Firm Characteristics and Stock Returns of Nigerian Quoted Firms: A Two-Sector Comparative Analysis

This study examines the relationship between firm characteristics and the stock returns selected banks and manufacturing companies quoted on the Nigerian Stock Exchange on a two-sector basis. The study employs pooled/panel data analytical techniques to analyze the financial data of 15 banks and 15 manufacturing companies quoted on the Nigerian Stock Exchange as of December 31st, 2018. The study finds the effect of firm characteristics on the stock return of financial sector firms is sharply different from that of the manufacturing sector firms. Through the fixed effect model result it was found that in the financial sector, earnings per share and liquidity have a positive and statistically significant relationship with a stock return while return on assets has a negative and statistically significant effect on stock return. Other variables (leverage, market capitalization and sales growth rate) effects on stock return are not statistically significant. On the other hand, in the manufacturing sector, out of the six firm characteristic variables, only market capitalization has a positive and statistically significant effect on stock return. The effects of the other five were not significant. Furthermore, the test of causality shows that in the financial sector, earnings per share, return on assets and liquidity ratio have causal links with stock return. However, in the manufacturing sector, market capitalization and earnings per share have a causal link with stock return. The study recommends that firm managers should develop strategies that will consistently improve stock price, which determines market capitalization and, to some extent, stock returns. Also, financial firms should be wary of overinvestment in assets and/or its underutilization. The need to acquire is desirable. But this can also cause problems when such assets idle away or the cost of maintaining them eats so much into the revenue of the firm. Finally, management should maintain a healthy balance between liquidity and investments; and, policy makers to design and execute policies that are sector sensitive rather than generic in nature.