CASH FLOW DYNAMICS, FIRM GROWTH AND FIRM PERFORMANCE ABSTRACT The aim of this study was to examine the relationship between cash flow dynamics, firm growth and firm performance. The data used for this study were from secondary sources obtained from the Nigerian Stock Exchange. Ordinary least square regression techniques was used to test the hypothesis for this study The study revealed a positive relationship between financing cash flow dynamics and firm growth. Also operating cash flow, investing cash flow and firm size had a positive relationship with firm performance. Tangibility had a negative relationship with firm growth. The study recommends that firm should invest wisely on projects that would yield higher returns. TABLE OF CONTENT CHAPTER ONE INTRODUCTION 1.1 BACKGROUND OF THE STUDY 1.2 STATEMENT OF THE RESEARCH PROBLEM 1.3 OBJECTIVES OF THE STUDY 1.4 RESEARCH HYPOTHESES 1.5 RELEVANCE AND SIGNIFICANCE OF THE STUDY 1.6 SCOPE AND LIMITATION OF THE STUDY CHAPTER TWO LITERATURE REVIEW 2.1 INTRODUCTION 2.2 THEORETICAL LITERATURE 2.2.1 IMPORTANCE OF CASH FLOW IN PREDICTING THE PERFORMANCE OF A FIRM 2.2.2 FINANCIAL STATEMENTS INFORMATION AND THE ROLE OF CASH FLOW STATEMENTS 2.2.3 CASH FLOW CLASSIFICATION 2.3 EMPIRICAL RESEARCH 2.4 CONCLUSION CHAPTER THREE 3.1 METHODOLOGY 3.2 RESEARCH DESIGN 3.3 SOURCES OF DATA COLLECTION 3.4 POPULATION OF THE STUDY 3.5 MODEL SPECIFICATION 3.6 APPRIOR EXPECTATION CHAPTER FOUR DATA ANALYSIS AND INTERPRETATION OF RESULTS 4.1 INTRODUCTION 4.2 DESCRIPTIVE STATISTICS 4.3 EMPIRICAL RELATIONSHIP BETWEEN CASH FLOW DYNAMIC AND FIRM CHARACTERISTICS 4.4 REGRESSION ANALYSIS 4.5 TEST OF HYPOTHESIS CHAPTER FIVE SUMMARY, RECOMMENDATION AND CONCLUSION 5.1 INTRODUCTION 5.2 SUMMARY OF FINDINGS 5.3 RECOMMENDATIONS 5.4 CONCLUSION BIBLIOGRAPHY CHAPTER ONE INTRODUCTION 1.1 BACKGROUND OF THE STUDY According information from financial reports can describe firm’s condition. The financial reports are affected by two factors, firms’ activities and accounting system adopted by the firm (Patepni, Healy & Bernard, 2004). There are many researches in value of financial reports information (both annual and interim reports). Some researches study accounting information in predicting firm’s future financial performance such as earnings and growth (Lev Trigrajan, 1993), while other researches measures the effect of accounting on share price (Abarbanell & Bushee, 1998). In the field of cash flow, there is a contradiction between standard setters and academic literature on the one side and accounting practice on the other. Standard setters often argue that by decomposing operating cash flow as referred to as “cash flow operations into cash receipts and cash payment”. The direct payments provide a better prediction on the future OCF. Several academic studies support this view (Mrishrian and Largay III 2000). However, in accounting practice, the predominant method is the indirect one that decomposes the current operating cash flow into potential cash flow (funds from operation) and short term accruals. Nevertheless, Neoclassical theory predicts that financial integration can foster growth in emerging markets because it permits capital from rich countries to be invested in economics with low savings but high growth opportunities. Thus far, empirical work has focused predominantly on the impact of equity market lieberalization on growth. Henry (2000a, b, 2003), Bekaert et al (2005), Mitton (2006), among others, show that equity market liberalization decreases the cost of capital, causes investment booms, and increases aggregate growth. Recent empirical firm level evidence corroborates and extends these aggregate findings. Chari and Henry (2004), for example document that companies with a larger free float and more liquid stock tend to attract more investor, interest and thus experience a lager decreases in their cost of equity than the other listed companies. However, firms with more growth opportunities are greatly exposed to firm risk because these firms tend to operate in more volatile environments and offer executive compensation contracts that are strongly tied to firm performance (Smith and Watts, 1992). The use of relative performance evaluation (RPE) in compensation contacts for employers of growth option (GO) firms can provide insurance against common exogenous. Shocks to firm performance and thus reduces the amount of risk that employers face. However, these firm’s use of RPS also can be impaired by the high costs associated with RPE implementation. The extent of RPE usage for high GO firms is an empirical question and the focus of this research. 1.2 STATEMENT OF THE RESEARCH PROBLEM This research set to investigates the relationship between cash flow dynamics, firm growth and firm performance in Nigeria insurance companies. Financial reports information and return on share by using five categories of commonly used financial ratio (Ross, Westerfield & Jordan, 2006) including profitability, long term solvency/leverage, short term solvency/liquidity, asset utilization/turnover and market value. In addition, it uses two additional variable from previous research, size which is derived from firm’s total costs (Johnson & Soenen, 2003; Hoberth, 2006) and cash flow from operation (Damati & Suhairi, 2006; Meythi, 2006). Therefore, the statement of the research problems are: 1. What is the relationship between cash flow dynamics, firm performance and firm growth in Nigeria insurance companies? 