Systemic Risk and Capital Budgeting Decisions of Quoted Industrial Goods Manufacturing Firms in Nigeria

Abstract

The purpose of this study was to examine the effect of systemic risk on capital budgeting decisions of quoted industrial goods manufacturing firms in Nigeria. Panel data were collected from annual reports of 15 industrial goods manufacturing firms. Capital budgeting was modeled as the function of exchange rate risk, interest rate risk and consumer price risk. Ordinary least square method of multiple regressions was used as data analysis method. After cross examination of the models, the fixed model was adopted. The regression summary produced adjusted R 2 from the fixed effect regression model implied that 69.9 percent variation in capital budgeting decision of the quoted manufacturing firms were attributed to changes in systemic risk while the model is statistically significant by the value of F-statistics and F-probability. The Durbin Watson statistics implies absence of serial autocorrelation. The study found that exchange rate risk is negative and significant; interest rate risk is positive and significant while consumer price risk is positive but not significant effect on capital budgeting. from the findings, it recommend that There is need for management of the manufacturing firms to formulate strategies of managing systemic risk and the implementation should not just be formulated but strategic and tactical measures should be put in place to absorb, retain and transfer systemic risk and there should be policy to fully deregulate interest rate in the financial market. Systemic risk management should be considered as part of strategic plans which need to be reviewed on a more frequent basis and macroeconomics policies should directed towards stabilizing Nigerian exchange rate to avoid depreciating naira exchange rate against key currencies that exposes t he firms to exchange rate risk