian prudential regulation authority (apra) introduced new prudential standards to enhance capital adequacy, liquidity management, and risk assessment practices across the banking sector.  apra also implemented stress testing requirements to assess banks' ability to withstand adverse economic scenarios and ensure they had adequate buffers to absorb potential losses.  the reserve bank of australia (rba) implemented monetary policy measures, including interest rate cuts and liquidity injections, to support economic growth, stabilize financial markets, and ease funding pressures on banks.  additionally, the australian government introduced fiscal stimulus packages to boost domestic demand, support employment, and stimulate economic activity, thereby alleviating some of the pressures facing the banking sector. longer-term implications  the gfc prompted a reassessment of risk management practices and regulatory frameworks within the australian banking sector, leading to a greater emphasis on resilience, transparency, and accountability.  australian banks increased their focus on building robust risk management systems, enhancing governance structures, and improving capital and liquidity management practices to better withstand future financial shocks. jakaria, australian finance & banking review 7(1) (2023), 9-29 17  the crisis also spurred efforts to enhance international cooperation and coordination on regulatory issues, as policymakers sought to address the global nature of systemic risks and prevent future financial crises from occurring. in conclusion, while the australian banking sector weathered the global financial crisis relatively well compared to many other countries, the crisis underscored the importance of robust regulatory frameworks and prudent risk management practices in safeguarding financial stability. the regulatory responses implemented in the aftermath of the gfc have strengthened the resilience of the australian banking sector and positioned it well to navigate future challenges and uncertainties. covid-19 pandemic: challenges and responses in maintaining financial stability and supporting the economy. the covid-19 pandemic, which emerged in late 2019 and rapidly spread across the globe, presented unprecedented challenges to the australian economy and financial system. as the pandemic unfolded, policymakers and regulatory authorities faced the daunting task of maintaining financial stability and supporting the economy amidst widespread disruptions and uncertainties. economic disruptions  the covid-19 pandemic triggered a severe economic downturn in australia, marked by sharp declines in economic activity, employment losses, and business closures.  lockdown measures and social distancing restrictions implemented to contain the spread of the virus led to disruptions in supply chains, reduced consumer spending, and contraction in key sectors such as tourism, hospitality, and retail.  the economic fallout from the pandemic also exacerbated pre-existing vulnerabilities, including high household debt levels, housing market imbalances, and dependence on international trade and tourism. financial stability concerns  the economic disruptions caused by the pandemic raised concerns about financial stability, as businesses faced liquidity pressures, borrowers struggled to service debts, and asset prices experienced volatility.  australian banks, while well-capitalized and profitable, braced for an increase in non-performing loans and credit losses as the economic outlook deteriorated and unemployment rose.  the reserve bank of australia (rba) and the australian prudential regulation authority (apra) closely monitored financial markets and worked to ensure the stability of the banking sector through liquidity support measures, regulatory forbearance, and stress testing exercises. policy responses  in response to the economic fallout from the pandemic, australian policymakers implemented a range of fiscal and monetary measures to support households, businesses, and financial markets.  the australian government rolled out substantial fiscal stimulus packages, including wage subsidies, income support payments, and business grants, to cushion the impact of the pandemic on household incomes and maintain business viability.  the reserve bank of australia (rba) implemented monetary policy measures, including interest rate cuts, quantitative easing, and yield curve control, to support liquidity conditions, lower borrowing costs, and facilitate credit flows to the economy.  regulatory authorities, including apra and the australian securities and investments commission (asic), provided regulatory relief and flexibility to financial institutions, allowing them to offer loan repayment deferrals, loan restructuring, and other forms of support to borrowers facing financial hardship. recovery and resilience  as vaccination efforts ramped up and restrictions eased, australia embarked on a path towards economic recovery, supported by the success in containing the spread of the virus and the resilience of its financial system.  government stimulus measures, accommodative monetary policy, and ongoing support from regulatory authorities helped to underpin confidence, restore business activity, and fuel a rebound in economic growth.  however, challenges remain, including the need to address structural imbalances, support sectors still grappling with the aftermath of the pandemic, and navigate global uncertainties such as supply chain disruptions and geopolitical tensions. in conclusion, the covid-19 pandemic presented unprecedented challenges to the australian economy and financial system, requiring swift and coordinated policy responses to maintain stability and support recovery. while significant progress has been made, the road to full economic recovery remains uncertain, underscoring the importance of continued vigilance, resilience, and policy adaptability in navigating the post-pandemic landscape. jakaria, australian finance & banking review 7(1) (2023), 9-29 18 social and environmental responsibility corporate social responsibility (csr): banks' role in promoting financial inclusion, sustainability, and ethical practices. corporate social responsibility (csr) has become an increasingly important aspect of the banking sector's operations, reflecting a broader recognition of banks' responsibilities towards society, the environment, and ethical business practices. australian banks have been actively engaged in csr initiatives aimed at promoting financial inclusion, sustainability, and ethical conduct, leveraging their resources, expertise, and influence to drive positive social and environmental impact. financial inclusion  australian banks play a vital role in promoting financial inclusion by providing access to banking services and credit to underserved and marginalized communities, including low-income individuals, small businesses, and rural populations.  banks offer a range of products and services tailored to meet the needs of financially excluded populations, such as basic transaction accounts, microfinance loans, and financial literacy programs.  additionally, banks collaborate with government agencies, non-profit organizations, and community groups to develop initiatives aimed at improving financial literacy, building financial resilience, and empowering disadvantaged individuals to participate in the formal financial system. sustainability  australian banks are increasingly incorporating sustainability considerations into their business strategies, operations, and decision-making processes, recognizing the importance of environmental, social, and governance (esg) factors in long-term value creation.  banks are investing in sustainable finance initiatives, including green lending, renewable energy financing, and impact investing, to support the transition to a low-carbon economy and address climate change-related risks.  banks are also integrating sustainability criteria into their investment and lending decisions, engaging with stakeholders to identify and mitigate environmental and social risks, and disclosing relevant esg information to stakeholders to enhance transparency and accountability. ethical practices  upholding ethical standards and promoting integrity is a cornerstone of csr for australian banks, reflecting a commitment to responsible business conduct, compliance with laws and regulations, and ethical decision-making.  banks have implemented robust corporate governance structures, codes of conduct, and compliance programs to prevent misconduct, mitigate conflicts of interest, and uphold the highest standards of ethical behavior.  banks also engage in stakeholder dialogue, including with customers, employees, investors, and regulators, to solicit feedback, address concerns, and continuously improve their ethical practices and corporate culture. community engagement  australian banks are actively involved in supporting local communities through philanthropic initiatives, employee volunteering programs, and community development projects.  banks donate to charitable organizations, sponsor community events, and provide grants to support education, health, arts, and cultural programs, contributing to the social and economic well-being of communities.  employee volunteering programs enable bank employees to donate their time and skills to support community organizations and address local challenges, fostering a culture of giving back and social responsibility within the organization. in conclusion, csr plays a critical role in shaping the banking sector's contribution to society and the environment, with australian banks actively engaged in promoting financial inclusion, sustainability, and ethical practices. by aligning their business objectives with broader societal and environmental goals, banks can create shared value for stakeholders, build trust and credibility, and contribute to a more inclusive, sustainable, and ethical financial system. climate change and green finance: initiatives to address environmental risks and promote sustainable investments. climate change poses significant environmental, social, and economic risks, requiring urgent action from governments, businesses, and financial institutions. australian banks are increasingly recognizing the importance of addressing climaterelated risks and promoting sustainable investments through initiatives focused on green finance, sustainable lending, and climate resilience. climate risk assessment and disclosure  australian banks are integrating climate risk assessment into their risk management frameworks to identify, measure, and manage the financial risks associated with climate change. jakaria, australian finance & banking review 7(1) (2023), 9-29 19  banks are conducting scenario analysis and stress testing to assess the potential impacts of physical risks (e.g., extreme weather events) and transition risks (e.g., policy changes, market shifts) on their loan portfolios, investments, and business operations.  transparency and disclosure of climate-related risks and opportunities are becoming standard practices, with banks disclosing relevant information in line with international frameworks such as the task force on climate-related financial disclosures (tcfd). green finance initiatives  australian banks are actively promoting green finance initiatives aimed at financing projects and activities that contribute to climate mitigation, adaptation, and environmental sustainability.  banks offer green loans, green bonds, and other financial products designed to fund renewable energy projects, energy efficiency upgrades, sustainable infrastructure, and climate-resilient development.  banks collaborate with government agencies, multilateral institutions, and industry partners to develop innovative financing solutions and support the transition to a low-carbon economy. sustainable lending practices  banks are incorporating environmental and social considerations into their lending practices, adopting policies and guidelines to screen and assess the environmental and social risks of lending activities.  banks are implementing responsible lending practices to ensure that loans are aligned with environmental sustainability objectives, including compliance with environmental regulations, adherence to sustainability standards, and support for environmentally responsible business practices.  banks are engaging with borrowers to promote sustainable business practices, provide incentives for environmental performance improvement, and facilitate the adoption of sustainable technologies and practices. climate resilience and adaptation  australian banks are also focusing on building climate resilience and adaptation measures to address the physical impacts of climate change and enhance the resilience of communities and businesses.  banks are investing in climate-resilient infrastructure, disaster risk reduction, and insurance products to help mitigate the impacts of extreme weather events, sea-level rise, and other climate-related hazards.  banks are working with stakeholders to develop strategies for managing climate-related risks, enhancing emergency preparedness, and supporting community resilience-building efforts. in conclusion, australian banks are taking proactive steps to address climate change and promote sustainable finance through initiatives focused on climate risk assessment, green finance, sustainable lending, and climate resilience. by aligning their business strategies with environmental sustainability goals and supporting the transition to a low-carbon economy, banks can play a crucial role in addressing climate-related risks, promoting sustainable development, and contributing to a more resilient and prosperous future. future prospects and challenges emerging trends: predictions on the future direction of australian banking, including the rise of digital banking, open banking, and artificial intelligence. the australian banking sector is poised for significant transformation in the coming years, driven by technological advancements, regulatory reforms, and changing consumer preferences. several emerging trends are likely to shape the future direction of australian banking, including the rise of digital banking, open banking, and artificial intelligence (ai). digital banking  the adoption of digital banking is expected to accelerate, driven by changing consumer behavior, advancements in technology, and the convenience offered by digital channels.  