Exploring Liquidity Risk and Interest-Rate Risk: Implications for Profitability and Firm Value in Nigerian Banks
DOI:
https://doi.org/10.6000/1929-7092.2019.08.27Keywords:
Firm value, profitability, liquidity risk, interest-rate risk, Nigeria.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.
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https://doi.org/10.1108/13581981211218342
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Aruwa, S. A., & Musa, A. O. (2014). Risk components and the financial performance of deposit money banks in Nigeria. International Journal of Social Sciences and Entrepreneurship, 1(11), 514-522.
Athanasoglou, P., Brissimis, S. N., & Delis, M. D. (2008). Bank-specific, industry-specific and macroeconomic determinant of bank profitability. Journal of International Financial Markets, Institutions and Money, 121-136.
https://doi.org/10.1016/j.intfin.2006.07.001
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Berger, A. N., & Bouwman, C. H. (2009). Bank liquidity creation. The review of financial studies, 22(9), 3779-3837.
https://doi.org/10.1093/rfs/hhn104
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https://doi.org/10.1016/0378-4266(89)90020-4
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https://doi.org/10.1093/rof/rfr030
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Demirgüç-Kunt, A., & Huizinga, H. (1999). Determinants of commercial bank interest margins and profitability: some international evidence. The World Bank Economic Review, 13(2), 379-408.
https://doi.org/10.1093/wber/13.2.379
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https://doi.org/10.2307/2297430
Diamond, D. W., & Rajan, R. G. (2001). Liquidity risk, liquidity creation, and financial fragility: A theory of banking. Journal of political Economy, 109(2), 287-327.
https://doi.org/10.1086/319552
Dumicic, M., & Ridzak, T. (2013). Determinants of banks net interest margin in Central and Eeastern Europe. Financial Theory and Practice, 37 (1), 1-30.
https://doi.org/10.3326/fintp.37.1.1
Ebrahim, H., Kazem, Y., Nader, M., & Reza, K. (2013). Effects of risk parameters (credit, operational, liquidity and market risk) on banking system efficiency: study of 15 top banks in Iran. Iranian Economic Review, 17(1), 1-23.
Elyasiani, E., & Mansur, I. (1998). Sensitivity of the bank stock returns distribution to changes in the level and volatility of interest rate: A GARCH-M model. Journal of Banking & Finance, 22(5), 535-563.
https://doi.org/10.1016/S0378-4266(98)00003-X
Ferrouhi, E. M. (2014). Bank Liquidity and Financial Performance: Evidence from Moroccan Banking Industry. Business: Theory & Practice, 15(4).
https://doi.org/10.3846/btp.2014.443
Filip, B. F. (2016). Assessing the banking systems’ performance and its determinants in EU28 countries. Theoretical and Applied Economics, 23(Special (I)), 260-268.
Flannery, M. J., & James, C. M. (1984). The effect of interest rate changes on the common stock returns of financial institutions. The Journal of Finance, 39(4), 1141-1153.
https://doi.org/10.1111/j.1540-6261.1984.tb03898.x
Guru, B. K., Staunton, J., & Balashanmugam, B. (2002). Determinants of commercial bank profitability in Malaysia. Journal of Money, Credit, and Banking, 17(1), 69-82.
Hair, J. F., Black, W. C., Babin, B. J., & Anderson, R. E. (2014). Multivariate Data Analysis (7th ed.). Pearson Education Limited.
Hamadi, H., & Awdeh, A. (2012). The determinants of banks net interest margin; Evidence from the Lebanese banking sector. . Journal of Money, Investment and Banking, (23), 85-98.
Holmström, B., & Tirole, J. (1998). Private and public supply of liquidity. Journal of political Economy, 106(1), 1-40.
https://doi.org/10.1086/250001
Hong, H., Huang, J. Z., & Wu, D. (2014). The information content of Basel III liquidity risk measures. Journal of Financial Stability, 15, 91-111.
https://doi.org/10.1016/j.jfs.2014.09.003
How, J. C., Melina, A. K., & Verhoeven, P. (2005). Islamic financing and bank risks: the case of Malaysia. Thunderbird International Business Review, 47(1), 75-94.
https://doi.org/10.1002/tie.20041
Kalluci, I. (2010). Determinants of Net Interest Margin in the Albanian banking system. Working paper series, Bank of Albania, 4, (Tirana).
Khan, M. S., Scheule, H., & Wu, E. (2017). Funding liquidity and bank risk taking. Journal of Banking & Finance, 82, 203-216.
https://doi.org/10.1016/j.jbankfin.2016.09.005
Khrawish, H. (2011). Determinant of commercial banks performance in Jordan. International Journal of Finance and Economics, (81), 81-95.
Kolapo, F. T., & Fapetu, D. (2015). The influence of interest rate risk on the performance of deposit money banks in Nigeria. International Journal of Economics, Commerce and Management, 3(5), 1218-1227.
Kosmidou, K. (2008). The determinants of banks profit in Greece during the period of EU financial integration. Managerial Finance, 34 (3), 146-159.
https://doi.org/10.1108/03074350810848036
Kosmidou, K., Tanna, S., & Pasiouras, F. (2005). Determinants of profitability of domestic UK commercial banks: panel evidence from the period 1995-2002. In Money Macro and Finance (MMF) Research Group Conference (Vol. 45, pp. 1-27).
Kwan, S. H. (1991). Re-examination of interest rate sensitivity of commercial bank stock returns using a random coefficient model. Journal of Financial Services Research, 5(1), 61-76.
https://doi.org/10.1007/BF00127084
Laeven, L., Ratnovski, L., & Tong, H. (2016). Bank size, capital, and systemic risk: Some international evidence. Journal of Banking & Finance, 69, S25-S34.
https://doi.org/10.1016/j.jbankfin.2015.06.022
Lartey, V. C., Antwi, S., & Boadi, E. K. (2013). The relationship between liquidity and profitability of listed banks in Ghana. International Journal of Business and Social Science, 4(3).
Lifland, S. (2011). The impact of working capital efficiencies on the enterprise value option: Empirical analysis from the energy sector. Advances in business research, 2(1), pp. 57-70.
Lynge, M. J., & Zumwalt, J. K. (1980). An empirical study of the interest rate sensitivity of commercial bank returns: A multi-index approach. Journal of Financial and Quantitative analysis, 15(3), 731-742.
https://doi.org/10.2307/2330406
Mallin, C., Ow-Yong, K., & Reynolds, M. (2001). Derivatives usage in UK non-financial listed companies. The European Journal of Finance, 7(1), 63-91.
https://doi.org/10.1080/13518470121892
Marozva, G. (2015). Liquidity and bank performance. The International Business & Economics Research Journal (Online), 14(3), 453.
https://doi.org/10.19030/iber.v14i3.9218
Memmel, C., & Raupach, P. (2010). How do banks adjust their capital ratios?. Journal of Financial Intermediation, 19(4), 509-528.
https://doi.org/10.1016/j.jfi.2009.10.002
Molyneux, P., & Thornton, J. (1992). Determinants of European bank profitability: A note. Journal of banking & Finance, 16(6), 1173-1178.
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Published
2018-05-10
How to Cite
Ebenezer, O. O., Islam, M. A., Yusoff, W. S., & Sobhani, F. A. (2018). Exploring Liquidity Risk and Interest-Rate Risk: Implications for Profitability and Firm Value in Nigerian Banks. Journal of Reviews on Global Economics, 8, 315–326. https://doi.org/10.6000/1929-7092.2019.08.27
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