Volume 5, Issue 3, March – 2020 International Journal of Innovative Science and Research Technology

ISSN No:-2456-2165

Towards Capital Commitment in Research and

Development, and Future Value of Nigerian
Listed Manufacturing Companies:
The Economic Value Added Approach
Uwah, Uwem Etim (Ph.D)*1 Akinninyi, Patrick Edet (ACFE) 2
Department of Accounting, Department of Accounting,
Akwa Ibom State University, (AKSU) Akwa Ibom State University,
P.M.B.1167, Uyo. Nigeria P.M.B.1167, Uyo, Nigeria

Abstract:- This study considered how the future value resources, other than human, which a firm procures and
of listed manufacturing companies in Nigeria can be utilizes for productive or profit-earning purposes.
enhanced through optimal capital commitment in Manufacturing companies are in business to make profit,
research and development (R&D); to achieve economic the more reason sound investment decisions must be made
value added (EVA). It was considered that when before funds are committed, to avoid losses.
adequate research is not done before capital investment,
the appraisal techniques are not sufficient to support When a capital asset is acquired by means of purchase
the capital project. This becomes a major problem to or construction, a company is said to be making capital
the Nigerian manufacturing companies. The study commitment in non-current assets (Horngren, 2014). Non-
adopted the quantitative panel methodology of the current assets are assets that provide service over a period
expost facto and correlational research design, where in the long term. Rich, Jones, Heitger, Mowen, and Hansen
secondary data were extracted from the Nigerian Stock (2010) opine that firms have at their disposal, the
Exchange fact books for the period, 2010 – 2016. Eighty opportunity and the desire to invest in projects and assets
three (83) manufacturing companies listed in the Stock that have long-term disposition. The desire to have new
Exchange during this period were taken as the production systems or acquire new plants and equipment
population of the study. The sample size was 69. The and engage in production of new products or research and
study answered three research questions and tested development, are issues of capital investment decisions
three hypotheses at 0.05 level of significance. Multiple which transcends to capital commitment. Oyedepo (2016)
and simple regression analyses were used on the data opined that decision to invest in a manufacturing system
collected, to find the relationship between the should consider a flexible decision mechanism, or a
independent and dependent variables for the seven traditionally fixed decision system. Whichever is adopted
years. The findings revealed that research and by management must be seen to enhance the addition of
development (R&D) had a significant relationship with economic value to the concern.
economic value added (EVA). Based on the findings and
conclusion, it was recommended that management of In embarking on research and development as a
manufacturing companies should ensure that more of capital item, the marginal efficiency of capital, which is the
research and development is embarked on by rate of discount which equates the price of a fixed capital
manufacturing companies since it will enhance asset with its present discounted value of expected income,
profitability, expansion and technological development. should be considered. According to Wikipedia, Marginal
efficiency of capital (MEC) is the net rate of return that is
Keywords:- Capital Commitment, Research and expected from the investment in additional capital. It is also
Development, Listed Manufacturing Companies, Economic called marginal productivity of capital, which is the annual
Value Added. percentage return on the last additional unit of capital. It is
calculated as the expected pay-off, when the cost of inputs
I. INTRODUCTION and depreciation are considered, and it is influenced by
expectations about future input cost and turnover. MEC and
By research and development (R&D), we refer to capital outlays are necessary in a firm’s decision on
activities of basic and applied research conducted by the investment project. MEC must be higher than the cost of
management, aimed at discovering solutions to problems or capital, r, for investment to be worthwhile. This is so, as the
creating new products. Capital commitment refers to the PV of future returns to capital needs to be higher than the
employment of capital resources after capital expenditure cost of capital, Ck. Therefore, PV ˃ Ck, that is MEC ˃ r.
decision was made. Capital decision-making means This is where capital budgeting is paramount. (Sheehan,
selecting the best act from the many available alternatives 2009).
of capital projects under a given situation. Hilton, Maher
and Selto (2012) posit that capital assets refer to the

