FINANCIAL STRUCTURE AND FINANCIAL PERFORMANCE OF QUOTED CONSUMER GOODS MANUFACTURING FIRMS IN NIGERIA (2001-2013)
Abstract
Capital structure, a term interchangeably used with financial structure by most authors, is one of the most important effective parameters on the valuation and direction of economic enterprises. In recent times, changing business environment demands that rating companies, also in terms of the credit, depend partly on their financial structure and strategic planning required in selecting effective resources to achieve objective of shareholders’ wealth maximization (Drobetz and Fix, 2003). In pursuit of this goal, managers face the task of determining the best combination of financial resources of the firm. The decision on how to finance the firm’s asset from stakeholders and how much debt and equity the firm will require to finance its asset is very crucial in the determination of corporate financial performance. According to Modarres and Abdoallahzadeh (2008), since the company’s cost of capital is seen as a function of its financial structure, choice of optimal financial structure or adequate and appropriate financing and investment reduce the company’s cost of capital and increase its market value which also increase shareholders wealth.
Literature on studies on the relationship between financial (capital) structure and firm’s financial performance mostly adopted specific measures such as Return on Equity (ROE), Return on Asset (ROA), Earning per Share (EPS) and Market values of the firm. These were used to measure financial performance of firms with reference to profitability as measured by Profit before tax which represents a more comprehensive financial performance indicator. Most studies that tried to adopt profitability as measure of performance are of foreign origin (Abor, 2005, and Deskalakis and Psillaki, 2005). These studies may have explained how capital structure affected profitability of quoted firms in their respective countries. It may not offer such explanation for profitability of quoted consumer goods manufacturing firms in Nigeria.