australian banks will continue to invest in digital transformation initiatives, enhancing their online and mobile banking platforms to deliver seamless, personalized, and intuitive banking experiences.  digital banking will become increasingly integrated into consumers' daily lives, with customers expecting instant access to a wide range of banking services and personalized financial advice on their preferred digital devices. open banking  the implementation of open banking regulations in australia is expected to catalyze innovation and competition in the banking sector by enabling customers to securely share their financial data with third-party providers.  open banking will empower consumers with greater control over their financial information and facilitate the development of innovative fintech solutions, such as personalized financial management apps, comparison platforms, and tailored product recommendations. jakaria, australian finance & banking review 7(1) (2023), 9-29 20  australian banks will need to adapt to the open banking ecosystem by embracing collaboration with fintechs, enhancing data security and privacy measures, and leveraging open apis to enable seamless integration with third-party services. artificial intelligence (ai)  ai and machine learning technologies will play an increasingly prominent role in australian banking, driving automation, efficiency gains, and personalized customer experiences.  banks will leverage ai-powered chatbots and virtual assistants to enhance customer service, provide real-time support, and streamline routine inquiries and transactions.  ai algorithms will be deployed to analyze vast amounts of customer data, identify patterns and trends, and offer personalized product recommendations, risk assessments, and financial advice tailored to individual needs and preferences. personalization and customer experience  personalization will emerge as a key differentiator in the australian banking sector, with banks leveraging data analytics, ai, and machine learning to deliver highly targeted and relevant products and services.  banks will focus on enhancing the customer experience across all touchpoints, from account opening and onboarding to ongoing engagement and support, by offering intuitive interfaces, proactive notifications, and personalized financial insights.  customer-centric design principles will drive innovation in product development, with banks co-creating solutions with customers and incorporating feedback to continually improve usability, accessibility, and satisfaction. in conclusion, the future of australian banking is expected to be characterized by digital innovation, open collaboration, and ai-driven personalization. as banks embrace emerging technologies and adapt to evolving consumer expectations, they will be well-positioned to deliver enhanced value propositions, foster innovation, and drive sustainable growth in the digital economy. addressing challenges: strategies to navigate regulatory complexities, cybersecurity threats, and socio-economic uncertainties the australian banking sector faces a myriad of challenges, including navigating regulatory complexities, combating cybersecurity threats, and addressing socio-economic uncertainties. to effectively address these challenges, banks can adopt a range of strategies aimed at enhancing regulatory compliance, strengthening cybersecurity defenses, and building resilience in the face of socio-economic uncertainties. regulatory compliance  stay abreast of regulatory changes: banks should closely monitor regulatory developments and stay informed about changes to laws, regulations, and industry standards affecting the banking sector.  implement robust compliance frameworks: banks should establish comprehensive compliance frameworks, policies, and procedures to ensure adherence to regulatory requirements, including governance structures, risk management practices, and internal controls.  invest in regulatory technology (regtech): banks can leverage regtech solutions, such as automation, data analytics, and regulatory reporting tools, to streamline compliance processes, reduce manual effort, and enhance accuracy and efficiency. cybersecurity defense  adopt a risk-based approach: banks should conduct regular cybersecurity risk assessments to identify vulnerabilities, assess potential threats, and prioritize mitigation efforts based on the level of risk exposure.  enhance cybersecurity awareness and training: banks should invest in cybersecurity awareness programs and training initiatives to educate employees about common threats, phishing scams, and best practices for safeguarding sensitive information.  implement multi-layered security controls: banks should deploy multi-layered security controls, including firewalls, encryption, intrusion detection systems, and access controls, to protect against cyber threats and unauthorized access to systems and data. socio-economic uncertainties  scenario planning and stress testing: banks should conduct scenario planning and stress testing exercises to assess the potential impact of socio-economic uncertainties, such as geopolitical risks, economic downturns, and natural disasters, on their financial performance and resilience.  diversification and risk management: banks should diversify their revenue streams, customer base, and geographic exposure to mitigate concentration risks and enhance resilience to external shocks. jakaria, australian finance & banking review 7(1) (2023), 9-29 21  foster customer relationships and trust: banks should prioritize building strong customer relationships and maintaining trust by providing transparent communication, proactive support, and responsive solutions to address the evolving needs and concerns of customers during times of uncertainty. collaboration and information sharing  collaborate with regulatory authorities: banks should engage proactively with regulatory authorities, industry associations, and government agencies to share information, exchange best practices, and address regulatory challenges collaboratively.  share threat intelligence: banks should participate in information-sharing networks, such as industry forums, cybersecurity alliances, and threat intelligence sharing platforms, to exchange threat intelligence, cyber defense strategies, and incident response protocols. in conclusion, addressing the challenges facing the australian banking sector requires a proactive and multifaceted approach that encompasses regulatory compliance, cybersecurity defense, and resilience to socio-economic uncertainties. by adopting strategies focused on regulatory compliance, cybersecurity defense, and collaboration, banks can navigate regulatory complexities, mitigate cybersecurity threats, and enhance resilience to socio-economic uncertainties, thereby safeguarding the stability and integrity of the financial system. conclusions recapitulation: summary of key insights from the historical journey of australian banking the historical journey of australian banking is marked by a rich tapestry of developments, challenges, and transformations that have shaped the evolution of the banking sector into what it is today. here are the key insights gleaned from this journey:  colonial origins and early growth: australian banking traces its roots back to the early colonial period, where the emergence of banking institutions played a crucial role in facilitating trade, commerce, and economic development. the establishment of the first banks laid the foundation for a formal banking system, providing essential financial services to support the growing economy.  challenges and adaptations: throughout its history, australian banking has navigated through various challenges, including economic uncertainties, currency fluctuations, and regulatory constraints. banks have demonstrated resilience and adaptability in responding to changing market dynamics, implementing innovative strategies to overcome challenges and ensure continued growth.  consolidation and expansion: following federation, the banking sector underwent significant reforms, leading to the consolidation of national banks and the expansion of banking services across the country. the establishment of regulatory frameworks and the growth of national banks contributed to the stability and growth of the banking sector in the post-federation era.  impact of world wars: the world wars had profound impacts on australian banking, with banks playing a critical role in financing wartime efforts and managing economic disruptions. the experience of wartime finance shaped banking practices and regulations, highlighting the interplay between banking, government, and national security interests.  regulatory evolution: the regulatory framework governing australian banking has evolved over time, reflecting changing economic conditions, financial innovations, and regulatory imperatives. the establishment of institutions such as the reserve bank of australia (rba) and the australian prudential regulation authority (apra) has strengthened regulatory oversight and contributed to the stability of the financial system.  deregulation and liberalization: the deregulation and liberalization of the 1980s and 1990s ushered in a new era of competition, innovation, and globalization in australian banking. reforms such as the deregulation of interest rates, removal of branching restrictions, and entry of foreign banks transformed the banking landscape, leading to increased efficiency and choice for consumers.  digital disruption and innovation: the rise of digital technology has revolutionized australian banking, leading to the emergence of online banking, fintech startups, and digital currencies. banks have embraced technology-driven innovations to enhance customer experiences, improve operational efficiency, and meet evolving consumer preferences in the digital age.  corporate social responsibility: australian banks are increasingly recognizing their responsibilities towards society, the environment, and ethical business practices. initiatives such as promoting financial inclusion, sustainability, and ethical conduct underscore banks' commitment to creating positive social and environmental impact while driving sustainable business growth. in summary, the historical journey of australian banking reflects a dynamic and evolving sector that has adapted to changing economic, technological, and regulatory landscapes over time. from its humble beginnings in the colonial era to its transformation into a modern, digitally-driven industry, australian banking continues to play a vital role in supporting economic growth, fostering innovation, and serving the needs of consumers and businesses alike. jakaria, australian finance & banking review 7(1) (2023), 9-29 22 looking ahead: reflections on the resilience, adaptability, and ongoing evolution of the australian banking sector as we gaze into the future, it becomes evident that the australian banking sector is poised to continue its journey of resilience, adaptability, and ongoing evolution in response to a rapidly changing landscape of challenges and opportunities. here are some reflections on what lies ahead:  resilience in the face of uncertainty: the australian banking sector has demonstrated remarkable resilience in the face of various challenges throughout its history, including economic downturns, regulatory reforms, and geopolitical uncertainties. looking ahead, the sector is likely to continue to weather storms by embracing a culture of risk management, prudent governance, and strategic planning to navigate through periods of uncertainty and volatility.  adaptability to technological change: technological advancements, particularly in the realms of digitalization, artificial intelligence, and blockchain, are reshaping the banking landscape at an unprecedented pace. australian banks must remain agile and adaptable in embracing emerging technologies, leveraging innovation to enhance customer experiences, improve operational efficiency, and drive sustainable growth in the digital era.  embrace of sustainability imperatives: with growing awareness of environmental, social, and governance (esg) issues, australian banks are expected to intensify their focus on sustainability and responsible banking practices. this includes promoting green finance initiatives, supporting sustainable investments, and integrating esg considerations into decision-making processes to align with evolving stakeholder expectations and contribute to positive social and environmental outcomes.  continued regulatory scrutiny and compliance: regulatory scrutiny on the banking sector is expected to remain heightened, with regulators prioritizing financial stability, consumer protection, and integrity in the wake of global economic challenges and systemic risks. australian banks must proactively engage with regulators, adhere to regulatory requirements, and invest in robust compliance frameworks to maintain trust and confidence in the financial system.  collaboration and partnerships: collaboration and partnerships will be key drivers of innovation and competitiveness in the australian banking sector. banks are likely to forge strategic alliances with fintech startups, technology firms, and other industry players to leverage complementary strengths, co-create innovative solutions, and unlock new opportunities for growth and differentiation in an increasingly interconnected ecosystem.  customer-centricity and personalization: as customer expectations continue to evolve, australian banks must prioritize customer-centricity and personalized experiences to differentiate themselves in a crowded market. this involves leveraging data analytics, ai-driven insights, and digital channels to understand customer needs, anticipate preferences, and deliver tailored solutions that enhance value and build long-lasting relationships. in conclusion, the future of the australian banking sector is characterized by resilience, adaptability, and ongoing evolution in response to a complex and dynamic operating environment. by embracing technological innovation, sustainability imperatives, regulatory compliance, collaboration, and customer-centricity, australian banks can navigate through challenges, seize opportunities, and drive sustainable growth in the years to come. author contributions: conceptualization, s.a j.; methodology, s.a j.; software, s.a j.; validation, s.a j.; formal analysis, s.a j.; investigation, s.a j.; resources, s.a j.; data curation, s.a j.; writing – original draft preparation, s.a j.; writing – review & editing, s.a j.; visualization, s.a j.; supervision, s.a j.; project administration, s.a j.; funding acquisition, s.a j. authors have read and agreed to the published version of the manuscript. institutional review board statement: ethical review and approval were waived for this study, due to that the research does not deal with vulnerable groups or sensitive issues. funding: the authors received no direct funding for this research. acknowledgments: not applicable. informed consent statement: informed consent was obtained from all subjects involved in the study. data availability statement: the data presented in this study are available on request from the corresponding author. the data are not publicly available due to restrictions. conflicts of interest: the authors declare no conflict of interest. references asheq, a. a., tanchi, k. r., kamruzzaman, m., & karim, m. m. 