Abstract
The purpose of this paper is to examine the effects of liquidity risk and interest rate risk on profitability and firm value, current studies are typically limited in emerging markets. This study employs a panel data estimation technique and a sample of 16 banks operating in Nigeria over the period from 2009 to 2017 making up to 144 observations. The findings of the study reveal that liquidity risk (loan to deposit ratio and liquid asset ratio) have a significant negative effect on firm value, the net interest margin and GDP have a negative significant impact on firm value for Nigerian banks. The loan to deposit ratio have a negative significant effect on firm value while the liquid asset ratio have a positive effect on firm value. The net interest margin have a negative significant effect on firm value while the asset interest margin have a positive significant impact on firm value. The GDP and inflation both have a positive significant relationship with firm value. The liquidity risk (loan to deposit ratio and liquid asset ratio) have a significant negative impact on return on equity of Nigerian banks. The GDP growth rate have a positive significant effect on the value of firm. Hence, this empirical study emphasizes and contributes to the dynamic role of liquidity risk and interest-rate risk and it's implication on profitability and firm value of banks in Nigeria and suggest that further study can explore a comparative study between Nigeria and financial firms in developed economy.
Highlights
The aftermath of financial turmoil that occurred in 2007 revealed the significance of the sound liquidity risk management in financial institutions
The descriptive statistics revealed that firm value (FV) of Nigerian banks has a mean of 0.1068 (10%) while the return on assets of Nigerian banks has a mean of 2 per cent
The recent global crisis has shown that banks, as major players in the financial universe, need to adjust their aims for profitability to ensure coverage against liquidity risk and interest rate risk
Summary
The aftermath of financial turmoil that occurred in 2007 revealed the significance of the sound liquidity risk management in financial institutions. Credit crisis was the sole causes of the financial crisis that later transformed into a liquidity crisis. What triggers the liquidity crisis was the rise in delinquencies in mortgage lending and the decline in housing prices in the United States in 2007. The deterioration of international stock markets, the drying of liquidity in interbank markets spilled over into a sovereign debt crisis in several European countries in early 2010 (Greece, Portugal, Ireland, Italy and Spain) which was caused by financial crisis (Moro, 2013). Since it is considered to be the most severe financial crisis since the Great Depression (Brunnermeier 2009), the global financial crisis has demonstrated the importance of establishing a level of liquidity sufficient to cope with adverse conditions
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