The study explored the interrelatedness of macroeconomic factors, firm characteristics and financial performance. The macroeconomic factors showed inconsistent results; interest rate had negative but non-significant effect, while inflation rate had a negative and significant effect. Exchange rate was negative but non-significant, while GDP growth rate was positive and significant. The mixed results may partially be attributed to the proxy for financial performance used in a study. The study by Issah and Antwi (2017) in the UK found that real GDP and exchange rate were significant. Otambo (2016) in Kenya also reported that GDP positively affected ROA. Inflation rates were not significant. Owolabi (2017) in Nigeria showed that inflation, interest rate and exchange rate had no significant effect on ROA. The interest rate and exchange rate behavior were in line with the present study of non-significant effect. Similarly, Rao (2016) in Nairobi reported a non-significant effect of exchange rate on financial performance. Gado (2015) in Nigeria found a positive effect for inflation while exchange and interest rate had negative effects.
This is contrary to Mwangi and Wekesa’s (2017) study conducted in Kenya, which showed that interest rate had a significant effect on performance. And Rao (2016) in Nairobi reported a significant negative effect of interest rate on financial performance. But the GDP growth and inflation rate were not significant. Otambo (2016) in Kenya also reported a negative effect of interest rates and exchange rates on ROA; inflation rates were not significant.
The study by Udu (2015) in Nigeria which proxied business operations as real GDP found that interest rate had a positive and significant effect on real GDP. On a sample of Deposit Money Banks in Nigeria, Ogunbiyi and Ihejirika (2014) found that real interest rate has negative and significant effect on ROA. Also, Osamwonyi and Michael (2014) who measured profitability using ROE reported a positive effect for GDP and a significant negative effect for interest rate, while inflation was not significant. Contrary to this, Enyioko (2012) found that interest rate has not affected performance of banks significantly. In conclusion, the effect of macroeconomic factors on performance may be sector based. This supports the study by Izedonmi and Abdullahi (2011) that the extent to which a factor affected a particular sector varies from one sector to another.
The study by Udu (2015) in Nigeria which proxied business operations as real GDP found that interest rate had a positive and significant effect on real GDP. On a sample of Deposit Money Banks in Nigeria, Ogunbiyi and Ihejirika (2014) found that real interest rate has negative and significant effect on ROA. Also, Osamwonyi and Michael (2014) who measured profitability using ROE reported a positive effect for GDP and a significant negative effect for interest rate, while inflation was not significant. Contrary to this, Enyioko (2012) found that interest rate has not affected performance of banks significantly. In conclusion, the effect of macroeconomic factors on performance may be sector based. This supports the study by Izedonmi and Abdullahi (2011) that the extent to which a factor affected a particular sector varies from one sector to another.
In other African countries such as Kenya, the study by Murungi (2014) on a sample of insurance firms found that interest rate and GDP had significant effects on performance, while inflation and exchange rates were not statistically significant. This is contrary to the study by Kiganda (2014) conducted in Kenya but with a focus on Equity Bank, which reported that real GDP, inflation and exchange rate had insignificant effect on profitability. Similarly, Kandir (2008) investigating the effect of macroeconomic factors on stock returns in Turkey reported that exchange rate and interest rate affect all the portfolio returns, while inflation rate was significant for 3 out of the 12 portfolios.
The analysis of firm characteristics showed that firm size, leverage and liquidity had positive and significant effect. The study by Dioha et al. (2018) in Nigeria found that size and leverage have significant effect on profitability; but liquidity was not significant. This is consistent with the study by Bist et al. (2017) in Nepal that showed that leverage had a positive and significant effect; but, size and liquidity were negative and insignificant. Chandrapala and Knápková (2013) in Czech Republic found that firm size has a significant positive impact on ROA. However, contrary to the present study, they found that debt ratio had significant negative impact on ROA.
Using firms from the agricultural sector the study by Lasisi et al. (2017) in Nigeria revealed that liquidity has a positive and significant effect on ROE, but leverage had a negative and significant effect on ROE.
The study by Mohammed and Usman (2016) in Nigeria showed that size and leverage have a positive and significant effect on share price. In Pakistan, the study by Bhutta and Hasan (2013) on firms listed on the food sector of Karachi Stock Market reported a significant negative relationship between size and profitability, and a positive insignificant relationship between food inflation and profitability. Also, debt to equity ratio had insignificant negative relationship.
Studies conducted on other sectors also show similar and mixed findings. Kaguri (2013) on a sample of life insurance companies in Kenya found that size, leverage and liquidity were statistically significant. On a sample of insurance companies in Ethiopia, Mehari and Aemiro (2013) revealed that size and leverage were positive and statistically significant; however, liquidity was statistically non-significant. Similarly, Sumaira and Amjad (2013) in Pakistan found that leverage and size were significant determinants of profitability, while liquidity was not significant. Sambasivam and Ayele (2013) in Ethiopia, which proxied profitability as ROA, found that leverage and liquidity were significant and negative.
The F-statistic which tests the significance of the model was significant ( po0.05). Therefore, jointly macroeconomic factors and firm characteristics interact to determine firm performance. Studies such as Rani and Zergaw (2017) on the banking sector in Ethiopia showed that macroeconomic factors (inflation, GDP and exchange rate) had positive but insignificant impact on ROE. Earnings and liquidity ratios significantly affected ROE. An additional industry-specific variable proxied by industry growth rate had also a significant impact on net interest margin. Also, the study by Owoputi et al. (2014) on banks in Nigeria found that inflation rate was significant for both ROA and ROE. Interest rate was significant for ROA and NIM. The GDP growth rate was not significant. Size was significant for ROA, ROE and NIM. From an Islamic perspective, Zeitun et al. (2007) in Jordan found that interest rate negatively and significantly affects ROA. The significant microeconomic variables were size and total debt to total assets.
Riaz and Mehar (2013) in Pakistan reported a significant impact of asset size and interest rate on ROE; and interest rate had a significant impact on ROA. Kanwal and Nadeem (2013) found that there is a strong positive relationship of real interest rate with ROA, ROE and EM. Second, real GDP is found to have an insignificant positive effect on ROA, but an insignificant negative impact on ROE and EM. Inflation rate, on the other hand, has a negative link with all three profitability measures.
Using samples drawn from manufacturing firms, studies by Ghareli and Mohammadi (2016) on firms in Iran showed that exchange rate, interest rate and leverage had positive and significant effect, while GDP was negative and significant. Inflation rate was negative but not significant, while firm size was not significant. Mirza and Javed (2013) in Pakistan found that inflation was significant but negative. Leverage was significant and positive, firm size was significant and positive, while liquidity (current ratio) was significant but negative. Specifically, Charles (2012) in Nigeria reported a positive relationship between money supply and manufacturing index performance, while inflation rate and exchange rate had negative effect on the performance of manufacturing sector.