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(2022). an investigation into the effect of knowledge management on employee retention in the telecom sector. administrative sciences, 12(4), 138. publisher’s note: cribfb stays neutral with regard to jurisdictional claims in published maps and institutional affiliations. © 2023 by the authors. licensee cribfb. this article is an open-access article distributed under the terms and conditions of the creative commons attribution (cc by) license (http://creativecommons.org/licenses/by/4.0/). australian finance & banking review (p-issn 2576-1196 e-issn 2576-120x) by cribfb is licensed under a creative commons attribution 4.0 international license. http://creativecommons.org/licenses/by/4.0/) http://creativecommons.org/licenses/by/4.0/ http://creativecommons.org/licenses/by/4.0/ copyright © cc-by-nc 2019, cribfb | afbr australian finance & banking review; vol. 3, no. 1; 2019 issn 2576-1196 e-issn 2576-120x published by centre for research on islamic banking & finance and business, usa 43 l1‎‎ norm based data analysis and related methods (1632-1989) bijan bidabad 1 abstract this paper gives a rather general view on the l1‎‎ norm criterion on the area of data analysis and related topics. we tried to cover all aspects of mathematical properties, historical development, computational algorithms, simultaneous equations estimation, statistical modeling, and application of the l1‎‎ norm in different fields of sciences. keywords: l1 norm, regression, algorithm, computer 1. introduction although the l1‎‎ norm is an old topic in science, lack of a general book or paper on this subject induced me to gather a relatively complete list of references in this paper. the methods related to l1‎‎ norm are very broad and summarizing them is very difficult. however, it has been tried to have a glance at almost all related areas. the sections are designed as separate modules, so that the reader may skip some of the sections without loss of continuity of the subject. while the least squares method of estimation of the regression parameters is the most commonly used procedure, some alternative techniques have received widespread attention in recent years. conventionally, interest in other methods of estimation has been generated by the unsatisfactory performance of least squares estimators in certain situations when some model assumptions fail to hold or when large correlations exist among the regressors. however, the least squares regression is very far from optimal in many non-gaussian situations, especially when the errors follow distributions with longer tails. in particular, when the variance of the error is infinite. while intuition may dispel consideration of errors with infinite variance, in many cases, studies have shown that, in fact, certain distributions with infinite variances may be quite appropriate models. an infinite variance means thick tail error distribution with lots of outliers. of course, observed distributions of economic variables will never display infinite variances. however, the important issue is not that the second moment is actually infinite, but the interdecile range in relation to the interquartile range is sufficiently large that one is justified in acting as though the variance is infinite. even when the majority of the errors in the model follow a normal distribution, it often occurs that a small number of observations are from a different distribution. that is, the sample is contaminated with outliers. since least squares gives a lot of weight to outliers, it becomes extremely sample dependent and it is well known that the performance of this estimator is markedly degraded in this situation. it has been stated that even when errors follow a normal distribution, an alternative to least squares may be required; especially if the form of the model is not exactly known or any other specification error exists. further, least squares is not very satisfactory if the quadratic loss function is not a satisfactory measure of loss. loss denotes the seriousness of the nonzero prediction error to the investigator, where prediction error is the difference between the predicted and the observed values of the response variable. it has been shown that for certain economic problems least absolute errors gives more satisfactory results than least squares, because the former is less sensitive than the latter to extreme errors, and consequently is resistant to outliers. it should be noted that the least absolute errors estimates have maximum likelihood properties and hence are asymptotically efficient when the errors follow the laplace distribution. although least absolute errors estimator is very old, it has emerged in the literature again and has attracted attention in the last two decades because of unsatisfactory properties of least squares. now, this method is discussed in econometrics textbooks such as kmenta (1986) and maddala (1977). many master's and ph.d. dissertations have been written on this subject in different departments such as lawson (1961), burgoyne (1965), gentleman (1965), barrodale (1967), oveson (1968), lewis (1969), cline (1970), hunt (1970), groucher (1971), henriksson (1972), 1 (b.a., m.sc., ph.d., post-doc.) professor of economics and chief economic advisor to bank melli iran. http://www.bidabad.com bijan@bidabad.com bidabad@yahoo.com http://www.bidabad.com/ mailto:bijan@bidabad.com mailto:bidabad@yahoo.com copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 44 bassett (1973), forth (1974), anderson (1975), ronner (1977), nyquist (1980), clarke (1981), kotiuga (1981), gonin (1983), busovaca (1985), kim ( ), bidabad (1989a,b) which are more recent (see bibliography for the corresponding departments and universities). robust property of this estimator is its advantage to deal with large variance error distributions. since many economic phenomena such as distribution of personal income, security returns, speculative prices, stock and commodity prices, employment, asset size of business firms, demand equations, interest rate, treasury cash flows, insurance, price expectations, and many other economic variables fall within the category of infinite variance (see, ganger and orr (1972), nyquist and westlund (1977), fama (1965), goldfeld and quandt (1981), sharpe (1971)) it is necessary to turn the economists attention to this estimator. there are many other works which confirm the superiority of least absolute to least squares estimator such as interindustry demand analysis of arrow and hoffenberg (1959), investment models of meyer and glauber (1964), security and portfolios analysis of sharpe (1971), danish investment analysis of kaergard (1987) and so forth. many new economic theories weaken the assumption of rationality of human behavior. this relative irrationality is a major source of large variances and outliers in economic data. therefore the least absolute errors estimator becomes a relevant estimator in the cases that rationality is a strong assumption. another major application of this estimator is on data with measurement errors. this type of errors makes variances large and forces the observations to locate far from reality, which obviously causes outliers. existence of two important types of measurement errors, sampling, and nonsampling errors, specifically in countries with poor statistics such as developing countries make this estimator a basic tool of analysis. unknown specification errors in regression models because of the complexity of human behavior always occurs in the mathematical formulation of human-related problems. specification error occurs whenever the formulation of the regression equation or one of the underlying assumptions is incorrect. in this context when any assumption of the underlying theory or the formulation of the model does not hold, a relevant explanatory variable is omitted, or an irrelevant one is included, qualitative change of the explanatory variable is disregarded, incorrect mathematical form of the regression is adopted, or incorrect specification of the way in which the disturbance enters the regression equation is used and so on; specification error exits (see also, kmenta (1986)). since specification errors are not always clear to researcher, least squares is a poor estimator, and other alternatives as least absolute errors estimators become attractive. although the least absolute errors estimator benefits from optimal properties in many econometric problems, it is not a commonly used tool. this is to some extent due to difficulties of calculus with absolute value functions. when the model is enlarged, and equations enter simultaneously, difficulties of computation increase. another problem with this estimator is that the properties of the solution space is not completely clear, and the corresponding closed form of the solution have not been derived yet. thus these three important problems of algebraic closed form, computational difficulties, and solution space properties are the main obstacles that prevent the regular use of l1‎‎ norm estimator. any attempt to remove these obstacles are worthy. 2. lp norm and regression analysis given a point u=(u1,...,un) in rn, minkowski norm or lp norm can be written as the following expression, n ││u││p = dp(u,0) =[ │ui│ p]1/p (1) i=1 when p=2, we are confronted with euclidian or l2 norm. thus, euclidian distance is a special case of lp distance (see, ralston and rabinowitz (1985)). the following overdetermined system of equations is given, y = xß + u (2) where, y is a nx1 vector of dependent variables, x, a nxm matrix of independent or explanatory variables with n>m, ß, a mx1 vector of unknown parameters and u is a nx1 vector of random errors. the problem is to find the unknown vector ß such that the estimated value of y be close to its observed value. a class of procedures which obtains these http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 45 estimated values is lp norm minimization criterion (see, narula (1982)). in this class, ││u││p is minimized to find the ß vector, min s = min ││u││p = min ││y-xß││p = ß ß ß n n m min [ │yi-xiß│p ]1/p = min [ │yi ßjxij│ p ]1/p ==> ß i=1 ß i=1 j=1 n n m min │yixiß│p = min │yi ßjxij│ p (3) ß i=1 ß i=1 j=1 where yi is the ith element of y and xi is the ith row of the matrix x. any value of p [1, ] may be used to find ß in (3) (see, money et al. (1978a), rice (1933)), but each value of p is relevant for special types of error distributions. many authors have investigated this problem (see, barrodale (1968), barr et al (1980a,b,c,81a,b), money et al (1978b,82), gonin and money (1985a,b), sposito and hand (1980), sposito and hand and skarpness (1983), sposito (1987b)). however, justification of p comes from the following theorem (see, kiountouzis (1971), rice and white (1964), hogan (1976), taguchi (1974,78)). theorem: if in model (2), x is nonstochastic and e(u)=0, e(uut)= ²i, and u distributed with f(u)=h.exp(-k│u│p), where h and k are constants and p [1, ]; then the "best" ß with maximum likelihood properties is a vector which comes from minimization of (3). certain values of p have particular importance (see, box and tiao (1962), theil (1965), anscombe (1967), zeckhauser and thompson (1970), blattberg and sargent (1971), kadiyala (1972), maddala (1977)). l norm minimization of (3) is called tchebyshev or uniform norm minimization or minimum maximum deviations and has the maximum likelihood properties when u has a uniform probability distribution function. when p=2, we are confronted with the least squares method. in this case, if the errors’ distribution is normal, it is the best unbiased estimator (see, anderson (1962), theil (1971)). when p=1, we have l1‎‎ norm or gershgorin norm minimization problem. it is also called least or minimum sum of absolute errors (msae, lsae), minimum or least absolute deviations, errors, residuals, or values (mad, mae, mar, mav, lad, lae, lar, lav), l1‎‎ norm fit, approximation, regression or estimation. harter (1974a,b,75a,b,c,76) monumental papers provide a chronology of works on nearly all the estimators which include l1‎‎ norm estimation too. a concise review of data analysis based on the l1‎‎ norm is presented by dodge (1987), and a brief discussion is given by gentle (1977) too. narula and wellington (1982) and narula (1987) give a brief and concise presentation of l1‎‎ norm regression. blattberg and sargent (1971) show that if the errors of the regression follow the second law of laplace (two-tailed exponential distribution) with probability density function f(u)=(1/2 ).exp(-│u│/ ) (4) where var(u)=2 ², then l1‎‎ norm minimization leads to maximum likelihood estimator. 3. properties of the l1‎‎ norm estimation similar to other criteria, the l1‎‎ norm estimation has its own properties, which are essential in computational and statistical viewpoints. the more important properties are as follows. 3.1 invariance property an estimator ß^(y,x) of population parameter ß is invariant if, http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 46 ß^( y,x) = ß^(y,x), [0, ) (5) gentle and sposito (1976), koenker and bassett (1978) have proved that the lp norm estimator of ß is invariant when the regression model is linear. the lp norm estimator is not invariant for general nonlinear models. the invariance property is the homogeneity of degree one of the ß^ solution function. 