CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The financial performance of business organisations has remained an important subject in academic research and economic policy discussions. Many researchers have linked financial performance to entrepreneurship, business growth, and the long-term survival of firms. Financial performance refers to a firm's ability to create value through its business activities, operating cash flows, and the attraction of additional equity capital. It is one of the major factors that determine whether a business can continue to operate successfully over time (Osirim & Wadike, 2023). It is also an important measure of management effectiveness because it helps investors, directors, and other stakeholders assess whether a business is performing well or poorly. Since businesses require profits to invest, expand, and remain competitive, maintaining good financial performance is essential. Akinrinola et al. (2023) explain that capital structure decisions and profitability are closely connected in Nigeria. This means that a firm's access to finance and its ability to manage available funds are important factors influencing its financial performance.

Business growth is often used as an indicator of financial performance because expansion is generally considered an important step towards achieving business stability, competitiveness, and profitability. This view was discussed by Markman (2002) and remains relevant in recent academic studies. Onuora et al. (2022) also explain that ownership structure has a significant influence on the financial performance of quoted companies in Nigeria. This suggests that the ownership, management, and financing arrangements of a business can determine its ability to grow and achieve its objectives. Generally, one of the major objectives of a business is to maximise the value of its owners' investment. This objective influences management decisions, investment plans, and the general direction of business activities.

During the 1980s, the Nigerian business environment was affected by military administration, inconsistent government policies, multiple taxation, and bureaucratic difficulties. These conditions created serious challenges for business operations and reduced the ability of many firms to generate profits. As a result, several local businesses closed down, while some foreign investors withdrew their investments from the country. However, the return to democratic government in 1999 created more favourable conditions for business activities and investment. Recent studies continue to show that the business environment and internal financial management are important to the success of firms. For example, Bagana (2024) found that liquidity management significantly influences the financial performance of selected quoted consumer goods firms in Nigeria. This indicates that both the operating environment and the ability of a firm to manage its financial resources can affect its overall performance.

Although the number of registered businesses in Nigeria increased significantly following the Nigeria Enterprises Promotion Decree of 1977, only a small proportion of these businesses have been listed on the Nigerian Exchange Group (NGX). The number of registered firms increased from 10,997 in 1972 to 33,949 by June 1980. Historically, business financing in Nigeria has been divided into two broad categories. The first consists of large and established companies that are quoted on the stock exchange and have access to formal capital market financing. The second consists of small and medium-sized businesses that are not listed on the stock exchange and depend mainly on limited or informal sources of finance (Ezike, 1985). This difference remains important in the Nigerian economy. According to Osirim and Wadike (2023), unquoted firms face difficulties in raising sufficient capital because they depend largely on personal savings, retained earnings, cooperative societies, and financial assistance from friends. These sources may not provide enough funds to support continuous business expansion.

The limited development of the Nigerian capital market has also affected the ability of many newly established businesses to obtain long-term financing. Available evidence suggests that only one out of every five businesses established in Nigeria survives beyond its first year. Financial difficulties and unfavourable operating conditions are among the factors associated with this high rate of business failure. Adeoye et al. (2023) support this position by showing that capital structure and business characteristics are important factors influencing the growth performance of small and medium-sized enterprises in Nigeria. Therefore, the limited access of unquoted firms to formal capital market financing may contribute to restricted business expansion, low investment capacity, and a greater risk of failure.

Quoted firms, on the other hand, have access to formal equity and debt markets, which can provide the funds required for long-term investment and business expansion. However, being listed on the stock exchange does not automatically guarantee strong financial performance. The Nigerian capital market experienced a major decline between 2008 and 2009, when market capitalisation fell from approximately ₦13.5 trillion to less than ₦4.6 trillion, while the All-Share Index dropped from about 66,000 points to below 22,000 points. Recent studies also show that listed companies continue to experience financial challenges. Akinleye and Salami (2024) report that listed manufacturing firms in Nigeria face continuing profitability pressures. Similarly, Yisau et al. (2024) found that capital structure, particularly debt-to-equity ratios, has a significant but negative effect on the Return on Assets of quoted deposit money banks. These findings suggest that access to the capital market does not necessarily guarantee better financial performance. Management quality, financing decisions, and the nature of the industry also influence the financial outcomes of quoted firms.

A comparison of quoted and unquoted firms is therefore important in understanding the financial performance of businesses in Nigeria. Both categories contribute to economic development, but they operate under different financial, ownership, and corporate governance conditions. Egbadju and Jacob (2022) explain that corporate governance practices have a significant influence on the performance of quoted non-financial firms in Nigeria. Similarly, Akande et al. (2023) found that financial inclusion and technology play important roles in determining the performance of small and medium-sized enterprises. Examining the differences between quoted and unquoted firms, as well as the factors responsible for their financial outcomes, is important for government policy, investment decisions, and business development strategies.