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Volume 5, Issue 3, March – 2020 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
Management must realize that all decisions about maximization objective cannot be realized, hence no value
future investments involve estimates and forecasts. Prudent addition to the firm.
capital commitment decisions must involve sensitivity
analysis to ascertain the impact of all risk and uncertainties This research built on the works of earlier researchers,
on the firm’s future investments. For economic value added such as McConnell & Muscarella (1985); Agboh (2011);
to occur, it is believed that there must be an optimal capital Boasson, Cheng & Boasson (2012); Hertz (2016) and
commitment by the management. This is the more reason others who worked on “corporate capital expenditure
strong feasibility studies through research are needful decisions and the market value of the firm”; “utilization of
before funds are committed to execute a project, which is capital budgeting as an optimal tool for investment analysis
the development that will eventually add economic value to in manufacturing companies”; “applying modern portfolio
the firm (Uwah & Akabom, 2016). theory to financial and capital budgeting decisions”; and
“risk analysis in capital investments” respectively. Gap was
II. STATEMENT OF PROBLEM created in the studies earlier made on the subject-matter of
capital commitment and the relationship they have with the
Before capital is committed in the manufacturing long term value of manufacturing companies. This research
process, pains should be taken to understand the process, is done in order to fill this gap and to know if economic
either in continuous or new manufacturing concerns. The value added (EVA) can be achieved through optimal capital
nature and operations of the product lines, the market commitment from the outcome of research and
where the goods will be on sale and indeed the competition development.
in the market must be researched on. It is imperative that
the R&D department must be enhanced to have the capacity III. OBJECTIVES OF THE STUDY
to undertake painstaking and holistic study, knowing that
the funds to be committed are normally huge and the The broad objective of the study was to assess the
capital expenditure decision on manufacturing, irreversible. extent of the relationship between Research and
The benefits of optimal capital commitment will be seen in Development (R&D) and economic value added (EVA) of
the firm in the measure of economic value added, not listed manufacturing firms in Nigeria. The specific
immediately, but in the distant future. objective was to find out if there is any relationship
between capital commitment and economic value added.
The problem would arise if the activities of Research The study was to also find out if economic value added can
and Development are played down by management, be determined through the capital efficiency of listed
thinking that operations could continue the old way, or for manufacturing companies in Nigeria. Another objective
new manufacturing companies, trying to use the rule of was to find out if R&D can provide a measure of value
thumb in their operations. The problem of not enhancing creation/ diminution in the manufacturing firms.
the activities of the R&D department would show in not
maximizing the long-term return on investment, unable to IV. THEORETICAL FRAMEWORK
make ultimate use of the human and physical resources
available, inability to maintain a balanced R&D portfolio The Information economics/statistical decision
and risk control, and the inability to foster a favourable theories by Friedrich Hayek (1930) is the framework used
climate for creativity and innovation. Some management in this study. This is an economics-based theory of the
may feel that R&D has a relative large cost centre which contemporary microeconomic policy. Matthews and Perera
does not relate directly with immediate sales, and as such, (1996) opined that information economics which is a study
might be tempted to cut it and quickly raise the net profit of how information and information systems affect
report. This is accounting reality which will likely sell out economic decisions is an extension of statistical decision
the company’s long-term value, in economic terms. If the theory. In this theory, individuals are assumed to make
company’s goals are to be achieved and the economic value choice according to the rank ordering of expected values. In
added realized, things would need to be done differently, the extension of this model, each expected value is
according to the outcome of researches. It is imperative that formulated as new information is received. These theories
the company sets up a robust R&D department which allow management to get complete information about costs,
would ensure reliable information for decision input inventory, usage, specifications, development history,
through the use of adequate logic. This would give a long material, manufacturing methods and processes. As
term solution as a result of provisions made for analyzed in Wikipedia, “the starting point for economic
environmental and envisaged technological changes, as analysis is the observation that information has economic
they would affect the firm. value because it allows individuals to make decisions that
yield higher expected payoffs than they would obtain from
The implications of these problems would show in choices made in the absence of information.” This theory is
low productivity, hence, lower profitability, which can relevant for management’s capital expenditure decision-
cause the collapse of business empires where billions of making because the quantitative and qualitative information
shareholders’ funds were sunk into. An early end to the at their disposal would aid the decisions they make, which
business does not align with the going-concern concept of would have an impact on the firm’s value in the long term.
accounting, and the realization of stakeholders’ wealth