3.2 transformation of variables if rm, by transforming y to y+x the optimal value of ß^ will increase by , (see, koenker and bassett (1978)); ß^(y+x ,x) = ß^(y,x) + (6) if a is a mxm nonsingular matrix, the transformation of x to xa premultiplies optimal ß^ by the inverse of a (see, taylor (1974), koenker and bassett (1978), bassett and koenker (1978)). ß^(y,xa) = a-1ß^(y,x) (7) 3.3 convexity of the objective function to show the convexity of s in (3), suppose m=1; the objective function (3) reduces to n n s = │yi ß1xi1│ = si (8) i=1 i=1 where si=│yi-ß1xi1│. if we plot si as a function of ß1, then we will have a broken line in sxß1 plane, and its function value is zero at ßi1=yi/xi1. the slope of the half-lines to the left and right of ßi1 are -│xi1│ and │xi1│, respectively. so, si's are all convex, and hence their sum s is also convex with slope at any ß1 equal to the sum of the slopes of the si's at that value of ß1 (see, karst (1958), taylor (1974)). consider now (3) when m=2, n n s = │yi ß1xi1 – ß2xi2│ = si (9) i=1 i=1 where si=│yi-ß1xi1-ß2xi2│. we may plot si as a function of ß1 and ß2. every si is composed of two half-planes in sxß1xß2 space that intersect in the ß1xß2 plane. thus si is convex downward which its minimum locates on the intersection of the two half-planes. since si's are all convex, their sum s surface is convex too. extension to m independent variables is straightforward. in this case, each si consists of two m dimensional halfhyperplanes in sxß1x...xßm space intersecting in the ß1x...xßm hyperplane, and as before is convex in the opposite direction of the s axis. s, which is the sum of all these half-hyperplanes forms a polyhedron hypersurface which is convex too. 3.4 zero residuals in the optimal solution l1‎‎ norm regression hyperplane always passes through r of thy n data points, where r is rank of the x matrix. usually, x is of full rank, and thus r is equal to m. so, for the number of parameters, there exist zero residuals for the minimal solution of (3). this implies that l1‎‎ norm regression hyperplane must pass through m observation points (see, karst (1959), taylor (1974), money et al. (1978), appa and smith (1973), gentle and sposito and kennedy (1977)). this phenomenon is because of the polyhedron shape of the s. it is obvious that the minimum solution occurs on at least one of the corners of s, and the corners of s are the loci of changes in slopes of the polygonal http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 47 hypersurface. note that these corners and also edges of s will be above the intersections of m subset of the following n hyperplanes. m yi ßjxij = 0 i {1,...,n} (10) j=1 since each of these hyperplanes corresponds to a particular m subset of observations, there will be m observations that lie on the regression hyperplane (see, taylor (1974)). 3.5 optimality condition this condition is derived from the kuhn-tucker necessary condition of nonlinear programming and proved by gonin and monpy (1987b) and charalambous (1979). define a={i│yi-xiß *=0} and i={i│yi-xiß *╪0}; in linear l1‎‎ norm regression, a necessary and sufficient condition for ß* to be a global l1‎‎ norm solution is the existence of multipliers i [-1,1] such that: ixi + sgn(yi-xiß *)xi = 0 (11) i a i i (see also, el-attar and vidyasagar and dutta (1976). appa and smith (1973) showed that this solution is a hyperplane such that: │n+ n-│ m (12) where n+ and nare the number of observations above and below the regression hyperplane, respectively. 3.6 unique and non-unique solutions since s is a convex polyhedron hypersurface, it always has a minimum. this solution is often unique. sometimes the shape of s is such that a line or a closed polygon or polyhedron or hyperpolyhedron segment of s is parallel to ß1x...xßm hyperplane. on this case the l1‎‎ norm regression parameters are not unique and infinite points of the mentioned hyperpolyhedron are all solutions (see, moroney (1961), sielken and hartley (1973), taylor (1974), farebrother (1985), sposito (1982), harter (1977)). 3.7 interior and sensitivity analysis narula and wellington (1985) showed that the l1‎‎ norm estimates might not be affected by certain data points. thus deleting those points does not change the estimated values of the regression parameters. in another discussion, they called sensitivity of l1‎‎ norm estimates, determined the amounts by which the value of response variable yi can be changed before the parameters estimates are affected. specifically, if the value of yi increases or decreases without changing the sign of ui, the solution of the parameters will not change (see, gauss (1809), farebrother (1987b)). for the topology of l1‎‎ norm approximation and its properties see kripke and rivlin (1965), vajda (1987), hromadka ii et al. (1987). other properties of the l1‎‎ norm regression are discussed by gentle and kennedy and sposito (1976,77), assouad (1977), sposito and kennedy and gentle (1980), bassett (1987,88a,b). 4. chronology and historical development (1632-1928) the origin of l1‎‎ norm estimation may be traced back to galilei (1632). in determining the position of a newly discovered star, he proposed the least possible correction in order to obtain a reliable result (see, ronchetti (1987) for some direct quotations). boscovich (1757) for the first time, formulated and applied the minimum sum of absolute errors for obtaining the best fitting line given three or more pairs of observations for a simple two-variable regression model. he also restricts the line to pass through the means of the observation points. that is, http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 48 n min : │yi-ß0-ß1xi1│ ß0,ß1 i=1 n (13) s.to: (yi-ß0-ß1xi1)=0 i=1 boscovich (1760) gives a simple geometrical solution to his previous suggestion. this paper has been discussed by eisenhart (1961) and sheynin (1973). in a manuscript, boscovich poses the problem to simpson and simpson gives an analytical solution to the problem (see, stigler (1984)). laplace (1773) provides an algebraic formulation of an algorithm for the l1‎‎ norm regression line, which passes through the centroid of observations. in laplace (1779), the extension of l1‎‎ norm regression to observations with different weights has also been discussed. prony (1804) gives a geometric interpretation of laplace's (1779) method and compares it with other methods through an example. svanberg (1805) applies laplace's method in determining a meridian arc, and von lindenau (1806) uses this method in determination of the elliptic meridian. gauss (1809) suggests the minimization of the sum of absolute errors without constraint. he concludes that this criterion necessarily sets m of the residuals equal to zero, where m is the number of parameters, and further, the solution obtained by this method is not changed if the value of the dependent variable is increased or decreased without changing the sign of the residual. this conclusion is recently discussed by narula and wellington (1985) which explained in the previous section under the subject of interior and sensitivity analysis. he also noted that boscovich or laplace estimators which minimize the sum of absolute residuals with zero-sum of residuals constraint, necessarily set m-1 of the residuals equal to zero (see, stigler (1981), farebrother (1987b)). mathieu (1816) used laplace's method to compute the eccentricity of the earth. van beeck-calkoen (1816) advocates the using of the least absolute values criterion in fitting curvilinear equation obtained by using powers of the independent variable. laplace (1818) adapted boscovich's criterion again and gave an algebraic procedure (see, farebrother (1987b)). let x1* and y* be the means of xi1 and yi then, ß0 = y* ß1x1* (14) value of ß1 is found by, n min: s = │yi~ ß1xi1~│ (15) ß1 i=1 where, xi1~ and yi~ are deviations of xi1 and yi from these means respectively. by rearranging the observations in descending order of yi~/xi1~ values, laplace notes that s is infinite when ß1 is infinite and decreases as ß1 is reduced. ß1 reaches the critical value yt~/xt1~ when it again begins to increase. this critical value of ß1 is determined when, t-1 n t │xi1~│ < ½ │xi1~│ │xi1~│ (16) i=1 i=1 i=1 this procedure to find a1 is called weighted median and has been used in many other algorithms such as rhodes (1930), singleton (1940), karst (1958), bloomfield and steiger (1980), bidabad (1987a,b,88a,b) later. bidabad (1987a,b,88a,b) derives the condition (16) via discrete differentiation method. http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 49 fourier (1824) formulates least absolute residuals regression as what we would now call linear programming; that is the minimization of a linear objective function subject to linear inequality constraints. edgeworth (1883) presents a philosophical discussion on differences between minimizing mean square errors and mean absolute errors. edgeworth (1887a,b) proposed a simple method for choosing the regression parameters. by fixing m-1 of the parameters, he used laplace's procedure to determine the optimal value of the remaining parameter. repeating this operation for a range of values for m-1 fixed parameters, he obtained a set of results for each of m possible choices of the free parameters. edgeworth drops the restriction of passing through the centroid of data. turner (1887) discusses the problem of non-unique solutions under the least absolute error criterion as a graphical variant of edgeworth (1887a) as a possible drawback to the method. edgeworth (1888) replies to turner's criticism by proposing a second method for choosing the two parameters of least absolute error regression of a simple linear model which makes no use of the median loci of his first method. edgeworth, in this paper, followed turner's suggestion for graphical analysis of steps to reach the minimum solution. before referring to double median method of edgeworth (1923), it should be noted that bowley (1902) completes the edgeworth's (1902) paper by a variant of double median method which presented after him by edgeworth (1923). this variant ignores the weights attached to errors. edgeworth (1923) discussed the more general problem of estimating the simple linear regression parameters by minimizing the weighted sum of the absolute residuals. he restates the rationale for the method and illustrates its usage through several examples. he also considers the nonunique solution problem. his contribution is called double median method. estienne (1926-28) proposes replacing the classical theory of errors of data based on least squares with what he calls a rational theory based on the least absolute residual procedure. bowley (1928) summarizes the edgeworth's contributions to mathematical statistics, which includes his work on l1‎‎ norm regression. dufton (1928) also gives a graphical method of fitting a regression line. farebrother (1987b) summarizes the important contributions to l1‎‎ norm regression for the period of 17931930. for more references see also crocker (1969), harter (1974a,b,75a,b,c,76), dielman (1984). up to 1928, all algorithms had been proposed for simple linear regression. though some of them use algebraic propositions, are not so organized to handle multiple l1‎‎ norm regression problem. in the next section, we will discuss the more elaborated computational methods for simple and multiple l1‎‎ norm regressions not in a chronological sense; because many digressions have occurred. we may denote the period of after 1928 the time of modern algorithms in the subject of l1‎‎ norm regression. 5. computational algorithms although a closed form of the solution of l1‎‎ norm regression has not been derived yet, many algorithms have been proposed to minimize its objective function (see, cheney (1966), chambers (1977), dielman and pfaffenberger (1982,84)). generally, we can classify all l1‎‎ norm algorithms in three major categories as, direct descent algorithms, simplex type algorithms, and other algorithms which will be discussed in the following sections sequentially. 5.1 direct descent algorithms the essence of the algorithms which fall within this category is finding a steep path to descend down the polyhedron of the l1‎‎ norm regression objective function. although the laplace's method (explained hereinbefore) is a special type of direct descent algorithms; the origin of this procedure in the area of l1‎‎ norm can be traced back to the algorithms of edgeworth which were explained in the previous section. rhodes (1930) found edgeworth's graphical solution laborious; therefore, he suggested an alternative method for the general linear model, which may be summarized as follows (see, farebrother (1987b)). suppose, we have n equations with m<n unknown parameters. to find l1‎‎ norm solution of this overdetermined system of equations he tries to reduce the m parameter model to a weighted median one parameter problem by solving m-1 of n equations (see also bidabad (1989a,b)). rhodes (1930) explained his algorithm by an example and did not give any proof for convergence. bruen (1938) reviews the l1‎‎ norm regression methods presented by earlier authors. he also compares l1‎‎, l2, and l norms regressions. singleton (1940) applied cauchy's steepest descent method (see, panik (1976)) for the general linear l1‎‎ norm regression. in this paper, a geometrical interpretation of gradient on l1‎‎ norm polyhedron and some theorems about existence and uniqueness of solution and convexity property all were given. this paper has not been clearly written, for discussion of the algorithm see bidabad (1989a,b). http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 50 bejar (1956,57) focuses on consideration of residuals rather than on the vector of parameters. he puts forth a procedure with the essence of rhodes (1930). however, he is concerned with two and three parameter linear models. karst (1958) gives an expository paper for one and two parameter regression models. in his paper, karst without referring to previous literature actually reaches to the laplace proposition to solve the one parameter restricted linear model, and for the two-parameter model, he proposed an algorithm similar to that of rhodes (1930). his viewpoint is both geometrical and algebraic, and no proof of convergence for his iterative method is offered. sadovski (1974) uses a simple "bubble sort" procedure and implements karst algorithm in fortran. sposito (1976) pointed out that sadovski's program may not converge in general. sposito and smith (1976) offered another algorithm to remove this problem. farebrother (1987c) recodes sadovski's implementation in pascal language with some improvement such as applying "straight insert sort". usow (1967b) presents an algorithm for l1‎‎ norm approximation for discrete data and proves that it converges in a finite number of steps. a similar algorithm on l1‎‎ norm approximation for continuous data is given by usow (1967a). the usow's algorithm is to descend on the