1.2 Statement of the Problem

Unquoted firms in Nigeria have continued to experience financial and operational difficulties, limiting their ability to contribute fully to economic development, employment generation, and industrial growth. Their performance has remained a major concern to government agencies, civil society organisations, and private sector stakeholders. Despite several government incentives, budgetary provisions, support from international development organisations, and the establishment of specialised financial institutions, many unquoted businesses still face serious challenges. These include limited access to money and capital markets, inadequate equity financing, poor management practices, low contributions from business owners due to limited personal savings, and high rates of business failure.

Access to formal credit remains one of the major problems facing unquoted firms in Nigeria. Loans provided by commercial banks are often short-term, making it difficult for these businesses to obtain the long-term funds needed for major investments and expansion. In addition, banks in developing economies have traditionally shown a preference for lending to governments or participating in foreign exchange transactions. This reduces the funds available to private businesses and increases the cost of borrowing (Levitsky, 1999). This challenge is also evident in Nigeria. Oyedokun and Amoo (2023) observe that the Nigerian financial sector does not have sufficient depth and coverage to adequately support the development of small and medium-sized enterprises. Adeyemi and Akindele (2023) also identify the high cost of financial services as a major obstacle to financial inclusion among SMEs.

Quoted firms also experience challenges that may affect their financial performance. Although these firms have access to the capital market, the Nigerian stock market has experienced considerable instability, and there is no definite evidence that listed firms always perform better financially than unlisted firms. Akinrinola et al. (2023) found no statistically significant relationship between total debt-to-equity ratio and Return on Assets among quoted manufacturing firms. This finding challenges the assumption that listing on the stock exchange automatically results in improved financial performance. Similarly, Yisau et al. (2024) reported a negative and significant relationship between capital structure and financial performance among quoted banks. This suggests that being listed may not always provide financial advantages and can also expose firms to certain financial risks.

Previous studies comparing the financial performance of quoted and unquoted firms have also produced different findings. Some researchers, including Walker and Petty (1978) and Anderson and Reeb (2002), suggest that unquoted firms may perform better than quoted firms because owner-managers have stronger personal incentives to improve business value. However, other researchers, such as Binder (1994), Tomas (2008), and Obiora (1987), have presented findings that do not support this position. Osirim and Wadike (2023), in a recent comparative study conducted in Nigeria, found a significant difference in the financial performance of quoted and unquoted firms. They attributed this difference partly to the greater ability of quoted companies to raise capital. Nevertheless, there are still limited studies using recent financial information, particularly data covering the period after the COVID-19 pandemic.

Another important concern is that official financial statistics in Nigeria have traditionally given greater attention to quoted companies, while the financial activities of many unquoted businesses receive less attention. This creates an incomplete picture of the productive capacity of the Nigerian economy. Decisions relating to government policy, investment, and business development may therefore be affected when they are based on limited financial information. Ignoring the performance of unquoted businesses may also result in missed opportunities to support their contribution to economic development.

Based on these concerns, there is a need for a detailed comparison of the financial performance of quoted and unquoted firms in Nigeria. The study therefore seeks to address the following questions: Do quoted firms perform well financially in Nigeria? Are unquoted firms financially viable? Is there a significant difference between the financial performance of quoted and unquoted firms in Nigeria?

1.3 Objectives of the Study

The main objective of this study is to compare the financial performance of quoted and unquoted firms in Nigeria.

The specific objectives are to:

i. Examine the financial performance of quoted firms in Nigeria.

ii. Examine the financial performance of unquoted firms in Nigeria.

iii. Determine the difference between the financial performance of quoted and unquoted firms in Nigeria.

1.4 Research Hypotheses

The following null hypotheses guide the study:

1. Quoted firms in Nigeria do not perform well financially.

2. Unquoted firms in Nigeria do not perform well financially.

3. There is no significant difference between the financial performance of quoted and unquoted firms in Nigeria.

1.5 Significance of the Study

This study is expected to make useful contributions to academic research, government policy, and business practice.

From an academic perspective, the study adds to the existing literature on the financial performance of quoted and unquoted firms in Nigeria. It provides an opportunity to examine the differences between these two categories of businesses using recent research evidence and developments. It also addresses the research gap identified by Osirim and Wadike (2023), who recommended further studies on the factors responsible for differences in the financial performance of listed and unlisted firms in Nigeria.

For policymakers, the findings may provide useful information for developing policies and programmes that improve access to finance for unquoted firms. Oyedokun and Amoo (2023) emphasise the need to improve the depth and reach of the Nigerian financial sector to support SME development. The findings of this study may therefore help policymakers understand the financial difficulties facing unquoted businesses and develop suitable measures to address them. The study may also encourage regulatory institutions, particularly the Securities and Exchange Commission (SEC) and the Nigerian Exchange Group (NGX), to consider ways of making listing requirements more accessible to growing unquoted firms. This would be consistent with the NGX's objective of providing opportunities for small-capitalisation and growth-oriented businesses (NGX, 2023).

