Interactions between Exchange Rate and Financial Performance Indicators in Nigeria Beer Industry: Evidence from Nigeria Breweries Plc

Oliver Ike Inyiama

doi:10.5901/ajis.2014.v3n6p341

Abstract

The study aims at evaluating the nature and magnitude of the interactions between foreign exchange rate and selected financial performance indicators in Nigeria beer industry from 2000 to 2013. Granger Causality procedure, 2-step cointegration and error correction model of Engle and Granger and correlation approach was adopted in the analysis. The Augmented Dickey Fuller (ADF), Phillips-Perron (PP) and the Kwiatkowski-Phillips-Schmidt-Shin (KPSS) procedures were applied to test for series stationary. All the series were found non stationary but achieved stationary at second difference. Earnings Per Share has a short term negative and insignificant effect while prices of equity shares, net asset value per share and price-earnings ratio are positively and insignificantly related to foreign exchange rate in the short run. All the variables shared negative and insignificant long run relationship with exchange rate. There is a unidirectional causality running from earnings per share to exchange rate and from exchange fluctuations rate to net asset value per share. The implication of the findings is that foreign exchange rate adversely affects earnings of firms in Nigeria brewery industry. Growth in earnings of firms in Nigeria brewery industry can cumulatively contribute to lowering the rate at which naira exchanges for other foreign currencies. DOI: 10.5901/ajis.2014.v3n6p341

Highlights

The need for policy makers at both micro and macroeconomic levels to have sufficient information as to the interactions of foreign exchange rate and key financial performance indicators is very crucial especially in the brewery sector
Citing Dornbusch and Fischer (1980), Nath and Samanta (2003) submits that under the goods market approaches, movements in foreign exchange rates influences the competitiveness of a firm, the value of the earnings, it’s transaction exposure and cost of its funds as many companies borrow in foreign currencies to fund their operations
This study aims at examining the interactions between foreign exchange rate and selected financial performance indicators such as earnings per share, price/earnings ratio and net asset value per share using Nigeria Breweries Plc as a test case

Summary

Introduction

The need for policy makers at both micro and macroeconomic levels to have sufficient information as to the interactions of foreign exchange rate and key financial performance indicators is very crucial especially in the brewery sector. Okwo and Ugwunta (2012) while citing Ogbadu (2000) argues that one of the major problems facing manufacturing companies in Nigeria, including the brewery sector, is the growing trend of high input costs which erodes their bottom line and leads to intermittent interruptions in their operational capacity. This trend was observed to have led to the closing down of production facilities by many of the brewery firms in Nigeria since they could no longer break even. This trend was observed to have led to the closing down of production facilities by many of the brewery firms in Nigeria since they could no longer break even. Glauben and Loy (2008) argue that variations of currency values as a consequence of fluctuations in foreign exchange rate, work as cost or profit shifters to expose the pricing behavior of the beer producing firm

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