convex polytope from vertex to vertex along connecting edges of the polytope in such a way that certain intermediate vertices are by-passed. this descent continues until the lowest vertex is reached. (see also, abdelmalek (1974), bidabad (1989a,b)). relation of this algorithm with the simplex method has been discussed by abdelmalek (1974). he shows that usow's algorithm is completely equivalent to a dual simplex algorithm applied to a linear programming model with nonnegative bounded variables, and one iteration in the former is equivalent to one or more iterations in the latter. bloomfield and steiger (1980) devise an efficient algorithm based on the proposition of usow explained above. sharpe (1971) by applying the l1‎‎ norm regression to the portfolio and its rate of return, gives an algorithm for the two-parameter linear regression model it must be possible to assign half of the points above and half below the regression line (see also bidabad (1989a,b)). rao and srinivasan (1972) interpret sharpe's procedure as the solution of parametric dual linear programming formulation of the problem. they give an alternate and about the equally efficient procedure for solving the same problem. brown (1980) gives a distinct but similar approach to those of edgeworth (1923) and sharpe (1971). he emphasizes on the median properties of the estimator. the similarity comes from the graphical approach of the three authors. kawara (1979) also develops a graphical method for the simple regression model. bartels and conn and sinclair (1978) apply the method of conn (1976) to the l1‎‎ norm solution of the overdetermined linear system. their approach is a minimization technique for piecewise differentiable functions (see also bidabad (1989a,b)). this algorithm has also been modified for the case of degeneracy (see also, bartels and conn and sinclair (1976)). bartels and conn (1977) showed that how l1‎‎ norm, restricted l1‎‎ norm, l∞ norm regressions, and general linear programming can all be easily expressed as a piecewise linear minimization problem. by some simplifications, this algorithm corresponds precisely to the algorithm proposed by bartels and conn and sinclair (1978). the contribution of this paper is putting a wide class of problems in the mold of two algorithms mentioned above. the techniques are easily extended to the models with norm restrictions (see also bidabad (1989a,b)). bloomfield and steiger (1980) proposed a descent method for the l1‎‎ norm multiple regression. their algorithm is also explained in bloomfield and steiger (1983). in some steps, this algorithm is related to that of singleton (1940) and usow (1967b). the basis of this method is to search for a set of m observations which locate on the optimal l1‎‎ norm regression. this set is found iteratively by successive improvement. in each iteration, one point from the current set is identified as a good prospect for deletion. this point is then replaced by the best alternative. the novel features of this method are in an efficient procedure for finding the optimal replacement and a heuristic method for identifying the point to be deleted from the pivot (see also bidabad (1989a,b)). in this paper relationship of this algorithm to linear programming is also discussed. seneta and steiger (1984) proposed an algorithm for the l1‎‎ norm solution of a slightly overdetermined system of equations. their proposition is based on the above algorithm of bloomfield and steiger. it is more efficient than the former if m is near n. seneta (1983) reviews the iterative use of weighted median to estimate the parameters vector in the classical linear model when the fitting criterion is l1‎‎ norm and also cauchy criterion. wesolowsky (1981) presents an algorithm for multiple l1‎‎ norm regression based on the notion of edge descent along the polyhedron of the objective function (see also bidabad (1989a,b)). this algorithm is closely related to those of rhodes (1930) and bartels and conn and sinclair (1978) which explained before. consider the multiple linear regression as before. in this paper, wesolowsky also discusses the problem of multicolinearity and gives an appropriate solution. http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 51 josvanger and sposito (1983) modify wesolowsky's algorithm for the two-parameter simple linear regression model. the modification is an alternative way to order observations instead of sorting all of them to find the necessary weighted median value. suppose the problem has been reduced to a weighted median problem. they place smaller values of factors to be sorted with corresponding weights below the current solution point and larger or equal values above it, then recheck the inequalities (16) of the weighted median. if the inequalities do not satisfy, then an appropriate adjustment is made. in particular, if the right-hand side is overly weighted, then the weight corresponding to the smallest sorting factor is transferred to the left-hand side, and the check is made again. a computer program for this algorithm is also given by the authors. "generalized gradient" method introduced by clarke (see, clarke (1983)) is a general procedure for nonsmooth optimization functions and problems (see, osborne and pruess and womersley (1986)). a subclass of this method is called "reduced gradient", explained by osborne (1985) is a general algorithm which contains linear programming, piecewise linear optimization problems, and polyhedral convex function optimization algorithms inside. the reduced gradient algorithm is a special case of descent method, which possesses two important characteristics. identify direction and taking a step in this direction to reduce the function value (see also, anderson and osborne (1975), osborne and watson (1985) osborne (1985,87)). the algorithms of bartels and conn and sinclair (1978), armstrong and frome and kung (1979), bloomfield and steiger (1980) are all special cases of reduced gradient method. imai and kato and yamamoto (1987) present a linear time algorithm for computing the two-parameters l1‎‎ norm linear regression by applying the pruning technique. since the optimal solution in the a0xa1 plane lies at the intersection of data lines, so, at each step, a set of data lines which does not determine the optimum solution are discarded. in this paper algebraic explanation of the problem is also offered. pilibossian (1987) also gives an algorithm similar to karst (1958) for the simple two-parameter linear l1‎‎ norm regression. bidabad (1987a,b,88a,b) proposed a descent method for the simple and multiple l1‎‎ norm regressions. these algorithms, with many improvements discussed by bidabad (1989a,b). since the algebraically closed form of the l1‎‎ norm estimator has not been derived yet, he tried to give some insight into this problem by applying a discrete differentiation technique to differentiate the l1‎‎ norm objective function. this differentiation on discrete domain variables accompanying with regular differentiation on variables with continuous domains increases our knowledge on the algebraically closed form of the problem. in order to improve the accuracy, speed and generally the efficiency of computation of the l1‎‎ norm estimator, he proposed four algorithms which two of them are for simple and others two are for multiple regression models. by inspecting the properties of proposed algorithms, many characteristics of the solution space are clarified. in bidabad (1989a,b) to find the minimum of the l1‎‎ norm objective function of the regression, m-1 points on the polyhedron of the objective function are selected, and from this set the mth point is found by descending in steepest direction. delete an appropriate point and enter the last mth point for next descending step. the procedure is continued until the global minimum is reached. although most of the descent methods use a similar procedure, the steps are well organized and modified for the special shape of the l1‎‎ norm objective function. in this paper, the new convergence theorems related to the proposed algorithms are proved, and their properties are discussed. 5.2 simplex type algorithms the essence of linear programming in solving l1‎‎ norm problem may be found in the work of edgeworth (1888). harris (1950) suggested that the l1‎‎ norm estimation problem is connected with linear programming. charnes and cooper and ferguson (1955) formulated the problem as a linear programming model. this article is the first known to use linear programming for this case. adaptation of linear programming to l1‎‎ norm estimation problem is shown below, min: 1n t(w+v) ß s.to: xß+in(w-v)=y (17) w,v 0 ß unrestricted in sign http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 52 where 1n is a vector of size nx1 of 1's and in is a nth order identity matrix. the vectors v and w are of size nx1 and their elements may be interpreted as vertical deviations above and below the fitted regression hyperplane respectively. this problem has n equality constraints in m+2n variables. when n is large, this formulation generally requires a large amount of storage and computation time. wagner (1959) shows that the formulation of the l1‎‎ norm regression may be reduced to m equality constraints linear programming problem. thus, this dual formulation reduces n equations of primal form to m equations of dual form and considerably reduces the storage and computation time. fisher (1961) reviews the formulation of the l1‎‎ norm estimation in relation to the primal form of linear programming. barrodale and young (1966) developed a modified simplex algorithm for determining the best fitting function to a set of discrete data under the l1‎‎ norm criterion. the method is given as algol codes (for critics see, mccormick and sposito (1975)). davies (1967) demonstrates the use of the l1‎‎ norm regression estimates. rabinowitz (1968) also discusses the application of linear programming in this field. crocker (1969) cautions against using the l1‎‎ norm criterion merely to restrain unwanted negative coefficient estimates which occur in the least squares regression. multicolinearity is one of the cases which causes this result. robers and ben-israel (1969) by using interval linear programming, proposed an algorithm to solve the l1‎‎ norm estimation problem. rabinowitz (1970), shanno and weil (1970) discuss some connections between linear programming and the approximation problem. barrodale (1970) summarizes the linear and nonlinear l1‎‎ norm curve fitting on both continuous and discrete data. spyropoulos and kiountouzis and young (1973) suggest two algorithms for fitting general functions and particularly fast algorithm with minimum storage requirements for fitting polynomials based on the algebraic properties of linear programming formulation. robers and robers (1973) have supplied a special version of the general method of robers and ben-israel (1969), which is designed specifically for the l1‎‎ norm problem. a fortran code is also provided. barrodale and roberts (1973) present a modification of the simplex method, which needs a smaller amount of storage, and by skipping over simplex vertices is more efficient than the usual simplex procedure. define the vector ß as a difference of two nonnegative vectors c and d; their formulation can be stated as follows, min: 1n t(w+a) c,d s.to: x(c-d)+in(w-v)=y (18) w,v,c,d 0 because of the relationships among variables, the computation can be performed by using only (n+2)x(m+2) amount of array storage, including labels for the basic and non-basic vectors. an initial basis is given by w if all yi are nonnegative. if a yi is negative, the sign of the corresponding row is changed, and the unit column from the corresponding element of v is taken as part of the basis. the algorithm is implemented in two stages. the first stage restricts the choice of the pivotal column during the first m iterations to the elements of the vector cj and dj recording to the associated maximum nonnegative marginal costs. the vector that leaves the basis causes the maximum decrease in the objective function. thus the pivot element is not necessarily the same as in the usual simplex. the second stage involves interchanging nonbasic wi or vi with the basic wi or vi. the basic vectors corresponding to cj and dj are not allowed to leave the basis. the algorithm terminates when all marginal costs are non-positive (see, kennedy and gentle (1980)). fortran code for this procedure is given by barrodale and roberts (1974). peters and willms (1983) give algorithms accompanying with computer codes for up-and-down dating the solution of the problem when a column or row inserted to or deleted from x, or y is changed. these algorithms are all based on barrodale and roberts (1973,74) procedure. abdelmalek (1974) describes a dual simplex algorithm for the l1‎‎ norm problem with no use of artificial variables. for this algorithm, the haar condition (see, osborne (1985), moroney (1961)) need not be satisfied anymore. this algorithm seemed to be very efficient at the time of publication. an improved dual simplex algorithm for l1‎‎ norm approximation is proposed by abdelmalek (1975a). in this algorithm, certain intermediate iterations are skipped, and in the case of ill-conditioned problems, the basis matrix can lend itself to triangular factorization and thus ensure a stable solution. abdelmalek (1980a) improves his previous algorithm by using triangular http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 53 decomposition. a fortran translation of the algorithm is given by abdelmalek (1980b). sposito and mccormick and kennedy (1978) summarize much of the works on l1‎‎ norm estimation including problem statement, linear programming formulation, efficient computational algorithms, and properties of the estimators. armstrong and kung (1978) propose an algorithm for the simple two-parameter l1‎‎ norm regression. the method is a specification of linear programming of barrodale and roberts (1973) algorithm. a fortran code is given too. armstrong and frome and kung (1979) use lu (lower-upper triangular) decomposition of bartels and golub (1969) in maintaining the current basis on the revised simplex procedure. a fortran translation is also enclosed. armstrong and godfrey (1979) show that the primal method of barrodale and roberts (1973) and the dual method of abdelmalek (1975) are essentially equivalent. with a given initial basis for the two methods, they show that both algorithms will generate corresponding bases at each iteration. the only difference is the choice of initial basis and heuristic rules for breaking ties. armstrong and kung (1982b) present a dual linear programming formulation for the problem. various basis entry and initialization procedures are considered. it has been shown that the dual approach is superior to primal one if a good dual feasible solution is readily available (see also, steiger (1980)). banks and taylor (1980) suggest a modification of barrodale and roberts (1973) algorithm. the objective function is altered to include magnitudes of the elements of both errors and solution vectors. for a general discussion on simplex for piecewise linear programming see fourer (1985a,b) and for a survey of the corresponding problem on the l1‎‎ norm see fourer (1986). narula and wellington (1987) propose an efficient linear programming algorithm to solve both l1‎‎ and l∞‎ norms linear multiple regressions. the algorithm exploits the special structure and similarities between the two problems. brennan and seiford (1987) develop a geometrical interpretation of linear programming in l1‎‎ norm regression. they give a geometric insight into the solving process in the space of observations. mcconnell (1987) shows how the method of vanishing jacobians which has been used to optimize quadratic programming problems can also be used to solve the special linear programming problem associated with computing linear discrete l1‎‎ norm approximation. for the possibility of applying other types of linear programming solutions such as karmarkar solution to l1‎‎ norm problem see meketon (1986). 