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ISSN No:-2456-2165
V. LITERATURE REVIEW projects and the nature of the problem will be seen when
decisions are made on capital commitment without
Albrecht, Stice, Stice and Swain (2008) say that adequate incorporation of the foregoing attributes.
Economic Value Added (EVA) is a major result of
optimum capital commitment in a manufacturing company. Capital is made up of monetary and non-monetary
EVA was proposed by a United States measurement assets contributed by shareholders who are the owners of
system, and it emphasizes the incremental income which an the company (equity capital). This is done to keep afloat,
organization can make over and above the required income the operations of the company. The Institute of Chartered
meant to cover costs of capital which is invested by both Accountants of Nigeria (ICAN) adopts the above definition
debt and equity holders in the organization. Hill (2008) also but adds that capital could also be contributed by creditors
opined that firms can make profits exceeding their total cost (loan capital). It is otherwise known as “wealth” in the form
of investment by creating economic value to its of money or productive assets taken as a sign of the
shareholders. This concept which is quite similar to the financial strength of the firm and which is available for
residual income concept is given as: (Return on Capital investment. The two main concepts of capital are financial
Invested × Cost of Capital). That is, and physical capital. While financial capital has to do with
the company’s equity or net assets, the assets’ operating
Capital Invested = after tax operating income – (cost of capability is shown in the physical capital. Profits exist in
capital × capital invested). the first concept, if the company maintains its capital which
= Net Operating Profit after tax – (cost of capital × was at the beginning as indicated by equity’s value or the
invested capital). purchasing power of the Naira, while profit exists in the
second concept of capital if the company has set aside
This means that EVA can be used as a measure of a adequate capital to maintain the operating of its assets.
company’s true economic profit as it reflects economic
reality beyond what traditional measures, such as net The concept of capital has its place in the
operating profit, earnings per share, and return on equity manufacturing sector since the firm needs capital to acquire
which shows accounting reality could offer. other operating assets needed for the production of goods
which would bring about increase in sales, hence increasing
As opined by Boasson, Cheng & Boasson (2012), the the firm’s value. This study sought to know if a relationship
three core corporate decision areas are; investment, exists between capital commitment in R&D and economic
financing and dividend decisions. Of the three, capital value added (EVA) in Nigerian manufacturing companies.
commitment involves decisions on investment and
financing, while dividend decision is made after the In a survey study jointly conducted by the United
investment has paid off. More so, investment and financing Nations Industrial Development Organization (UNIDO)
decisions are seen as being paramount in capital and the Centre for the study of African economies,
expenditure decisions. According to Albrecht, et al (2008), Department of Economics, University of Oxford in 2002, it
the screening and preference decisions must be made to was found out that Nigerian manufacturing companies
fully ascertain which investment to embark on, before encounter so many challenges which sometimes could not
financial commitment is made. allow them to make optimal capital commitment to enhance
the future value of the firm. The qualitative and subjective
Beatty, Riffe and Welch (1997) opined that financing variable which stood out here was the problem of exporting
decision is not made immediately, until after the approval manufacturing goods. It was found out that ‘manufacturing
and authorization of the proposed budgets, and on this is a transaction-intensive process and to be involved in
background, once financing decision, which is capital export, more transactions would be required. One of the
commitment is effected, it is irreversible, but the project input transactions needed was feasibility study on the
will be monitored and tracked, up to the post completed market. The paper argued that manufacturing in Nigeria is
audit process. In his argument, contrary to this postulation, at a disadvantage comparatively, due to poor policy
Bragg (2007) maintained that the financing of investment environment that increases transaction costs. These costs
should be an integral part of capital budgeting and should manifest in the form of inefficiency and bureaucracy as
be considered simultaneously with the acquisition evidenced in poor infrastructure which stifled Nigerian
(investment) decision. The justification for this reasoning is exports. More so, the study showed that Nigerian firms are
that both the source of funds and the cost of capital have inefficient or poor in manufacturing than their competitors;
material impact on capital commitment decisions of therefore they prefer to supply a large domestic market and
management. have little incentive to export what is produced. But owing
to economic reasons, the domestic market may not support
It is believed that to achieve excellence in capital enough sales that would enhance optimum manufacturing
commitment, so as to have economic value for firms in capacity and these results in under-capacity utilization
Nigeria, management should adopt what Isom (1995) called which eventually affects the economic value of the
“the four qualitative attributes to decision making”. These company negatively. The gap in the study was that it did
attributes are: (i) Reliable input premises; (ii) Adequate not consider making optimum capital commitment to
logic; (iii) Relevant solution; and (iv) Adaptability to support research and development as a transaction cost in
change. A problem can arise in investment on capital

