AHAM NZENWATA
ABSTRACT
The paper investigated the nature of the relationship between
firm value and economic development. For the purpose of the study, firm value
was proxied as total asset of the firm while economic development was proxied
as GDP. The study covered a period of twelve years due to limited data. Data
collected from the CBN statistical bulletin and the firm’s annual report was
analysed using Pearson on SPSS16.0. our results indicated a highly positive
relationship between economic development and firm value. We therefore
concluded that the trend in the value of the firm over time is a good indicator
of the general economic condition.
1. INTRODUCTION
Firm
or enterprise value is a measure of the actual economic value of a company at
any given moment. Firm value measures what it would actually cost to purchase
the entire company. Investors use the current value of all of a company’s
outstanding shares as its economic value Known as market capitalization. This is
the total value of the shares outstanding of a publicly traded company; it is
equal to the share price times the number of shares outstanding. As outstanding
stock is bought and sold in public markets, capitalization could be used as a
proxy for the public opinion of a company's net
But
the worth or value of the firm in itself is dependent on the ability of the
firm to achieve the basic objective of the business. Thus, the basic objective
of the business firm is to create value by developing, producing and supplying
goods and services to customers. This has to be done in such a way as to allow
companies to make a profit, which in turn demands far more than just skills in
companies’ own fields and processes. Firms improve their resources and hence
create value by developing materials and ideas for productive purposes.
The
goods and services produced must meet demands made by customers, other
companies or public institutions if companies are to survive. Profitability
results when customers are prepared to pay more for goods and services than it
costs to produce them. When profitability is achieved, the firm is able to
expand its activities by installing additional productive capacity and
employing more people to work for it. Society also benefits from the profitable
activities of the firm by increased returns to the coffers of the state by way
of taxes and also perhaps through corporate social responsibility.
The
ability to produce this kind of added value – profit – is the basic
prerequisite for business, but it is also a foundation for prosperity in
economic terms. Only profitable companies are sustainable in the long term and
capable of creating goods, services, processes and return on capital. The
objective of this paper is to investigate how the value of the firm is affects
the wider economy.
2. LITERATURE
REVIEW
The
role played by firms nowadays on the economy is undoubtedly of great
importance. Businesses benefit each of us by producing the goods and services
that we desire. Instead of having to produce everything we consume on our own,
businesses facilitate trade between people and allow for greater variety,
quantity, and quality of products and services at lower prices.
The
present situation that the world economy is facing is also showing the
importance of firms, since governments are putting some efforts in order to
help them due to their economic importance. Romer (2001) presents the idea that
it occurs when growth occurs in the economy through the channel of the firm
when someone uses some resources turning them into something valuable. At the
same time economic growth is presented by Apolinário (2005) as a result of the
human and technological capital, and the organization that manages both. The
integration of these factors leads us to the concept of economic development
driven by the firm.
Arvanitidis,
Petrakos, & Pavleas (2007) identified some economic growth determinants,
such as:
·
High quality of human
capital;
·
High Technology,
innovation and R&D;
·
Stable political
environment;
·
High degree of
openness (networks, links), among others.
Most
of them can be easily connected with the entrepreneurial fabric of the firm,
which supports the idea that economic growth, whether sustainable or not, is
promoted by firms either at a micro or macroeconomic level.
Economic
growth is also related with the concept of innovation, as Mccann (2006)
presents, innovation is the spark for regional economic growth that occurs in
locations where firms (normally small) are based with a good labor force and
specialized services. At the same time, as Vargas (2000) argues, business firms
have been seen for some time as an alternative to macroeconomic policies in
order to fight poverty.
However
the relation between economic growth or development and firms also presents
some negative aspects. For instance the increase in the number of firms may
create rivalry instead of cooperation Narula, R. (2004). And even on the
concept of sustainable development is not understood in the same way by
everyone. Giddings, Hopwood, & O'Brien (2002) argue that even with
governments and some business sectors being concerned about sustainability
issues, the separation of the concept in three different dimensions may be used
to justify the focus in one of these dimensions, usually the economic, as
justified by some other authors such as Korton (1996) or Monbiot (2000).
In
order to achieve economic development it is agreed that firms are an efficient,
or at least, a widely acceptable solution Vargas (2000) Overall, the presence
of the business firm in the economy results in a higher standard of living for
all concerned. Even though people sometimes feel the negative aspects of the
firm if market failures are present, the benefits of having business in the
economy far outweigh the costs.