5.3 other algorithms this category consists of algorithms which were not classified in the two last sections. rice (1964c) applies the bisection method to l1‎‎ norm regression. in this method at each step, the domain of s is broken to two segments, and the appropriate segment is selected for the next iteration. the solution is reached when the last segment is less than a predetermined small value (see, bidabad (1989) for discussing the bisection method). abdelmalek (1971) develops an algorithm for fitting functions to discrete data points and solving the overdetermined system of linear equations. the procedure is based on determining l1‎‎ norm solution as the limiting case of lp norm approximation when p tends to one from right in the limit. this technique thus obtains a solution to a linear problem by solving a sequence of nonlinear problems. schlossmacher (1973) computed the l1‎‎ norm estimates of regression parameters by an iterative weighted least squares procedure. instead of minimizing the sum of absolute deviations, he minimized the sum of weighted squared errors with 1/│ui│ as weights. once the least squares is applied to the problem and residuals are computed. the absolute value of the inverse of the residuals are again used as corresponding weights in the next iteration for minimizing the sum of weighted squared errors (see also, holland and welsh (1977)). fair (1974) observed that the estimated values of ß did not change after the second or third iterations. in cases where any residual is zero, the continuation of the procedure is impossible, because the corresponding weight to this residual is infinite. this problem is also discussed by sposito and kennedy and gentle (1977), soliman and christensen and rouhi (1988). absolute convergence of this algorithm has not been proved, but a non-convergent experiment has not been reported. soliman and christensen and rouhi (1988) used left pseudoinverse (see, dhrymes (1978) for a description of this inverse) to solve the general linear l1‎‎ norm regression. according to this procedure, one should calculate the least squares solution using the left pseudo-inverse or least squares approximation. calculate the residual vector. select the m observations with the smallest absolute values of the residuals and partition the matrices as the selected observations locate on the top and solve ß for the top partitions. although this procedure is operationally simple, its solution is not the same as other exact methods, and no proof is presented to show that the solution is in the neighborhood of the exact solution of the l1‎‎ norm minimization problem. http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 54 application of median polish (see, tukey (1977)) and n-median polish to l1‎‎ norm estimation are discussed and developed by bloomfield and steiger (1983), kemperman (1984), sposito (1987a), bradu (1987a,b). application of karmarkar's algorithm for linear programming and its relation to l1‎‎ norm is given by sherali and skarpness and kim (1987). for using homotopy method in l1‎‎ norm, see garcia and gould (1983), schellhorn (1987). an algorithm for linear l1‎‎ norm approximation for the continuous function is given by watson (1981), (see also, baboolal and watson (1981)). 5.4 initial value problem it is discussed by many authors on how the algorithms should be started. selection of initial value is an important factor in the execution time of various algorithms. on the other hand, a good starting point leads to the solution faster and reduces the number of iterations. there are several papers which consider the problem for the l1‎‎ norm minimization algorithms. duris and sreedharan (1968) briefly refer to this problem. mccormick and sposito (1976) used the least squares estimator to construct a starting point for the algorithm of barrodale and roberts (1973). this initial value reduced the number of iterations in most cases. sposito and hand and mccormick (1977) show that the total cpu time needed to obtain optimal regression coefficients under the l1‎‎ norm can generally be reduced if one first computes a near-best l1‎‎ norm estimator such as least squares and then solve the modified procedure of barrodale and roberts (1973). a similar discussion about l∞‎ norm estimation is given by hand and sposito (1980). sklar and armstrong (1982) demonstrate that utilizing the least squares residuals to provide an advanced start for the algorithm of armstrong and frome and kung (1978) results in a significant reduction in computational effort. 5.5 computer programs and packages although many authors have coded the computer programs for their own algorithms, which were referenced before, there are also other packages which solve the l1‎‎ norm regression problem and compute the necessary statistics. some of these packages are imsl (see, rice (1985)); blinwdr (see, dutter (1987)); robeth and robsys (see, marazzi (1987), marazzi and randriamiharisoa (1985)) and xplore (see, hardle (1987)). since this software has its own special characteristics, we do not go through the details of them. the interested reader may consult the references. 5.6 comparison of the algorithms generally, the comparison of algorithms is not a straightforward task. as it is indicated by dutter (1977), factors such as quality of computer codes and computing environment should be considered. in the case of the l1‎‎ norm algorithms, three specific factors of the number of observations, number of parameters, and the condition of data are more important. kennedy and gentle and sposito (1977a,b), and hoffman and shier (1980a,b) describe methods for generating random test data with known l1‎‎ norm solution vectors. gilsinn et al. (1977) discuss a general methodology for comparing the l1‎‎ norm algorithms. table 1. summary of the characteristics of the existing algorithms. ref. compared with m range n range time performances bcs br 2-8 201 roughly equal speed afk br 5-20 100-1500 30%-50% afk is faster a br 1-11 15-203 nearly equal speed bs br 2-6 100-1800 bs is faster for larger n w afk, ak 2-25 100-1800 w is faster for larger n, smaller m ss bs 4-34 10-50 ss is faster for m near n b4 afk, bs, br 3-10 20-10000 b4 is faster and more accurate; afk and bs failed in large samples ak s 2 50-500 ak is faster js ak 2 10-250 js is faster b2 js 2 20-10000 b2 is faster n number of observations. m number of parameters. http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 55 bcs bartels,conn,sinclair (1978). br barrodale,roberts (1973,74). ak armstrong,kung (1978). s sadovski (1974). afk armstrong,frome,kung (1979). a abdelmalek (1980a,b). bs bloomfield,steiger (1980). w wesolowsky (1981). js josvanger,sposito (1983). ss seneta,steiger (1984). b2 bidabad (1989a,b), algorithm 2. b4 bidabad (1989a,b), algorithm 4. kennedy and gentle (1977) examine the rounding error of l1‎‎ norm regression and present two techniques for detecting inaccuracies of the computation (see also, larson and sameh (1980)). many authors have compared their own algorithms with those already proposed. table 1 gives a summary of the characteristics of the algorithms proposed by different authors. it is important to note that since the computing environment and condition of data with respect to the distribution of the regression errors of the presented algorithms by table 1 are not the same, definitive conclusion and comparison should not be drawn from this table. armstrong and frome (1976a) compare the iterative weighted least squares of schlossmacher (1973) with barrodale and roberts (1973) algorithm. the result was high superiority of the latter. anderson and steiger (1980) compare the algorithms of bloomfield and steiger (1980), bartels and conn and sinclair (1978) and barrodale and roberts (1973). it was concluded that as the number of observations n increases the br locates in a different complexity class than bcs and bs. all algorithms are linear in the number of parameters m, and bs is less complex than bcs. complexities of bs and bcs are linear in n. there is a slight tendency for all algorithms to work proportionately harder for even m than for odd m. br and bs had the most difficulty with normal error distribution and the least difficulty with pareto distribution with corresponding pareto density parameter equal to 1.2. gentle and narula and sposito (1987) perform a complete comparison among some of the l1‎‎ norm algorithms. they limited this comparison to the codes that are openly available for l1‎‎ norm linear regression of unconstrained form. table 2 shows the required array storage and stopping constants of the corresponding algorithms and the algorithms of bidabad (1989a,b). table 2. the array storage requirement for selected algorithms. table 2. the array storage requirement for selected algorithms. program name ref. required array storage stopping constants l1 br 3n+m(n+5)+4 big=1.0e+75 toler=10**(-d+2/3) d=no.of decimal digits of accuracy l1 a 6n+m(n+3m/2+15/2) prec=1.0e-6 esp=1.0e-4 l1norm afk 6n+m(n+m+5) acu=1.0e-6 beg=1.0e+15 blad1 bs 4n+2m(n+2) ---------------- bl1 b4 2n+m(3n+m+2)-2 ---------------- lonesl s 4n prec=1.0e-6 big=1.0e+19 simlp ak 4n acu=1.0e-6 big=1.0e+19 desl1 js 5n tol=1.0e-6 bl1s b2 5n ---------------- see table 1 for abbreviations. sources: gentle, narula, sposito (1987), bidabad (1989a,b). they concluded that the bs program performs quite well on smaller problems, but in larger cases, because of accumulated round-off error, it fails to produce correct answers. increasing the precision of the coded program to http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 56 avoid rounding error increases the execution time, so it is not clear what would happen to the relative efficiency of bs after modification. the wesolowsky program was not usable and deleted in their study. because of the superiority of afk to br and ak to s, which had been indicated in previous studies, br and s algorithm did not enter in their study. gentle and sposito and narula (1988) also compare the algorithms for unconstrained l1‎‎ norm simple linear regression. this investigation is essentially an extraction of gentle and narula and sposito (1987). the attained results are completely similar. bidabad (1989a,b) compare the algorithm b2 with js and b4 with the algorithms of afk, bs, and br. he concludes that b2 is faster than js and b4 is faster for smaller m and accurate for larger n. he also observed the failure of afk and bs for larger problems. 5.7 nonlinear form computational methods suppose again y, x, u and ß are defined as before. in nonlinear l1‎‎ norm regression, the problem is to estimate ß vector in the nonlinear model, yi = fi(xi,ß) + ui i=1,...,n; n m (19) where fi is the response function, and xi is the ith row of x. l1‎‎ norm regression parameters are derived by minimizing the following sum: n min: │yi fi(xi,ß)│ (20) ß i=1 the function (20) can be reformulated as a nonlinear programming problem as, n min: wi ß i=1 s.to: yi fi(xi,ß) wi 0 -yi + fi(xi,ß) wi 0 (21) wi 0 i=1,...,n over the last three decades, numerous algorithms have been proposed for solving the nonlinear l1‎‎ norm regression problem. these methods can be classified into the following three main categories (see, gonin and money (1987b); for another categorization see watson (1986), mclean and watson (1980)). the first category consists of the methods using only the first order derivative. in these algorithms, the original nonlinear problem is reduced to a sequence of linear l1‎‎ norm problems, which each of them can be solved efficiently by standard linear programming procedures. these methods are of the gauss-newton type. the main algorithms which fall into this category have been presented by authors like osborne and watson (1971), anderson and osborne (1977a,b), shrager and hill (1980), mclean and watson (1980), jittorntrum and osborne (1980), osborne (1980), watson (1980,84a), bartels and conn (1982), hald and madsen (1985). the second category consists of methods which by using a second-order derivative, transform the original problem into a sequence of unconstrained minimization problems. the non-differentiability of the objective function is then overcome. this procedure is known as the penalty function method of nonlinear programming. the contributors are el-attar and vidyasagar and dutta (1979), fletcher (1981,84), tishler and zang (1982), conn (1984), conn and gould (1987). in the last category, the objective function is linearized but quadratic approximations are incorporated to take curvature effects into account (see, murray and overton (1981), overton (1982), bartels and conn (1982)). http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 57 other characteristics of nonlinear l1‎‎ norm problem are discussed by rice (1964a,b), osborne and watson (1978), charalambous (1979), glashoff and schultz (1979), hald (1981a,b), wagner (1982), watson (1982,87), powell and yuan (1984). 