CHAPTER ONE

INTRODUCTION
1.1 Background to the Study

The main goal of a firm is to increase the shareholder’s welfare by increasing the value of a firm.

Maximizing firm value is essential for a company because it means increasing the prosperity of

shareholders as well, which becomes the company’s main goal. However, a good firm value is

able to attract other parties’ interests to join the company. In other words, performance on the

stock market is an index or indicator of corporate success. Any corporate entity experiencing a

rise in the market price of its stocks is considered a good company by the investors. Modigliani

and Miller stated that firm value is determined by a company's asset earnings power. If the

company predicts good prospects in the future, the value of the stock will be higher. Otherwise,

if the company has fewer prospects, the stock price will be low.

Firm attributes are variables that affect the firm’s decision both internally and externally.

Therefore, company attributes are specific variables that contribute towards the changes in firm

value. Company attributes are divided into firm performance characteristics and firm structural

characteristics. The firm performance characteristic includes firm growth and profitability, while

firm structural characteristics include firm size, firm leverage, firm age, and capital expenditure

or management efficiency. Firm characteristics can be seen as the wide varieties of information

disclosed in the financial statement of business entities that serve as the predictors of the firm’s

quality of accounting information and performance. Therefore, the current study considered firm

performance characteristic: profitability, firm growth and Firm structural characteristics: firm

size and firm leverage as firms attributes.

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In corporate finance, the commonly used method for financial analysis is the use of profitability

and market value ratios as key measures of firms’ overall efficiency and performance. These

metrics are widely used in financial models for performance measurements. Theoretically,

several variables may influence firm performance, as the survival or business success mostly

depends on the profitability and market value of the firm. The relationship between company

attributes and firm value in listed pharmaceutical firms in Nigeria has attracted scholarly

attention, highlighting various factors that significantly influence firm value. Firm size, leverage,

profitability, and firm growth have been identified as having a positive and significant

relationship with firm value, whereas leverage tends to negatively firm value in these firms

(Ukavwe & Jeroh, 2024, Anisah et al., 2023, Agba, 2023, Izukwe & Jeroh, 2022). However, the

specific firm characteristics remain unknown to firms as to which variable contributes to the

prospect and value of a firm, and this justifies the reason for the current study.

Firm value is a measure of a company's capacity to optimize shareholder wealth. It is a sign that

potential investors would find the company appealing to invest in. Firm value, as used in the

finance industry, is an economic indicator of a company's performance that reflects the value of

the enterprise overall and allows for the efficient and effective use of financial resources. It is a

representation of the company's readily provided assets (equity, shareholders, and debt

financiers). The propensity of a business to grow, which translates into investors' inclination to

invest, is described by the firm value. An attractive firm value draws in investors to the business.

Despite these challenges, some pharmaceutical companies in Nigeria have demonstrated

resilience and growth, driven by factors such as innovative business models, strategic

partnerships, and effective management practices. Understanding the factors that drive firm

value in the Nigerian pharmaceutical industry is essential for managers, investors, and

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policymakers seeking to promote the growth and development of the sector. Previous studies

have investigated the determinants of firm value in various industries, but few have focused on

the pharmaceutical sector in Nigeria. This study aims to address this knowledge gap by

examining the relationship between company attributes and firm value of listed pharmaceutical

firms in Nigeria.

1.2 Statement of the Problem

The pharmaceutical industry in Nigeria plays a critical role in healthcare delivery, yet it faces

numerous challenges that impact its overall performance and firm value. As listed

pharmaceutical firms operate in a highly regulated and competitive environment, understanding

the relationship between company attributes such as profitability, firm growth, firm size, firm

leverage and firm value is essential for stakeholders. However, empirical evidence on how these

attributes influence firm value in the Nigerian context remains limited.

Nigeria's pharmaceutical sector is marked by a dual landscape: local manufacturers and

multinational corporations. Despite efforts to boost local production through policies and

incentives, Nigerian pharmaceutical firms struggle with issues such as inadequate infrastructure,

fluctuating foreign exchange rates, and regulatory hurdles. These challenges can hinder their

ability to attract investment and improve their firm value (Ojo & Makanjuola, 2020).

The core problem is the lack of comprehensive understanding regarding how specific company

attributes affect the firm value of listed pharmaceutical firms in Nigeria. Critical questions arise,

such as: Which company’s attributes significantly correlate with firm value in this sector? how

do factors like corporate governance and investment in research and development impact firm

performance? what is the role of financial transparency and operational efficiency in enhancing

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the market valuation of pharmaceutical firms? Failure to address these questions may result in

continued underperformance of pharmaceutical firms in Nigeria, leading to inadequate

healthcare provision and limited economic growth. Investors may shy away from investing in

firms that lack transparency or demonstrate poor governance, thus perpetuating a cycle of

underdevelopment within the industry (Uadiale & Ekwueme, 2020). Furthermore, policymakers

may struggle to create effective regulatory frameworks without a clear understanding of these

dynamics.