Investors may also benefit from the findings because the study provides information for comparing the financial performance of quoted and unquoted firms. Understanding the financial position and performance of both categories may help individual and institutional investors make better investment and portfolio diversification decisions. The study may also contribute to improved investor confidence by providing information on the financial outcomes of different categories of businesses in Nigeria.

1.6 Scope and Limitations of the Study

This study focuses on comparing the financial performance of selected quoted and unquoted firms in Nigeria. It covers twenty firms, consisting of ten quoted firms and ten unquoted firms, over a period of ten years, from 1999 to 2008. Although the empirical investigation covers this period, recent academic studies and policy developments between 2022 and 2024 are also considered to provide additional context. The study is limited to firms operating within the Nigerian economy and uses audited financial statements as its primary sources of data.

Certain challenges were encountered during the research process, particularly in obtaining financial information from the selected firms. Some of the companies approached were unwilling to provide copies of their audited financial statements, which affected the number of firms from which information could be obtained. Another limitation is that the study does not cover the most recent financial years because of data availability challenges during the initial period of investigation. Future researchers may address this limitation by using more recent panel data, especially information covering the post-COVID economic recovery period, to update and extend the findings of this study.

1.7 Definition of Terms

Financial Performance: Financial performance refers to the measurement of a firm's results from its business activities and policies in monetary terms. It shows the ability of a company to generate revenue, control expenses, and make profits in relation to its assets or shareholders' equity. Common indicators used to measure financial performance include Return on Assets (ROA), Return on Equity (ROE), Net Profit Margin (NPM), and Earnings Per Share (EPS) (Higgins, 2022; Osirim & Wadike, 2023).

Quoted Firms: Quoted firms are companies whose shares or other securities are listed and traded on a recognised stock exchange. In Nigeria, the Nigerian Exchange Group (NGX) is the major platform for the listing and trading of these securities. Companies seeking to be listed must satisfy certain requirements relating to their financial records, market capitalisation, free float, and number of shareholders (NGX, 2023). Quoted firms can raise funds from public investors and are expected to comply with established disclosure and corporate governance requirements.

Unquoted Firms: Unquoted firms are companies whose securities are not listed on a recognised stock exchange. These businesses usually obtain funds through personal savings, retained profits, bank loans, and informal financial arrangements. Many unquoted firms in Nigeria operate as small and medium-sized enterprises (SMEs), which form a large part of the business sector but often experience difficulties in obtaining long-term financing (Adeoye et al., 2023; Osirim & Wadike, 2023).

Return on Assets (ROA): Return on Assets is a financial ratio used to determine how efficiently a firm uses its total assets to generate profit. It is calculated by dividing net income by total assets and expressing the result as a percentage. ROA is commonly used in research as an indicator of the financial performance of firms in Nigeria (Bagana, 2024; Akinrinola et al., 2023).

Return on Equity (ROE): Return on Equity measures the amount of net profit generated in relation to shareholders' equity. It indicates how effectively a firm's management uses the funds invested by shareholders to generate earnings. ROE is often used together with ROA to assess the financial performance of quoted and unquoted firms (Onuora et al., 2022; Yisau et al., 2024).

Capital Structure: Capital structure refers to the combination of debt and equity that a firm uses to finance its operations and expansion. It includes the proportion of borrowed funds, shareholders' equity, and retained earnings used to support business activities. Decisions concerning capital structure can influence a firm's profitability, financial risk, and overall performance (Akinrinola et al., 2023; Yisau et al., 2024).

Profitability: Profitability refers to the ability of a firm to generate profit from its business activities. It measures the level of profit made in relation to revenue, assets, shareholders' equity, or operating costs. Profitability is an important part of financial performance and is necessary for business survival and expansion. It is commonly measured using indicators such as net profit margin, gross profit margin, ROA, and ROE (Higgins, 2022; Akinleye & Salami, 2024).

Liquidity: Liquidity refers to the ability of a firm to meet its short-term financial obligations when they become due by using its available current assets. It is an important indicator of financial stability and the ability of a business to continue its daily operations. Previous research has shown that liquidity management can significantly influence the financial performance of quoted firms in Nigeria (Bagana, 2024).

Small and Medium Enterprises (SMEs): Small and Medium Enterprises are businesses that operate below the established limits for large companies in terms of capital, annual turnover, and number of employees. In Nigeria, many SMEs are unquoted firms and play an important role in employment generation and economic development. However, they often face challenges relating to access to finance, management, and business expansion (Adeoye et al., 2023; Oyedokun & Amoo, 2023).

Nigerian Exchange Group (NGX): The Nigerian Exchange Group, formerly known as the Nigerian Stock Exchange (NSE), is the major stock exchange platform in Nigeria where the securities of quoted companies are listed and traded. It provides companies with access to public investment funds and serves as an important source of long-term equity financing (NGX, 2023).

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