Financial Constraints and Investment Efficiency: Evidence from Listed Non-Financial Firms in Nigeria (2015–2024)
Abstract
This study examines the effect of financial constraints on investment efficiency among listed non-financial firms in Nigeria from 2015 to 2024. Employing an ex post facto panel design, the study analyses the annual reports of 60 non-financial companies listed on the Nigerian Exchange Group over 10 years, yielding 600 firm-year observations. This study assesses financial constraints using the Kaplan-Zingales (KZ) index. It estimates investment efficiency using a model that distinguishes between efficient investment and under- and over-investment. The analysis employs pooled OLS, fixed effects, random effects, and two-step system GMM estimators, with robustness checks using the SA index, WW index, and alternative investment-efficiency proxies. The findings show that financial constraints significantly impair investment efficiency, predominantly through under-investment rather than over-investment, as the over-investment sub-sample shows no significant impact. Investment efficiency is positively associated with firm size, firm age, profitability, and Tobin's Q, and negatively associated with leverage and sales growth. The KZ index explains substantial cross-firm variation in investment efficiency, and results remain robust to alternative constraint and efficiency measures and endogeneity correction using system GMM. These findings support agency and stakeholder theories of corporate investment behaviour and underscore the need to enhance access to external funding and strengthen corporate governance to mitigate under-investment among Nigerian listed firms.
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