5.8 lp norm computation suppose our linear regression model of the form discussed before. the lp norm estimation of ß may be found by minimizing the sum of the pth power of the absolute values of the errors. that is, n m min: │yi ßjxij│ p (22) ß i=1 j=1 the above problem can be reformulated as a mathematical programming problem. rewrite the error vector as the difference of two nonnegative vectors w and v, which present positive and negative deviations respectively. that is u=w-v; w,v 0. the lp norm approximation problem reduces as follows (see, kiountouzis (1972)), n min: (wi p+vi p) ß i=1 m s.to: wi vi + ßjxij = yi j=1 (23) wi,vi 0 ßj unrestricted in sign i=1,...,n; j=1,...,m it should be noted that this formulation is extremely flexible as it allows that any other constraint to be added (see, money and affleck-graves and hart (1978)). another nice specification is that we can change the model to nonlinear form by removing the summation term in the first n constraints and inserting fi(xi,ß) instead. that is, n min: (wi p + vi p) ß i=1 s.to: wi vi + fi(xi,ß) = yi (24) wi,vi 0 ßj unrestricted in sign i=1,...,n; j=1,...,m the resultant is the formulation of nonlinear lp norm estimation problem. for general lp norm regression, there exist various computational methods for linear as well as nonlinear models (for details of the discussion, interested readers may see, descloux (1963), rice (1964,69), barrodale and young (1966), sreedharan (1969,71), ekblom and henriksson (1969), karlovitz (1970a,b), barrodale and roberts http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 58 (1970), barrodale and roberts and hunt (1970), fletcher and grant and hebden (1971,74b), kiountouzis (1972), forsythe (1972), kahng (1972), ekblom (1973a,b), anton and duris (1973), watson (1973,77,78,84b,85a), shisha (1974), merle and spath (1974), oettli (1975), rey (1975), mond and schechter (1976), borowsky (1976), shier and witzgall (1978), kennedy and gentle (1978), wolfe (1979), porter and winstanley (1979), barr and affleckgraves and money and hart (1980a), harter (1981), madsen (1985), gonin and du toit (1987), fichet (1987b)). in the case of l∞‎ norm solution of overdetermined system of equations, there are similar methods as well (for more information, interested readers may see the following selected articles and also their references, kelley (1958), goldstein and cheney (1958), cheney and goldstein (1958), stiefel (1960), veidinger (1960), valentine and van dine (1963), aoki (1965), osborne and watson (1967), bartels and golub (1968a,b), gustafson and kortanek and rom (1970), barrodale and powell and roberts (1972), cline (1972,76), duris and temple (1973), watson (1973), barrodale and phillips (1974,75), boggs (1974), fletcher and grant and hebden (1974a), madsen (1975), abdelmalek (1975b,76,77a,b), conn (1975), coleman (1978), charalambous and conn (1978), bartels and conn and charalambous (1978), armstrong and kung (1979), klingman and mote (1982), bartels and conn and li (1987), brannigan and gustafson (1987)). 6. simultaneous equations system the l1‎‎ norm estimation has been extensively studied for single equation regression model, and its properties are well recognized. but despite the wide variety of econometric applications of l1‎‎ norm estimation to simultaneous equation systems, there have been only a few investigators in this area which their works are summarized in this section. suppose the following equation as the first equation of a structural system, ┌ ┐ y = y + x1ß + u = [y|x1]│---│ + u ≡ z + u (25) └ ß ┘ where y is a vector of dependent endogenous, y, matrix of independent endogenous, x1, matrix of exogenous variables; and ß are vectors of regression parameters and u is random error vector. the reduced form for y is given by, y = x + v (26) direct and indirect least absolute deviations (dlad, idlad) analogs of direct and indirect least squares (dls, idls) may be applied to the systems (25) and (26) respectively. the l1‎‎ norm objective function analog of two-stage least squares (2sls) for estimation of may be defined as, n min: │yi pi tz │ (27) i=1 where yi is the ith element of y, pi t is the ith row of p=(xtx)-1xt (see, fair (1974)). amemiya (1982) by comparing the problem (27) with theil's interpretation of 2sls, n min: (yi pi tz )2 (28) i=1 and interpretation of 2sls as the instrumental variables estimator, namely, the minimization of, n min: (pi ty pi tz )2 (29) http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 59 i=1 defines two-stage least absolute deviations (2slad) as n min: │pi ty pi tz │ (30) i=1 amemiya (1982) combines the two ideas and proposes 2slad as a class of estimators obtained by minimizing, n min: │qfi + (1-q)pi ty pi tz │ (31) i=1 where q is a parameter to be determined by the researcher. when q=0, problem (31) is equivalent to (30) and yields the estimator which is asymptotically equivalent to 2sls. when q=1 then (31) is equivalent to (27). for any value of q [0, ) amemiya (1982) proves the strong consistency of 2slad and gives its asymptotic variance under three different cases of normal, partially normal and non normal distribution of u and v. powell (1983) demonstrates the asymptotic normality of amemiya (1982) proposed estimators for more general distributions of error terms. amemiya (1982) also proposes another alternative lad analog of 2sls. once idlad is applied to each equation of reduced form and ^ is computed. then by minimizing the following expression, n min: │yi -xi t ^ x1i tß│ (32) ß i=1 ^ and ß^ are derived. he calls this estimator double two-stage least absolute deviations (d2slad). a similar discussion for different values of q has also been done. powell (1983) shows an asymptotic equivalence proposition for the sub-class of d2slad estimators. this result is analogous to the finite sample equivalence of theil's interpretation of 2sls, and its instrumental variable interpretation. glahe and hunt (1970) as pioneers of introducing l1‎‎ norm in the simultaneous system of equations, compare small sample properties of least absolutes and least squares estimators for an overidentified simultaneous system of two equations via monte carlo experiments. estimators, where used, are dlad, dls, idlad, idls, 2slad, and 2sls. all comparisons were made for all three pairs of direct, indirect, and two-stage least absolute and least squares estimators for different sample sizes of ten and twenty with considering various cases of multicolinearity, heteroskedasticity, and misspecification. they concluded that the l1‎‎ norm estimators should prove equal or superior to the l2 norm estimators for models using a structure similar to that of their study, with very small sample sizes and randomly distributed errors. the same structure is used by hunt and dowling and glahe (1974) with laplace and normal error distributions. the estimators in their study are dlad, dls, 2slad, and 2sls. they concluded that the l1‎‎ norm estimators provided 100% of the best results in the case of laplace distribution, and 37.5% of the best results in the case of a normal distribution of errors. nyquist and westlund (1977) perform a similar study with an overidentified three equations simultaneous system with error terms obeying symmetric stable distributions. the estimators used in this study were similar to those of glahe and hunt (1970) mentioned above. they concluded that with normal distribution, l2 norm estimators are favorable. in nonnormal case, l1‎‎ norm estimators tend to perform better as the degree of nonnormality increases. when sample size increases, the relative performance of 2slad to dls is increased too. in the normal distribution case, 2sls is the best, and for nonnormal distributions, 2slad is the leading alternative closely followed by idlad, and for extremely nonnormal cases, idlad seems to be more robust than 2slad. http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 60 7. statistical aspects since the l1‎‎ norm criterion has discovered many interesting extension in statistics; this section has a glance at some of its features on the various fields of statistics. 7.1 sampling distribution ashar and wallace (1963), rice and white (1964), meyer and glauber (1964), glahe and hunt (1970), fama and roll (1971), smith and hall (1972), kiountouzis (1973), brecht (1976), ramsay (1977), hill and holland (1977), rosenberg and carlson (1977), pfaffenberger and dinkel (1978) have examined small sample properties of l1‎‎ norm fitting via monte carlo method in different conditions. the relative efficiency of this estimator to least squares occurs if errors distribution has big tails. wilson (1978) concludes that l1‎‎ norm estimator is 80% as efficient as least squares when errors follow contaminated normal distribution. when outliers are present, the l1‎‎ norm estimator becomes more efficient. his approach is monte carlo too, and a wide variety of experiments are examined. cogger (1979) performed ex-post comparisons between l1‎‎ and l2 norms forecasts from box-jenkins autoregressive time series models. the comparisons indicated that l1‎‎ norm approaches to the estimation of arima (integrated autoregression moving average) models of time series data should receive further attention in practice. for multivariate regression with a symmetric disturbance term distribution, rosenberg and carlson (1973) showed that the error in the l1‎‎ norm estimation is approximately, normally distributed with mean zero and variancecovariance matrix ²(xtx)-1, where, ²/n is the variance of the median of errors (see also, sposito and tvejte (1984), ronner (1984)). they concluded that the l1‎‎ norm estimates have smaller variance than least squares in regression with high kurtosis error distribution (see also, bloomfield and steiger (1983)). sielken and hartley (1973), farebrother (1985) have shown that when the errors follow a symmetric distribution, and the l1‎‎ norm estimates may not be unique, the problem may be formulated in such a way as to yield unbiased estimators. a similar discussion for general lp norm may be found in sposito (1982). bassett and koenker (1978) showed that the l1‎‎ norm estimates of regression parameters in general linear model are consistent and asymptotically gaussian with covariance matrix ²(xtx)-1, where ²/n is the asymptotic variance of the sample median from random samples of size n taken from the error distribution (see, bassett and koenker (1982), koenker and bassett (1984), bloomfield and steiger (1983), oberhofer (1982), wu (1988). a simple approximation method for computing the bias and skewness of the l1‎‎ norm estimates is given by withers (1987) which shows that bias and skewness of ß^ are proportional to the 3rd moments of independent variables. the moment problem in the l1‎‎ norm is discussed by hobby and rice (1965). dupacova (1987a,b) used the tools of nondifferentiable calculus and epi-convergence to find the asymptotic properties of restricted l1‎‎ norm estimates. asymptotic interesting properties of boscovich's estimator, which is l1‎‎ norm minimization of errors subject to zero mean of residuals constraint may be found in koenker and bassett (1985). l1‎‎ norm fit for censored regression (or censored "tobit") models has been introduced by powell (1984,86). paarsch (1984) by monte carlo experiments showed that the powell estimator is neither accurate nor stable. gross and steiger (1979) used an l1‎‎ norm analog of l2 norm estimator for the parameters of stationary, finite order autoregressions. this estimator has been shown to be strongly consistent. their evidence is based on monte carlo experiments (see also, bloomfield and steiger (1983) for more discussions). 7.2 statistical inference the asymptotic distribution of the three l1‎‎ norm statistics (wald, likelihood ratio, and lagrange multiplier tests) of linear hypothesis for the general linear model have been discussed in koenker and bassett (1982a). they derived the asymptotic distribution for a large class of distributions. it has been shown that these tests under mild regularity conditions on design and error distribution have the same limiting chi-square behavior. comparison of these tests based on monte carlo experiments is given in koenker (1987). since the l1‎‎ norm estimator asymptotically follows a normal distribution, stangenhaus and narula (1987) by using monte carlo method determined the sample size at which normal distribution approximation can be used to construct the confidence intervals and test of hypothesis on the parameters of the l1‎‎ norm regression. comparison methods for studentizing the sample median which can be extended to l1‎‎ norm regression is discussed by mckean and sheather (1984); and accordingly, testing and confidence intervals are compared by sheather and mckean (1987). http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 61 two coefficients of determination for l1‎‎ norm regression are given by mckean and sievers (1987). a class of tests for heteroskedasticity based on the regression quantiles is given in koenker and bassett (1982b). more recent works on l1‎‎ norm statistical inference and analysis of variance may be found in armstrong et al. (1977), siegel (1983) sheather (1986), mckean and shrader (1987), shrader and mckean (1987), stangenhaus (1987), brown and hettmansperger (1987), tracy and khan (1987), vajda (1987), sheather (1987), fedorov (1987). for other characterization see, fichet (1987a), lecalve (1987). 7.3 multivariate statistics in the usual clustering method, euclidian metric or distance as an appropriate real-valued function for constructing dissimilarity criterion is used (see also, bidabad (1983a)). spath (1976) used the l1‎‎ metric as a criterion for the clustering problem. more modification and extension may be found in spath (1987). kaufman and rousseeuw (1987) introduced an l1‎‎ norm type alternative approach, used in the k-medoid method, that minimizes the average dissimilarity of all objects of the data set to the nearest medoid. trauwaert (1987) and jajuga (1987) applied the l1‎‎ metric in fuzzy clustering method of isodata (iterative self organizing data analysis technique (a)). trauwaert (1987) showed that in the presence of outliers or data errors, the l1‎‎ metric has superiority over l2 distance. an l1‎‎ norm similar version of multidimensional scaling is presented by heiser (1988) (see also, critchley (1980)) and of correspondence analysis by heiser (1987). robust lp norm discrimination analysis is discussed by haussler (1984) and watson (1985a). l1‎‎ norm estimation of principal components considered by galpin and hawkins (1987). 