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the area of capital investment concerning inputs that would while the book value reflects the accounting information of
support international market through exports. the current period and the accounting decisions made over
time, regarding depreciation of the assets, valuation of
The Economic Value Added (EVA) model, according inventory and dealing with acquisitions. Therefore,
to Albrecht et al (2008) is similar to the residual income adjustments in the book value are made in order to get a
concept except that while the later focuses on operating value of the market that is reasonable. This adjustment is
profit before tax, the EVA insists on net operating profit made by subtracting from the current value of capital, the
after tax. This shows that EVA considers the effect of book value of capital (Fabozzi & Peterson, 2003).
taxation when calculating profit. This assertion is
corroborated by Adams, Bourne & Neely (2004) who EVA which is concerned with the economic profit of
further pointed another difference, being that residual the firm is comprehensively calculated as net operational
income considers a minimum required rate of return (hurdle profit after tax (NOPAT) less (cost of capital multiplied by
rate) as a variable for measuring the minimum level of the capital invested by the firm). Cost of capital is taken as
income which is earned from using the organization’s the weighted average cost of capital (WACC). WACC = ke
assets. 𝐸 𝐷
𝑉
+ 𝑘𝑑 (1 − 𝑡) 𝑉 , 𝑤ℎ𝑒𝑟𝑒 the cost of debt, kd is assumed to
be irredeemable. Albrecht et al (2008) then opine that NPV
In their study, Danayanda, Irons, Harrison, Herbohn,
is a fundamental traditional investment analysis for capital
& Rowland (2002) maintained that the hurdle rate is
expenditure, but the use of EVA provides extension of the
normally set by the management and may be used on the
NPV rule. Thus, the Net Present Value can be taken as the
cost of acquiring the assets or capital for the organization.
economic value added to the firm on its years of existence.
EVA on the other hand, according to Albrecht et al (2008)
is focused on using the firm’s specific cost of capital to
Therefore the formula below shows extension of the
establish the rate of returns required on the capital used by
NPV, where:
the firm for the project(s). This return must be the average,
expected by both shareholders and debenture holders, who 𝑡=𝑛
are the source of the capital. This is the concept of 𝐸𝑉𝐴𝑡
𝑁𝑃𝑉 = ∑
weighted average cost of capital, which represents the (1 + 𝑘0 )𝑡
𝑡=1
investors’ opportunity cost of taking risk by investing funds
in a company. And 𝐸𝑉𝐴𝑡 is the economic value added to the firm in
year t in the life, n years of the firm’s existence.
The other difference as opined by Hill (2008) is that
residual income has a combination of the hurdle rate and Hill (2008) posits that while investment decision
average total assets to determine the minimum income selects opportunities that support optimal investment
required by the firm, while EVA uses invested capital portfolio to maximize expected net cash inflows (ENPV) at
which is concerned with interest-bearing debt plus all the level of risk that is minimal, finance decision explores
shares invested in the firm. It is also noted that non-interest potential sources of fund (debt and equity) which are long-
bearing operating liabilities, such as accounts payable are term or short-term, needed for investment sustenance, and
excluded by EVA in the residual income equation. This make evaluation of returns which are risk-adjusted, so as to
gives a new equation in invested capital assets as ‘Interest- select the capital structure that would maximize the
bearing debt plus total equity’. It can also be computed as weighted average cost of capital (WACC) of the company.
‘Total assets – Non-interest-bearing operational liabilities’. It is worthy of note that WACC represents the cut-off rate
Albrecht et al (2008) however submitted that operating which is global for the firm and justifies that investment
liabilities are not included in this computation because they decision is made after appropriate consideration was given
do not generate any explicit interest expense for the firm. to the financing decision.
The operating liabilities rather represent a free source of
capital for the firm’s use to generate further operating In the real sense, when cash inflows exceed the capital
profits. It is carried that economic value added is the profit costs, NPV will be positive, giving rise to an economic
after-tax that is greater than the minimum return on capital. value added (EVA) which is positive. On the other hand, a
negative NPV will be realized if capital costs exceed the
Many authors see EVA as the best measure of true expected cash inflows. Stewart (1991) posits that capital
profitability (added value) or otherwise (value reduction) of expenditure should be evaluated using WACC as a cost of
a firm, and it varies with the cash flow instead of earnings capital if a company’s average business activities have the
per share (EPS). Economic value added (EVA) can be same risk as the project it is undertaking, but Yee (2000)
measured using the three basic inputs in the definition, i.e. postulated that projects which are outside the core business
current value of capital in the investments; returns earned of the company should not use WACC as the risks of the
on capital invested; and the initial cost of capital. Though businesses are not the same.
there is a difference between market value and book value,
when EVA is measured, these variables can be taken only Investment appraisal using WACC as a corporate cost
at book value and considered as proxy of the firm’s market of capital is based on the assumptions that: (i).The
value (Kenny, 2016). The invested capital in assets at hand company’s operational activities can accommodate the
and the expected future growth make up the market value

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risks from new projects. (ii) Each project undertaken by the Every company has its capital assets. The capital of a
company is small in scale when compared to the existing company, literally in accounting refers to the financial
operations. (iii).The existing capital structure of the capital which, as opined by Wikipedia, “is any economic
company will be retained with financial risk being left resource measured in terms of money used by businesses to
unchanged. Justifying these assumptions, Hill (2008) went buy what they need to make their products”. This definition
on to say that a company’s component capital costs reflect relates to a manufacturing concern. The financial capital
the variability of future expected dividend and interest could be the internally generated fund (retained earnings)
flows. This is the reason for the first assumption, which or externally borrowed funds for purchase of capital
indicates that WACC reflects the global risks of the flows equipment needed for production of goods (manufacturing).
combined. That is, when a figure is used as discount rate to
appraise a project, the risk return of the new investment The real capital or economic capital is made up of
should be able to satisfy the expected interest and dividend physical goods that give rise to the production of finished
payments. goods and products/services. Operating assets of
manufacturing companies are the capital assets. Horngren
Taking a look at the second assumption, Yee (2000) (2014) says they are the assets which the manufacturing
asserts that when a new investment is considered, marginal companies use for a long period of time. They include
costs of capital that is applicable to marginal investments buildings, manufacturing equipment and office furniture.
appraisals are considered as the relevant costs. These, of Capital assets are considered as operational because of their
course are the returns to the company on relative basis, use for the generation of revenues owing to their day-to-day
indicated as incremental cash flows to the existing capital. operations in the company for a long time period, and also
they are capitalized in the books of the company. This
The third assumption is made on the premise that new means they are recorded as long-term assets when acquired
projects will be financed using the existing discount rate, and depreciated over their useful lives. Before these capital
WACC, which implies that the financing decision basis for assets could be acquired however, financial capital, which
the new project is similar to the existing projects (Hill, is saved-up financial “wealth”, must be available. As
2008). According to Dittmar, Mahrt-Smith & Servaes captured by Wikipedia, the financial concept of capital
(2003), if management should increase the firm’s value, revolves around funds readily available for investment.
using market value added (share price) as a vehicle, a This is the same as the net assets or the entity’s equity. The
positive EVA must be created first, as the driver. Recalling measurement of financial capital could be in either nominal
the earlier review by Albrecht et al (2008), it was said that monetary units or units of constant purchasing power. The
if firms make profits that exceed their overall cost of funds physical concept on the other hand, shows capital as the
(positive NPV), they create an economic value added productive capacity of the entity, such as units of output per
(EVA) for their shareholders. But taking the shareholder day.
theory into consideration, the EVA does not cover every
stakeholder. Therefore, considering an efficient capital The International Financial Reporting Standards
market, without trade barriers, the EVA will drive the (IFRS) measures financial capital maintenance by using
demand for the company’s shares to rise, and as such, constant purchasing power or nominal monetary units. The
market value added (MVA) will be created which will three concepts of capital maintenance known by IFRS are
sustain the firm, owners and other stakeholders. The MVA showcased through physical capital maintenance, or
can also be sustained by the active dividend policy of the financial capital maintenance in nominal monetary units
company. All these, combined with the corporate objective and/or maintenance of financial capital in constant
of the company will result to corporate wealth purchasing power’s units. In manufacturing, the real
maximization which is the same as firm’s value as capital, which is different from financial capital are the
indicated in its high share price. This in our view can only already produced durable goods that is used in production
be achieved through optimum capital commitment. of further goods or services.