2. What are the factors that determine firm growth from performance and cash flow in the insurance company? 3. Is cash flow dynamics a necessity for firm growth and firm performance? 4. What are the factors responsible for variability in cash flow analysis of insurance companies? 1.3 OBJECTIVES OF THE STUDY The traditional methods of financial analysis that companies have being using for a long time to access their financial performance are plagued by a number of drawbacks. The income statement and balance sheet cannot sufficiently evaluate the financial performance of a firm as the cash flow statements have proved to be. Furthermore, accounting information from both balance sheet and an income statement is also less reliable compare to the cash flow statements. For this reason, a company could easily be faced with insolvency without a timely prior warning of such a development when using traditional approach. Hence the objective of this study therefore are as follows: 1. To examine the relationship between cash flow dynamics, firm performance and firm growth in Nigeria insurance companies. 2. To find out the factors that determine firm growth, firm performance and cash flow in the insurance company. 3. To investigate whether cash flow dynamic is a necessity for firm growth and firm performance. 4. To ascertain the factors responsible for variability in cash flow analysis of insurance companies. 1.4 RESEARCH HYPOTHESES In an attempt to fully capture the impact of cash flow dynamics, firm growth and firm performance, the following hypothesis are hereby stated: H1: There is a positive relationship between cash flow, firm growth and firm performance. H2: Cash flow analysis enhance productivity and reliability of Nigeria insurance companies. H3: Cash flow statements are better tools for the financial performance of a business entity in comparisms with the use of an income statement or balance sheet. 1.5 RELEVANCE AND SIGNIFICANCE OF THE STUDY The significance of the study is to reveal the impact of cash flow statements on corporate. Performance in the insurance company bearing in mind that the rational for the introduction of the cash flow statement, is to produce qualitative corporate report to assist users decision making. The study is therefore meant to evaluate for this reason behind the introduction of cash flow statement has achieved. Other significance of this study are: To enable users to corporate reports to have a better understanding of the general working of the cash flow statement. To the academicians, it will increase the body of their knowledge. It will also enable the insurance companies in Nigeria to make an evaluation on the relevance of cash flow statement to corporate performance. 1.6 SCOPE AND LIMITATION OF THE STUDY The scope of this study is an empirical work on cash flow dynamic, firm growth and firm performance in Nigeria insurance companies. Therefore, the work will examine the performance of selected insurance companies from Edo State for a period of five years (2005-2010). Among the limitations which preview a wider range of coverage of the study being used. The problem of incomplete data since some vital information from companies may not be released for this study. also financial constraint, in carrying out this research work. Another constraint is the different corporate governance rule and ownership structure existing in the companies used thereby making comparisms difficult. More also, inadequate materials to make research work more robust. Lastly, the use of different accounting policies in company account and preparing financial statement. REFERENCES Abarbanell, Jaffey S. & Bushee, Brian J. (1998). Abnormal returns to a fundamental analysis strategy. The accounting review 73(1). Johnson, Robert & Soenen, Luc. (2003). Indicator of successful companies. European Management Journal, 21(3): 364-369. Daniati, Naria, & Suhairi (2006). Penguarub Kandunga informasi komponen laporan arus kas, laba kotor, dan size perusahaan yerhadap expected rturn Saham (survey Pada industri textile dan automotive yangterdaftar dia BEJ). Padang: Simposium 4asound Akuntansi 9. Hobarth, Mag. & Lukas L. (2006). Modeling the relationship between financial indicators and company performance – an empirical study of us listed companies. France: dissertation Vienna University of Economics and Business Administration. Dwi-Martiani, Mulyomo, & Rahfiani, Khainirizka (2009). The effect of fianical ratios, from size, and cash flow from operating activities in the in trim report to the stock return. Chinese Business Review, 8(6):44-53. Al-Mwalla, M. Al-Omai A.M, & Ayed, F. (2010). The relationship between P/E ratio, dividend yield ratio, size and stock return in Jordanian companies: A co-integration approach, international research journal of finance and economics, issue 49):88-97.
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