The Effect of Financial Structure on the Performance of Nigeria Consumer Goods Firms

Abstract

This study assesses the effect of financial structure on performance of consumer goods firms quoted in Nigerian Stock Exchange. In this study, twenty three (23) out of the twenty seven (27) firms were randomly chosen for the period 1993 to 2013. The study applied earnings per share and return on equity as performance indices. To add to this, total debt to total equity ratio, short term debt to total equity ratio were adopted to measure financial structure while tangibility, firm size, growth and risk were included as control variables capable of influencing performance. The effect of financial structure on performance was analysed using pooled ordinary least square, fixed effect and random effect regression technique. The results of the analysis divulged that financial structure represented by total debt to total equity ratio and short term debt to total equity ratio, negatively affect financial performance of consumer goods firms measured by earnings per share and return on equity. The negative effect of financial structure variables: total debt to total equity ratio and short term debt to total equity ratio tends to buttress that as result of agency conflict, performance of firms that are highly geared are negatively affected. The findings also were in conformity with the proposition of the pecking order theory that firm performance and financial structure are negatively correlated. This study concludes that financial structure has negative effect on financial performance of Nigeria consumer goods firms. In the light of this, we suggests that firm’s management should established a debt-equity mix capable of improving financial performance notwithstanding the proxy adopted for assessing performance. Over investment in fixed assets should be discontinued and effective and efficient utilization of fixed assets vehemently upheld.

Keywords: financial structure; performance; return on assets; return on equity; consumer goods firms