 The concept of capital in manufacturing companies  Investment decisions and capital commitment
Harold (2004) in Agboh (2011) asserted that the main In the firm’s statement of financial position, assets are
objective for setting up manufacturing companies is to shown as non-current and current. The non-current assets
create wealth. Hirst and Baxter (1996), as economists, are further classified into physical (tangible) and intangible,
defined wealth creation as utility, which they otherwise which are shown in the net assets of the firm. Investment in
defined as the added value which makes a product or assets by firms ensure that the cash flows are income,
service to be more esteemed than it was initially expected. which can further be re-invested in more assets to increase
This is same as production. However, Hill (2008) describes the cash flow, for more capital, or dividends pay-out to the
the value of a company’s shares as a representative of their shareholders (Tirole, 2006).
market price, which turns out to be a reflection of
shareholders’ and indeed, other stakeholders’ perception Writing on investment decisions, as it affects capital
about the quality of the firm’s financial position. budgeting, Hampton (1989) opined that investment is at its
optimum when the capital stock of a company is available
to maintain maximally, the output volume that is demanded
of the company to meet its market share.

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The implication of this, according to Hampton (1989), analysis, so that they could be relevant in the Nigerian
is that optimum investment reflects the “point of production economic scenario. As opined by Brounen and Kosdijk
at which a company meets its desired capital stock level to (2004), investment analysis is the evaluation of investment
achieve the best rate of returns, more so when compared through the establishment of cash flow, estimation of the
with that of its competitors”. Investment by companies required rate of return (opportunity cost of capital) and the
must be seen to meet three main criteria of: Maximizing the application of a decision rule for making choice. Using the
firm’s value, after adequate risk assessment; being properly company’s strategy, all realistic options should be
financed; ensuring that if there is no sound investment identified and the advantages and disadvantages of each
opportunity that satisfies the above points, the cash must be option analyzed, which should lead to the identification of
returned to shareholders, so as to maximize their value. the preferred course of action.
However, Graham and Harvey (2001) posit that investment
in capital by a firm can better be done through optimum Uwah and Asuquo (2016) also maintained that there is
“asset financing strategies”, which would have the potential expediency in using corporate strategy to plan future
to bring about its long term value. investment, if the firm must be sustained in the long term.
The implication is that after the establishment of the firm’s
Peterson and Fabozzi (2002) wrote that capital is objective, there should be continuous evaluation of
synonymous with funds used in financing the assets of the investment on projects using capital budgeting and risk
firm. They maintain that capital investment decisions are analysis techniques. The firm can be said to achieve its
those decisions that involve current outlays in return for a corporate strategy, if it continues to invest in non-current
stream of benefits in future years. A project which is capital assets that would ensure its long term existence.
in nature is made up of a particular capital investment
decision, and the project can be independently or mutually Drury (2006) maintained that the implications of
exclusively appraised. Further still, the project may be capital commitment on long term value of firms are
contingent on another project, which would warrant joint indicated in having a positive net present value which
appraisal. shows the difference in investment cost and gross present
value from that investment. Also, Pandey (2009) cited in
Madhani Pankaj (2008) reasons that whatever Agboh (2011) further states that “capital budgeting refers to
constraints a firm to ration its finances for capital the processes of generating, evaluating, selecting and
commitment, management should be able to allocate following up on capital commitment alternatives” (p.37).
available funds among competing investment proposals. The features in capital commitment are: the expected
Preference should be given to the project that is appraised benefits, irrespective of risks involved and the long lead
to yield higher returns that can maximize its long term time between initial outlay and cash inflows. Keeping these
value. Projects ranking is the technique used here because features in mind would guide management in making
the company would have many acceptable investments investment decisions.
which require the limited finance.
This re-emphasizes the position held by other scholars
As put by Ojo (2004), budgeting refers to the planning on this subject-matter such that great care should be taken
earlier made before the actual expenditure is incurred. in making such decisions owing to the reasons that: (1)
Budget prepares the blue-print, both in quantity and How profitable a firm is would depend on its competition
monetary terms and reflects the objectives of the firm. with others. Sound investment decisions give rise to a
Capital budgeting, therefore involves in specific terms, the firm’s profitability of the firm and impacts positively on its
planned allocation of funds that are available, to the long competitive position. (2) The destiny of the company lies
term assets of the company so that maximum profitability on capital budgeting decisions. (3) The cost structure of the
can be achieved in the long term. Similarly, Philippalys firm in the future depends on its long term plan. (4)
(2003) opined that capital budget has to do with how the Investment decisions which are capital in nature are
firm can harness its resources which are usually scarce, by irreversible, and any attempt to reverse it would bring huge
allotting them to productive opportunities. To consider the financial loss to the firm. (5) Even with the scarce resources
future cash flow to the company, comparison must be made of firms, capital investment is cost intensive. (6) Firms
between the streams of earnings from the project with the should neither operate below or above the optimum
expenditure made on the project. This assertion is made on capacity as both result to waste. (7) Economic growth from
the premise that capital budgeting is made up of planning activities such as employment and other activities are
and development of available capital, for the optimum determined by appropriate capital investment decisions.
objective, which is to maximize the long term profitability
of the company.  Financing activities and capital commitment
Horngren (2014) describes financing activities as
Summarizing the above, Agboh (2011:89) asserted involving cash inflows and outflows involved in long-term
that the system of capital budgeting is employed to evaluate liabilities and equity of a company. The issuance of shares,
expenditure decisions which involve current outlays, but payment of dividends, and buying and selling treasury
likely to produce benefits over a period of time longer than stock are all aspects of financing activities. To borrow
one year. Manufacturing companies ought to develop and money and pay off long-term liabilities in the likes of notes
be seen to implement strategic plans on investment payable, bonds payable, and mortgages payable, are all

