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

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