3. METHODOLOGY
The methods useD for analyses chosen is the
Pearson correlation analysis to determine the nature and level of correlation
or association between firm value and the economy. The correlation analysis is
of the form:
Where N = Population size
n = sample
size
y = dependent
variable(s) and
x = independent
variable(s)
4. DATA PRESENTATION AND ANALYSES
Table
1: Nigeria GTB and Guaranty Trust
Bank Total Assets, 2002-2013
|
PERIOD
|
GDP (N'BILLION)
|
GTB TOTAL ASSETS (N'MILLION)
|
|
2002
|
7,795.76
|
59,292.40
|
|
2003
|
9,913.52
|
83,310.73
|
|
2004
|
11,411.07
|
119,698.24
|
|
2005
|
14,610.88
|
167,897.70
|
|
2006
|
18,564.59
|
305,080.57
|
|
2007
|
20,657.32
|
478,363.06
|
|
2008
|
24,296.33
|
714,345.35
|
|
2009
|
24,794.24
|
1,032,954.61
|
|
2010
|
33,984.75
|
1,083,304.12
|
|
2011
|
37,409.86
|
1,523,527.55
|
|
2012
|
40,544.10
|
1,620,317.22
|
|
2013
|
42,396.77
|
1,904,365.80
|
Source(s) CBN statistical bulletin, 2013
edition,
GTB Annual Reports, Various Editions
The table above depicts the trend in
Nigeria Gross Domestic Product and Guaranty Trust Bank’s Total Assets for the
period 2002 to 2013. A more in depth description of the trends will be given in
the charts below.
Figure
1: Trend in Nigeria GDP. 2002 - 2013
Figure 1 above is a line chart showing
the trend in Nigeria Gros Domestic Product for the period of the study. From
the graph we see a gradual but consistent increasing trend in Nigeria GDP. From N7,795.76 billion in 2002, it rose to
N24,294.33 billion in 2008. The change in value in 2008-2009 seem to have been
muted probably due to the global financial crises during that period. Beyond
the 2008-2009 period the growth rate seemed to continue unimpeded. Until 2013.
Figure
2: Trend in Guaranty Trust Bank Total Assets,
2002 - 2013
Figure 2 above is a depiction of the
trend in the total assets of Guaranty Trust Bank for the period of the study.
Unlike the GDP graph above, GTB witnessed a steeper growth gradient for the
period. But the trend in growth for both Nigeria GDP and GTB’s total seem to
have a brief growth interruption during the same period, 2008-2009. Beyond this
period the bank total asset growth continued without interruption.
The implication of the above is that
any increase or decrease in the economy is almost seamlessly transmitted to
activities and hence in growth of the banking sector.
|
Table 2. Correlations Matrix for Nigeria GDP and GTB Total Assets
|
|||
|
|
|
NGgdp
|
GTBtassets
|
|
NGgdp
|
Pearson Correlation
|
1
|
.978**
|
|
Sig. (2-tailed)
|
|
.000
|
|
|
N
|
12
|
12
|
|
|
GTBtassets
|
Pearson Correlation
|
.978**
|
1
|
|
Sig. (2-tailed)
|
.000
|
|
|
|
N
|
12
|
12
|
|
|
**. Correlation is significant at the 0.01
level (2-tailed).
|
|||
Table
two above show the correlation between the Nigeria GDP and GTB Total Assets.
The table shows that there is a highly positive correlation between total
assets of the bank and Nigeria’s GDP of 97.8%. The implication of this result
is the firm is inexorably linked to the economy. Similarly, the economy is also
vitally linked to the value and prospects of good performance of the companies
operating within it. Consequently, as the value of firms (in terms of assets,
profitability and share price) operating within the economy is increasing, the
economy will also be highly predicted to increase and vice versa.
5. DISCUSSION OF
FINDINGS AND CONCLUSIONS
Our analysis above indicates a strong
and positive association between value of the firm and economic development.
This point to the very important role of business firms play in the growth and
development of the economy. Thus, as businesses prosper and expand their
activities, the economy also benefits by increase in employment and tax revenue
raised from such businesses.
Finally,
we also conclude that the trend in the value of the business firm over time is
a good indicator of the general business condition within the economy.
REFERENCES
Apolinário, M. J. (2005). Development: A Material Factor. Direct
Review, 44-48.
Giddings, B., Hopwood, P., &
O'Brien, G. (2002). Environment, economy
and society: Fitting them together into sustainable development.
Sustainable Development , 187-196.
Islam, S. M., Munasinghe, M., &
Clarke, M. (2003). Making long-term
economic growth more sustainable: evaluating the costs and the benefits.
Ecological Economics , 149-166.
Korton, D. (1996). When Corporations Rule the World.
London: Earthscan.
Mccann, P. (2006). On the supply-side determinants of
regional growth. Construction Management and Economics, 681-693.
Monbiot, G. (2000). Captive State. London: Macmillan.
Narula, R. (2004). R&D collaboration by SMEs: New
opportunities and limitations in the face of globalisation. Technovation ,
153-161.
Romer, P. (2001). Economic Growth.
Vargas, C. M. (2000). Community Development and Micro-enterprises:
Fostering Sustainable Development , 11-26.
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