The Influence of Inflation on Profitability of Publicly Quoted Firms in Nigeria: A Panel Data Approach

Abstract

The aim of this study is to examine empirically the relationship between inflation and firm profitability in Nigeria using firm-level panel data comprising 21 quoted companies over a period of 10 years from 2007 to 2016. Three variants of inflation; core inflation, food inflation and headline inflation, are considered while firm profitability is proxied by earnings per share. When the three conventional panel data models; pooled least square, fixed effects and random effects models are estimated and compared, the results show that the fixed effects model is the most plausible description of the relationship between inflation and firm profitability. The fixed effects results show that firm's financial profitability has a negative relationship with both core and food inflation rates but has a positive relationship with headline inflation rate. However, while none of the estimated coefficients is significant statistically, we argue that given the relatively large size of these coefficients, they are economically significant. Therefore, we conclude that inflation is an important factor for firm profitability in Nigeria