Firm Characteristics and Liquidity Transformation: Evidence from Commercial Banks in Nigeria

Liquidity transformation is one of the main concerns of commercial banks since it is crucial for their existence. In carrying out financial intermediation role, banks are often faced with issues relating to liquidity transformation, hence exposed to the likelihood of bank runs. The liquidity levels of commercial banks in Nigeria have over time been characterized by a fluctuating trend. The current study sought to examine the effect of firm characteristics on liquidity transformation with focus on commercial banks in Nigeria. The relationship between firm characteristics and liquidity transformation was underpinned by Financial Intermediation Theory, Market Power Theory, Efficiency Structure Theory and Capital Buffer Theory. Causal research design was adopted and based on purposive sampling of seventeen commercial banks that fully operated in Nigeria for the period 2010 to 2017, only fifteen of these banks were covered due to unavailability of data. Panel regression analysis was applied and the study found that bank size and capital adequacy had insignificant effect on liquidity transformation of commercial banks in Nigeria. It was further established that management efficiency (β=0.0003, p=0.001) and earnings ability (β=-0.3301, p=0.000) had significant effect on liquidity transformation of commercial banks in Nigeria. The study recommends that bank management should strive towards the minimization of operational expenses while maximizing revenue so as to ensure a smooth financial intermediation process. The study also recommends that income generated from the financial intermediation role of banks should be properly managed with a relative share of it channeled towards further intermediation activities; this in turn will increase liquidity levels in view of a growing net interest margin. Notably, bank size and capital adequacy had insignificant effect on liquidity transformation of commercial banks in Nigeria. Due to these findings, further studies can be done on the effect of bank size and capital adequacy on liquidity transformation of commercial banks in Nigeria for a longer time frame. Other firm characteristics may also be considered in view of the unexplained 38.57 percent variation in liquidity transformation.