The stakeholders impacted by these issues include pharmaceutical companies, investors,

healthcare professionals, policymakers, and consumers. Each group has a significant interest in

the success and sustainability of the pharmaceutical industry, underscoring the importance of

research that can guide improved practices and policies. Although some studies, such as Akinola

et al. (2021), Ukavwe and Jeroh, (2024), Anisah et al., (2023) , Agba, (2023), Izukwe and Jeroh,

(2022) have examined corporate attributes and firm value within Nigeria's pharmaceutical sector,

there is a noticeable lack of comprehensive research exploring the relationship between various

company attributes and firm value. This gap highlights the need for further investigation to offer

practical insights for stakeholders.

1.3 Research Question

When examining the relationship between company attributes and firm value, particularly for

listed pharmaceutical firms in Nigeria, it is essential to develop comprehensive research

questions that encompass various dimensions, such as

i. How do Profitability influence firm value of listed pharmaceutical companies in Nigeria?

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 ii. What is the impact of firm growth on the valuation of listed pharmaceutical firms in

Nigeria?

iii. To what extent do firm size play in enhancing the firm value of listed pharmaceutical

firms in Nigeria?

iv. How do Firm leverage influence firm value of listed pharmaceutical companies in

Nigeria?

1.4 Objective of the Study

The objective of this study is to examine the relationship between company attributes and firm

value of listed pharmaceutical firms in Nigeria. Specifically, the study aims to:

i. examine how profitability influences the firm value of listed pharmaceutical companies

in Nigeria.

ii. assess the impact of firm growth on the valuation of listed pharmaceutical firms in

Nigeria.

iii. investigate the extent to which firm size enhances the firm value of listed pharmaceutical

firms in Nigeria.

iv. analyze how firm leverage influences the firm value of listed pharmaceutical companies

in Nigeria.

1.5 Research Hypotheses

Ho1 Profitability has no significant effect on the firm value of listed pharmaceutical

companies in Nigeria.

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Ho2 Firm growth has no significant effect on the firm value of listed pharmaceutical

companies in Nigeria.

Ho3 Firm size has no significant effect on the firm value of listed pharmaceutical companies

in Nigeria.

Ho4 Firm leverage has no significant effect on the firm value of listed pharmaceutical

companies in Nigeria.

1.6 Significance of the study

Managers of Pharmaceutical companies: By understanding what drives firm’s value

pharmaceutical companies can focus on strategies that boost their overall performance.

Corporate leaders can use these insights to make informed choices about resource allocation,

innovation, and market strategy, which can boost firm value over time.

To investors: This study will offer valuable insights for investors, helping them identify which

firms have strong attributes and better risk-reward profiles. Increased investment in well-

performing firms will strengthen the entire sector.

Economic Development: By promoting key attributes that drive firm value, this research can

contribute to the growth of Nigeria's pharmaceutical sector, which is crucial for improving

healthcare and supporting the country's economic development. Also, by aligning with

international best practices, Nigerian pharmaceutical companies can become more competitive

on the global stage, raising their standards and market position.

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Contributing to Research: This study will fill a gap in the academic literature, especially by

focusing on the Nigerian pharmaceutical industry, and provide a foundation for future research in

emerging markets.

1.7 Scope of the Study

This study will focus on analyzing the corporate attributes measured by financial performance

variables: profitability and firm growth and firm structural characteristics: firm size and firm

leverage of all pharmaceutical companies listed on the Nigerian Stock Exchange, using both

quantitative and qualitative metrics over a period of ten years, with a specific emphasis on listed

pharmaceutical firms in Nigeria.

1.8 Definition of Operating Terms

Company Attributes: Characteristics or features of a company that may influence its operations

and performance. This can include factors such as corporate governance practices, management

styles, financial metrics, innovation capabilities, and corporate social responsibility initiatives.

Firm Value: The overall worth of a company. Firm value reflects investor perceptions and

expectations about the company's future profitability and growth potential.

Pharmaceutical Firms: Companies engaged in the research, development, manufacturing, and

marketing of drugs and medications. These firms play a crucial role in healthcare by providing

essential products that improve health outcomes.

Listed Firms: Companies that have shares traded on a stock exchange, in this case, the Nigerian

Stock Exchange (NSE). Being listed typically implies adherence to regulatory standards and

disclosure requirements that enhance transparency and investor trust.

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Firm Performance Characteristics: Firm performance characteristics refer to the metrics and

indicators that evaluate how well a company is performing financially and operationally. These

characteristics provide insights into a company's profitability, efficiency, growth, and market

success.

Firm Structural Characteristics: Firm structural characteristics refer to the inherent attributes

that sdefine a company's organizational framework, ownership, and financial structure. These

characteristics influence how the company operates and positions itself in the market.

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