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ISSN No:-2456-2165
activities of financing by the organization. While the cash investment or plough-back of earnings. Similarly, Brigham
inflows are indicated by proceeds from both short-term and and Houstin (2013) put it that if a firm’s earnings are
long-term borrowing and cash received from shareholders retained, the portion of investment in money terms will rise
from the issue of shares, cash outflow on the other hand is in future, which will eventually lead to growth in earnings
indicated by repayments of amounts borrowed (excluding and dividends.
payment of interest) and payment of dividends to
shareholders. It is generally agreed in this review that the firm’s
value would not increase because there is increase in
Meigs and Meigs (1995) assert that the main current and future dividends; rather it would increase where
transactions from the financing activities of companies can the firm pays less current dividends, and retain funds for a
be grouped into three; stock, debt and dividends highly profitable investment opportunity. In the same vein,
transactions. When cash is received from the sales of the firm’s value would be added where the shareholders are
shares, capital is raised and ownership is diluted. This may paid high current dividend where it is found out that there is
not be a bad sign after all, as far as the firm’s expansion is poor investment opportunities in the present and near
at a rate that is acceptable. But the firm can repurchase its future. However, in either case, the impact of taxation must
shares to increase the ownership and cash is decreased. be considered, since according to Rich et al (2010) taxation
When debt is issued, there is cash inflow but the debt is an on dividends and capital gains vary. This is why dividend
obligation for future settlement, which carries with it, policy decision has effect on taxation of investors.
interest payment. This interest payment is not regarded as Akinsurile (2010) posits that three theories which impacts
financing activity, but an operating activity, since the on investors’ preference have to be considered in
payments are made in course of normal business determining capital commitment for the long-term value of
operations. However, the repayment of the debt is cash firms in the view of dividend and earnings. These are
outflow in the financing activity. dividend irrelevance, bird-in-hand and tax effect theories.

 Dividend policy and capital commitment VI. HYPOTHESES AND MODEL DEVELOPMENT
Policy on dividend is one of the fundamental
decisions that management has to make to favour or retard The hypotheses for this study were developed and
the economic value added to firms vis-a-vis capital model shown as follows:
commitment. According to Moeljadi (2014) when earnings
per share increase, this signals growth in dividend to the Hypothesis 1: There is no significant relationship between
ordinary shareholders. Growth in earnings would come to capital commitment by listed manufacturing companies in
the firm because of factors such as inflation, amount of Nigeria and current value of capital in the investments.
earnings retained and re-invested by the company, as well Hypothesis 2: There is no significant relationship between
as the company’s rate of returns on equity. marginal efficiency of capital (MEC) of listed
manufacturing companies in Nigeria and returns earned on
Albrecht et al (2008) have said that if there is stability capital invested.
in output for units produced, there is a rise in both the sales Hypothesis 3: There is no significant relationship between
price and input costs owing to inflation. The earnings per research and development (R&D) and economic value
share (EPS) of the company will grow at the inflation rate, added (EVA).
and aside from this, it will also grow because of the re-