7.4 nonparametric density estimation l1‎‎ norm has also been used in nonparametric statistics and density estimation. the procedure of density estimation is done via the parzen kernel function. abou-jaoude (1976a,b,c), devroye and wagner (1979,80) give the conditions for the l1‎‎ norm convergence of kernel density estimates. devroye (1983,85) gives the complete characterization of the l1‎‎ norm consistency of parzen-rosenblatt density estimate. devroye concludes that all types of l1‎‎ norm consistencies are equivalent. gyorfi (1987) proves the l1‎‎ norm consistency of kernel and histogram density estimates for uniformly and strong mixing samples. devroye and gyorfi (1985) give a complete explanation of the l1‎‎ norm nonparametric density estimation. the central limit theorems of lp norms for kernel estimators of density and their asymptotic normality in different conditions of unweighted and weighted lp norm of naive estimators, and under random censorship are discussed in csorgo and horvath (1987,88), horvath (1987), csorgo and gombay and horvath (1987). bandwidth selection in nonparametric regression estimation is shown by marron (1987). via an example, he concludes that it is a smoothing problem. welsh (1987) considers simple l1‎‎ norm kernel estimator of the sparsity function and investigates its asymptotic properties. l1‎‎ and l2 norms cross-validation criteria are studied for a wide class of kernel estimators by rossi and brunk (1987,88). gyorfi and van der meulen (1987) investigate the densityfree convergence properties of various estimators of shannon entropy and prove their l1‎‎ norm consistency. munoz perez and fernandez palacin (1987) consider the estimating of the quantile function by using bernstein polynomials and examine its large sample behavior in the l1‎‎ norm. for comparison of the l1‎‎ and l2 norms estimators of weibull parameters, see lawrence and shier (1981) and for a nonparametric approach on quantile regression, see lejeune and sarda (1988). 7.5 robust statistics one of the most important properties of the l1‎‎ norm methods is resistivity to outliers or wild points. this property makes it one of the most important techniques of robust statistics. huber (1987) pointed out that the l1‎‎ norm method serves in two main areas of robust estimation. sample median plays an important role in robust statistics. the sample median is the simplest example of an estimate derived by minimizing the l1‎‎ norm of deviations. thus, the l1‎‎ norm minimizes the maximum asymptotic bias that can be caused by asymmetric contamination. therefore, it is the robust estimate of choice in cases where it is more important to control bias than the variance of the estimate. next, the l1‎‎ norm method is the simplest existing high-breakdown estimator. thus it can be a good starting point for iterative estimators which give nonsense solution if they started with a bad initial point and since it is resistant to outliers, may be used as an starting point for trimming the wild points (see also, taylor (1974), holland and welsch (1977), harvey (1977,78), armstrong and frome and sklar (1980), antoch et al (1986), antoch (1987), portnoy (1987), bassett (1988b)). this technique for polynomial regression with a test about the degree of the polynomial and for regression quantiles is considered in jureckova (1983,84), jureckova and sen (1984). the same thing for nonlinear regression is devised by prochazka (1988). ronchetti (1987) reviews the basic http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 62 concepts of robust statistics based on influence function and also in relation with l1‎‎ norm (see also galpin (1986)). for computational algorithms in bounded influence regression, see marazzi (1988). ekblom (1974) discusses the statistical goodness of different methods when applied to regression problem via monte carlo experiments, and in ekblom (1987) he shows the relationship of l1‎‎ norm estimate as limiting case of an lp norm or huber estimates. haussler (1984) and watson (1985a) considered the robust lp norm discrimination analysis problem. robust estimates of principal components (see, bidabad (1983c)) based on the l1‎‎ norm formulation are discussed by galpin and hawkins (1987). the asymptotic distributional risk properties of pre-test and shrinkage l1‎‎ norm estimators are considered by saleh and sen (1987). l1‎‎ norm estimator is also a member of m and r estimators (see, bloomfield and steiger (1983) for more discussions). 8. application l1‎‎ norm method has been extensively developed in various fields of sciences and work as strong analytical tools in analyzing human and natural phenomena. many branches of sciences in applied mathematics, statistics, and data analysis like econometrics, biometrics, psychometrics, sociometrics, technometrics, operation research, management, physic, chemistry, astronomy, medicine, industry, engineering, geography and so forth are heavily dependent to this method. the assumption of normally distributed errors does not always hold for economic variables as well as other data and variables, and so we are not confronted with finite variance anywhere. an infinite variance means thick tail errors distribution with a lot of outliers. since the least squares gives a lot of weights to outliers, it becomes extremely sample dependent. thus, in this case, least squares becomes a poor estimator. of course, the observed distributions of economic or social variables will never display infinite variances. however, as discussed by mandelbrot (1961,63) and hereinbefore, the important issue is not that the second moment of the distribution is actually infinite, but the interdecile range in relation to the interquartile range is sufficiently large that one is justified in acting as though the variance is infinite. thus, in this context, an estimator which gives relatively little weight to outliers, such as l1‎‎ norm estimator is clearly preferred. distribution of personal income has been known to have this characteristic since the time of pareto -1896. ganger and orr (1972) give some evidence on time series characteristics of economic variables which have this property. many other economic variables such as security returns, speculative prices, stock and commodity prices, employment, asset sizes of business firms, demand equations, interest rate, treasury cash flows, insurance and price expectations all fall in the category of infinite variance error distribution (see, goldfeld and quandt (1981), nyquist and westlund (1977), fama (1965), sharpe (1971)). arrow and hoffenberg (1959) used the l1‎‎ norm in the context of interindustry demand. meyer and glauber (1964) compare l1‎‎ and l2 norms directly. they estimated their investment models on a sample by both estimators and then examined them by forecasting ex-post sample. they concluded that, with very few exceptions, the l1‎‎ norm estimation outperformed the l2 norm estimators, even with criteria such as the sum of the squared forecast errors which least squares is ordinarily thought to be minimal. sharpe (1971) compares l1‎‎ and l2 norms estimators for securities and portfolios. a similar discussion has been given by cornell and dietrich (1978) on capital budgeting. affleck-graves and money and carter ( ) did the same research by applying lp norm and with emphasis on factors affecting the estimation of coefficients of an individual security model. kaergard (1987) compares l1‎‎, l2, and l∞‎ norms estimators for danish investments via their power to predict the even years from estimation over odd years for a long period. hattenschwiler (1988) uses goal programming technique in relation with l1‎‎ norm smoothing functions on several large disaggregate linear programming models for switzerland food security policy (see, bidabad (1984a) for a description of goal programming relevance). other applications of the l1‎‎ norm smoothing functions on the models for planning alimentary self-sufficiency, food rationing, and fluxand balancing model for feedingstuffs are referenced by hattenschwiler (1988). wilson (1979) used l1‎‎ norm regression for statistical cost estimation in a transport context. chisman (1966) used l1‎‎ norm estimator to determine standard times for jobs in which work-elements are essentially the same for all jobs except that the quality of each type of the work-element used may vary among jobs. frome and armstrong (1977) refer to this estimator for estimating the trend-cycle component of an economic time series. charnes and cooper and ferguson (1955) give the optimal estimation of executive compensation of employees by solving the l1‎‎ norm problem via the technique of linear programming. application of the l1‎‎ norm in location theory is of special interest; because by this metric the rectangular distance of two points in two dimensional cartesian coordinates can be considered very well (see, cabot et al (1970), wesolowsky and love (1971,72), drezner and wesolowsky (1978), ratliff and picard (1978), morris and verdini (1979), megiddo and tamir (1983), calamai and conn (1987); see also, the bibliography of domschke and drext (1984)). farebrother http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 2019 63 (1987a) applies the l1‎‎ norm to committee decision theory. mitchell (1987) uses the l1‎‎ norm to find the shortest path for a robot to move among obstacles. l1‎‎ norm has been applied to chemistry by fausett and weber (1978); in geophysics by dougherty and smith (1966), claerbout and muir (1973), taylor and banks and mccoy (1979); in astronomy by rousseeuw (1987), in physical process and pharmacokinetic by frome and yakatan (1980), gonin and money (1987a). for a mechanical representation of l1‎‎ norm, see, farebrother (1987d). application of the l1‎‎ norm in power systems for static state estimation is given by kotiuga and vidyasagar (1982). anderson (1965) suggests using l1‎‎ norm estimation in order to assure the nonnegative coefficient in linear time equations. for application on the data of orbital measurement, see mudrov et al. (1968). 9. other variants narula and wellington (1977a) propose the minimization of the sum of weighted absolute errors. that is, minimizing the expression wi│ui│. an algorithm for this problem is introduced. narula and wellington (1977b) proposed a special case of the above formulation by the name, "minimum sum of relative errors". in this problem, wi are set equal to 1/│yi│ (see also comment of steiger and bloomfield (1980)). narula and wellington (1977c) give an algorithm for l1‎‎ norm regression when the model is restricted to pass through the means of each of the variables (see, farebrother (1987c) for a remark). in the case of restricted l1‎‎ norm estimation some algorithms presented by young (1971), armstrong and hultz (1977), barrodale and roberts (1977,78), bartels and conn (1980a,b), armstrong and kung (1980). an algorithm for l1‎‎ norm regression with dummy variables is given by armstrong and frome (1977). womersley (1986) introduces a reduced gradient algorithm for censored linear l1‎‎ norm regression. in the context of stepwise regression and variable selection, there are also special algorithms for the case of l1‎‎ norm (see, roodman (1974), gentle and hansen (1977), narula and wellington (1979,83), wellington and narula (1981), dinkel and pfaffenberger (1981), armstrong and kung (1982a)). an algorithm for regression quantiles is given by narula and wellington (1984). computation of best onesided l1‎‎ norm regression that is finding an approximation function which is everywhere below or above the function is given by lewis (1970). for numerical techniques to find estimates which minimize the upper bound of absolute deviations, see gaivoronski (1987). arthanari and dodge (1981) proposed a convex combination of l1‎‎ and l2 norms objective functions to find new estimator for the linear regression model. dodge (1984) extends this procedure to a convex combination of huber m-estimator and l1‎‎ norm estimator objective functions. dodge and jureckova (1987) showed that the pertaining convex combination of l1‎‎ and l2 norms estimates could be adapted in such a way that it minimizes a consistent estimator of the asymptotic variance of the newly produced estimator. in dodge and jureckova (1988) it is discussed that the adaptive combination of m-estimator and l1‎‎ norm estimator could be selected in an optimal way to achieve the minimum possible asymptotic variance. instead of minimizing the absolute deviations, nyquist (1988) minimized absolute orthogonal deviations from the regression line. in this paper, computational aspects of this estimator are considered, and a connection to the projection pursuit approach to the estimation of multivariate dispersion is pointed out. spath and watson (1987) also introduce orthogonal linear l1‎‎ norm approximation method. application of orthogonal distance criterion for l2 and general lp norms may be found in spath (1982,86b), watson (1982b), wulff (1983). rousseeuw (1984) proposes a new method of estimation called by "least median of squares" regression. this estimator is derived by minimizing the expression, med(ui2) for ß. the resulting estimator can resist the effect of nearly 50% of contamination in the data. for an applied book on this topic, see rousseeuw and leroy (1987). computational algorithms of this estimator may be found in souvaine and steele (1987), steele and steiger (1986). when the number of observations in comparison with the number of unknowns is large, it ought to be better to split the observations into some unknown clusters and look for corresponding regression vectors such that the average sum of the lp norm of the residual vector attains a minimum. this combination of clustering and regression is called clusterwise regression. a case study and numerical comparison for clusterwise linear l1‎‎ and l2 norms regressions are given by spath (1986a). for clusterwise linear l1‎‎ norm regression algorithms see spath (1986c), meier (1987), and for the presentation of clusterwise regression, see spath (1985,87). application of the l1‎‎ norm to one and two-way tables is given by armstrong and frome (1976b,79), buckley and kvanli (1981) (see also, bloomfield and steiger (1983) for general discussions). there are other applications of l1‎‎ norm in u-statistics by chun (1987), bayesian approach by militky and cap (1987), isotonic regression by menendez and salvador (1987), sample allocation by melaku and sadasivan (1987) and method of averages by kveton (1987). http://www.cribfb.com/journal/index.php/afbr copyright © cc-by-nc 2019, cribfb | afbr www.cribfb.com/journal/index.php/afbr australian finance & banking review vol. 3, no. 1; 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