Exchange rate volatility and firm performance in Nigeria: A dynamic panel regression approach

Abstract

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