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 Development of model

Fig 1:- Conceptual Framework

VII. RESEARCH METHODOLOGY adopted the non-census sampling (probability sampling).

The stratified random sampling technique was used so that
 Research Design the sample could be truly representative of all units or strata
The study adopted quantitative panel methodology of the population. The strata includes manufacture of
using the ex post facto and correlational research design. consumer goods, construction, food and agricultural
The goal of this design was to measure the relationship of processing, manufacturing of healthcare and
two variables. The topic for this study is co-relational, pharmaceutical products, industrial goods manufacturing,
measuring the relationship between capital commitment in mining, oil and gas production and processing of
research and development, and economic value added in beverages.
listed manufacturing companies. This methodology was
used in analyzing secondary (panel) data collected and The sampling procedure used was the proportional
collated from the Nigerian Stock Exchange (NSE) Fact stratified sampling. The percentage composition of the
Books and the published financial statements of these manufacturing companies listed in the NSE were: 12
companies for a seven-year period, (2010-2016). percent of agricultural and food processing sector, 20
percent of consumer goods sector, 33 percent of industrial
For the purpose of this study, therefore, “Research and goods sector, 10 percent of healthcare and pharmaceutical,
Development” was the independent variable while 5 percent of mining and construction sector, 10 percent of
“Economic value added” was taken as the dependent oil and gas production and 10 percent of food and
variable. The future value of the firm as manifested in the beverages sector. This means that the researcher studied 69
economic value added depends on the capital commitment manufacturing companies quoted in the Nigerian Stock
made on research and development. Exchange, as sample size made up of 8 in agric and food
processing, 14 in consumer goods, 23 in industrial goods, 7
 Population of the study in healthcare and pharmaceutical products, 3 in mining and
The population of this study was the 83 manufacturing construction, 7 in the oil and gas production, and 7 in the
companies that are listed on the Nigerian Stock Exchange, manufacture of beverages. The percentages were calculated
as at December, 2016. These companies are in the various thus: Number per sector divided by sample size × 100.
sectors in the manufacturing industry.
Carrying out ex post facto research as outlined in the
 Sampling procedure and sampling technique research design of this study, the researcher collected the
The Taro Yamane formula was used to arrive at the necessary data painstakingly from the Nigerian Stock
sample size of 69 manufacturing companies. The researcher Exchange and also used secondary data sources, which

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Volume 5, Issue 3, March – 2020 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
were mainly the published financial statements prepared by Therefore,
the selected companies under study. CV = 𝑎0 + 𝛽1 𝐿𝑜𝑔𝐶𝐶𝑖𝑡 + 𝛽2 𝐿𝑜𝑔𝑀𝐸𝐶𝑖𝑡 +
𝛽3 𝐿𝑜𝑔𝑅&𝐷𝑖𝑡 + 𝜇𝑖𝑡
 Model Specification RE = 𝑎0 + 𝛽1 𝐿𝑜𝑔𝐶𝐶𝑖𝑡 + 𝛽2 𝐿𝑜𝑔𝑀𝐸𝐶𝑖𝑡 + 𝛽3 𝐿𝑜𝑔𝑅&𝐷𝑖𝑡 +
The researcher used simple linear as well as multiple 𝜇𝑖𝑡
linear regression analyses to find the relationship between R&D = 𝑎0 + 𝛽1 𝐿𝑜𝑔𝐶𝐶𝑖𝑡 + 𝛽2 𝐿𝑜𝑔𝑀𝐸𝐶𝑖𝑡 +
capital commitment on research and development, and 𝛽3 𝐿𝑜𝑔𝑅&𝐷𝑖𝑡 + 𝜇𝑖𝑡
future value of the firm as indicated in the economic value
added. The general equation for regression is given as Y = Where: i = 1,2,3……..69, and t = 1,2,3,4,5,6,7.
ƒ(X), which means Y, depends on X. Here, the dependent
variable, economic value added is denoted by Y, and the In this model, i represents the ith cross-sectional unit
independent variable, capital commitment on R&D is and t represents the tth time period. The dependent variable
denoted by X. The equation can be written as: Y = 𝛼 + is the Economic Value Added (EVA), here hypothesized to
𝛽1 𝑥1 + 𝛽2 𝑥2 + 𝛽3 𝑥3 + 𝜇 depend on research and development (R&D) – a decisive
variable for capital commitment (CC) and Marginal
Where, 𝛼 is the intercept, and 𝛽1 , 𝛽2 , 𝛽3 are the Efficiency of Capital (MEC). The hypotheses are for each
coefficients of variables 𝑋1 , 𝑋2 , 𝑋3 respectively, which manufacturing firm, i on the sample over the t, 2010 – 2016
show the kind of relationship existing between dependent analysis period. Vector variables for measuring Research
and independent variables and 𝜇 is known as the error term. and Development as represented by CC and MEC, were
regressed against current value of capital in the investments
Therefore, Y= Dependent variable {Economic value (CV) and returns earned on capital invested (RE), the
added (EVA)}, indicated by current value of capital in the proxies of EVA as the dependent variable. In this model,
investments (CV) and returns earned on capital invested EVA is calculated as net operational profit after tax
(RE). (NOPAT) less (cost of capital multiplied by the capital
invested by the firm). Cost of capital is taken as the
X = Independent variable {Research and 𝐸
weighted average cost of capital (WACC). WACC = ke 𝑉 +
Development (R&D)}, indicated by Capital Commitment 𝐷
(CC) and Marginal Efficiency of Capital (MEC). 𝑘𝑑 (1 − 𝑡) 𝑉 , 𝑤ℎ𝑒𝑟𝑒 the cost of debt, kd is assumed to be
irredeemable.
Following the model put up by Sudiyatno, Puspitsari
and Kartika (2012), the model for this study was adapted as VIII. TESTING OF HYPOTHESES AND ANALYSIS
follows:
Hypotheses one to three were tested using SPSS V.20.
Model: Research and Development = f (Economic with a confidence interval of 95% taken, and the decision
Value Added) rule was to reject the null hypothesis if the calculated value,
i.e. Economic Value Added, EVA = f (R&D). p, is less than the alpha value of 0.05 (p ˂ 0.05) and to
accept, if otherwise.

