The moderating role of financial innovation on financial risks, business risk and firm value nexus: Empirical evidence from Nigeria

Abstract

Banks provides the impetus for economic growth and the financial crisis of 2007-2008 emanated from tremendous use of financial innovation, causing a major drawback that triggers new trends in the study of financial risks. The aim is to explore the moderating role on the financial risks, business risk and firm value nexus. The study applies the balanced panel data to analyse the 16 commercial banks in Nigeria over the period 2009 to 2017 making up to 144 observations. The empirical results reveal that credit risk is significantly positive with firm value while liquidity risk, operational risk, market risk and solvency risk have a significant negative effect on firm value. Further results revealed that business risk is significantly negative with firm value. The financial innovation significantly moderates the relationship between financial risks, business risk and firm value of the banks. Other factors that significantly affects the firm value in the model of the study are bank size, GDP growth, diversification, profitability and Herfindahl-Hirschman Index. The study provides practical implications in expectant that managers of Nigerian banks should focus on investing in innovation through considerable investment in R&D and aligning their innovative capabilities with their risk management policies and available financial resources (i.e. derivative financial instrument, employee trainings, expertise, technology and finance) to improve their management of inherent risks and firm value relationship. It is imperative for banks to reduce credit related risk to the barest minimum. This is because an increase in credit risk might be a precursor to financial crises and anti-real sector’s growth. Remarkably, this study contributed to existing knowledge as prior studies on financial risk components are often related to profitability and have repeatedly lack logical consistency in extant literature. Hence, within the limit of the researchers’ knowledge, this study is one of the very few studies that offers new insights on the relationship between business risk and firm value and provides useful information on the dynamic role of innovativeness that is of phenomenal value to the regulatory authority to determine relevant policies.