Capital Structure Composition and Financial Performance of Food and Beverage Firms in Nigeria

Diette-Abayeh Ayebanengiyefa

doi:10.7176/ejbm/11-24-01

Abstract

The study examined capital structure composition and Financial performance of Food and Beverage firms using Secondary data obtained from Nigeria stock exchange. Leverage composition; Short term debt to total Asset, Long Term debt to total asset and debt-equity ratio were regressed against market performance proxies earnings yield, price/earnings ratio and Tobin Q. Variables were subjected to Hausmann test for selection of appropriate model. Findings indicate Significant positive relationship between short term debt over total asset ratio and Tobin Q, Long term debt to total asset relate significantly positively with Tobin Q and earnings yield Also, there is Significant positive relationship between Debt Equity ratio and Earnings yield. We also found significant negative relationships between Short term debt and Earnings yield, Long term debt and P/E ratio, and between Debt Equity ratio and Tobin Q. Additionally, we found insignificant negative relationship between Short term debt and Price earnings ratio and between Debt equity ratio and P/E ratio. Also, a shift in capital structure composition from STD/TA to LTD/TA has a positive effect on TBQ which is statistically significant and a Shift from LTD/TA to STD/TA still maintains an equally positive effect on TBQ. However, it is more rewarding for the firm to shift to more long-term debt in its capital structure as it has higher effect on TBQ. A shift from TD/TA to LTD/TA has a significant positive effect on Earnings Yield and a shift from LTD/TA to STD/TA has a positive insignificant effect on EY. It will be rewarding for the firms to increase their earnings yield by shifting from STD to LTD. Based on findings, we conclude different compositions of leverage have different effects on market valuation of firms. We recommend Firms should optimally use LTD to increase market valuation. And should also examine capital structure composition to ascertain which of the combination maximises firm value Keywords: Capital Structure Composition, Tobin Q, Earnings Yield, Debt/Equity ratio, Price Earnings Ratio DOI : 10.7176/EJBM/11-24-01 Publication date : August 31 st 2019

Highlights

The issue of capital structure is daily discussed by academics, corporate executives, investors, analysts and researchers
We examine a capital structure composition shift to LTD/TA given that the aggregate composite ratio TD/Equity is controlled for
We found a positive significant relationship between LTDTA and earnings yield implying that an increase in long term debt increases earnings yield

Summary

Introduction

The issue of capital structure is daily discussed by academics, corporate executives, investors, analysts and researchers. The way a firm is financed is believed by some authors to influence its performance and value. Another group of proponents oppose the idea that the financing need of a firm does not impact on firm value or performance. The controversy generated by these arguments and opposing views dates back many decades and is yet to abate due to the strategic role firms play in the provision of goods and services, income generation, source of tax revenue to the government and employment. Firms generally is an engine that drives economic development and its successes and failure is of interest to many

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Conclusion