Unstandardized Standardized
Adjusted Coefficient Coefficient
Model t Sig. Result
R² Standard
R R² B Beta
Error
Capital
commitment 0.925 0.856 0.854 0.502 0.025 0.925 19.945 0.000 Significant
(CC)
(Reject H0)

ANOVA
Sum of Mean
Model
Squares df Square F Sig.
Capital Regression
commitment 3910.149 1 3910.149 397.783 0.000
(CC)
Residual 658.600 67 9.830
Total 4568.749 68
Dependent variable: Current value of capital (CV)
Table 1:- A table showing simple linear regression and its associated ANOVA of the relationship between Capital Commitment
(CC) and Current Value of Capital (CV) in hypothesis one

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From Table 1 above, the relationship between capital financial assets increases or decreases by one unit in value,
commitments and current value of capital is shown. The there are a corresponding 0.502 unit in the value of current
Table’s analysis shows a Beta value of 0.925 which is capital which increases or decreases in the sampled
about 93% of the total contribution of capital commitment manufacturing firms. More so, the associated analysis of
to the firm’s economic value added. A multiple correlation variance (ANOVA) reveals the sum of squares for
coefficient (R) of 0.925 which indicates a high correlation regression and residual to be 3910.149 and 658.600
was observed to correspond with this beta value. The R2 respectively, while the mean squares values are also shown
value of 0.856 which shows a relationship of about 86% as 3910.149 and 9.830 respectively, which indicate a
between the independent and dependent variables was also significant relationship between the variables. Finally, the
observed. However, the value of the adjusted R2 which is Sig.value reveals 0.000, which is less than the alpha value
the modification for the limitation of R2 was 0.854. This of 0.05 level and as such, the null Hypothesis one was
indicates that the independent variable in the model rejected, meaning that a significant relationship exists
explains about 85% variation on the dependent variable. between ‘capital commitment’ and ‘current value of
The unstandardized B value of 0.502 shows that as capital’ a proxy of the economic value added.

Table 2:- A table showing simple linear regression and its associated ANOVA of the relationship between Marginal Efficiency of
Capital (MEC) and Returns earned on capital invested (RE) in hypothesis two

The data in table 2 dealt with the data showing the correlation coefficient (R) of 0.712 was seen. This indicates
extent to which marginal efficiency of capital (MEC) relate a high correlation. R square (R2) value of 0.507 was also
with the returns earned on capital invested (RE) of 69 realized. This implies that while about 71% of multiple
sampled companies for the period 2010 to 2016, used in the correlations (R) were established between the independent
study. The SPSS result shows the multiple regression and dependent variables, about 50% was realized as the
analysis of Beta value 0.677 for marginal efficiency of contribution of the independent variable to the economic
capital by Nigerian firms and its corresponding dependent value added of firms in Nigeria. The table revealed that a
variable, returns earned on capital invested in the firms. value of 0.000 is the p-value. As this value is lower than the
These data inform us that about 67% of research and alpha value of 0.05, our hypothesis two was rejected,
development contribute to the economic value added, of following our decision rule. This decision therefore means
firms in Nigeria. The variables show significant values at that there is a significant relationship between marginal
0.000 Sig.level. A multiple correlation between the efficiency of capital (MEC) of manufacturing firms in
dependent variable, returns earned on capital invested (RE) Nigeria with the returns earned on capital invested in these
with the independent variable, marginal efficiency of firms. This is reflected in the 0.000 Sig.value realized in the
capital (MEC) was also made. A multiple regression multiple regression analysis.

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Table 3:- A table showing simple linear regression and its associated ANOVA of the relationship between Research &
Development (R&D) and Economic Value Added (EVA) as hypothesized in hypothesis three

Data presented on Table III above reveals the X. RECOMMENDATION

relationship between Research & Development (R&D) and
Economic Value Added (EVA). From the Table, R&D has More of Research and development should be
a Beta value of 0.281, indicating an approximate embarked on by manufacturing companies as this variable
contribution of 28% to EVA in the manufacturing firms shows a significant relationship with the economic value
under study. This result shows a positive correlation added. An increase in capital committed to this investment
coefficient and also a relatively average relationship. A p- would ensure the growth of the manufacturing companies,
value of 0.019 realized also shows that the value is less since it will enhance profitability, expansion and
than the 0.05 alpha level, which makes us to reject the null technological development.
hypothesis three. This indicates that there is a significant
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