EFFECTS OF CAPITAL STRUCTURE ON FINANCIAL PERFORMANCE OF FOOD AND BEVERAGE COMPANIES IN NIGERIA

EFFECTS OF CAPITAL STRUCTURE ON FINANCIAL PERFORMANCE OF FOOD AND BEVERAGE COMPANIES IN NIGERIA

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1.1 Background of the study 

It is a common assumption that businesses with larger capital bases tend to generate higher returns and offer greater value. There is a widespread but mistaken belief that a more optimal distribution of an organization's capital is the grease that propels its performance and growth (Modigliani & Miller, 1958). However, in today's world, one of the most essential financial decisions that corporate organizations must make, in addition to the decision about investments, is the decision regarding capital structure. This is due to the fact that it will have a significant long-term financial influence on its operations, more especially on the company's return maximization and value. It is possible for a corporation to issue a significant amount of either debt or stock. Because of this, it is essential for a business to employ the optimum proportion of debt and equity in order to optimize the total value of its market position (Alfred, 2007).

One of the most important aspects of a company is its financial situation. A financing manager's primary focus is on determining the optimal mix of debts and equity that his firm should have in order to obtain the most favorable terms for their financing. In developing nations, like Nigeria, limited financial resources have been one of the most significant factors impacting the success of corporate enterprises (Alfred, 2007). The broadening and deepening of a variety of financial markets provides the foundation upon which Nigeria's business sectors may choose the best capital structure for their operations. The corporate sector is primarily distinguished by the presence of a large number of enterprises that function in an environment that is mostly deregulatory and growing increasingly competitive. Since 1987, financial liberalization has altered the operating environment of firms in Nigeria by providing a greater degree of leeway for Nigerian financial managers to select the appropriate capital structure for their own businesses (Alfred, 2007). According to Capon, Farley, and Hoeing (1990), which was quoted by Bala and Matthew (2005), it is suggested that the performance of firms may be described by a variety of characteristics that could be distinctive to either the company or the industry. As a consequence of this, the success of a corporation may be affected positively or negatively by a number of things. It follows that the ineffective management of some businesses is probably not totally to blame for the companies' lackluster performance. It is not possible to provide an accurate evaluation of the performance of a firm without first doing a comprehensive analysis of the many business strategies, methods, and instruments at the organization's disposal. A rise in the price of a company's stock as a result of its strong performance on the market is an evident consequence of such success and is likely to elicit a favorable reaction from investors. According to Udeh and Igwe (2013), low-geared enterprises have a greater likelihood of achieving a positive return on the capital that they have invested, in compared to high-geared companies. At the very least, it is anticipated that interest payments to suppliers of funds would be increased in the latter corporations. This will almost always have a significant impact on both the available earnings and the performance of the organization in the eyes of the fund providers. Others feel that managers of high-geared firms function with such unfathomable dexterity that keeps them on their toes all year round in order to please suppliers of fund. While this may seem accurate, it is important for managers of high-geared companies to impress fund providers. Because of this, there is a possibility that this will result in unexpectedly high levels of performance (Udeh & Igwe, 2013). In addition, determining whether or not short-term and long-term debts have the same impact on the overall performance of food and beverage enterprises in Nigeria is a fascinating subject that needs to be answered. Previous research in this topic appears to have reached conclusions that are in conflict with one another. Therefore, in light of the ideas presented above, the structure of this study is to investigate how the success of the food and beverage companies in Nigeria is affected by the use of various combinations of different capital structure. 

1.2 Statement of the problem 

There are a variety of schools of thought held by financial managers on the function that capital structure plays in businesses. Others think that it is more useful to manage corporate companies that have long term debts, despite the fact that other people are of the opinion that it is preferable to have a greater number of short term debts (Udeh & Igwe, 2013). Another school of thought maintains that the two should coexist in organizations in an appropriate proportion so as to maximize productivity at the company level and guarantee that investors get the greatest possible return on the capital they invest. One school of thought contends that risk-averse managers seem to be more at ease with short-term debts. This is due to the fact that it decreases the danger that they are exposed to (Udeh & Igwe, 2013). On the other hand, managers who take conventional risks prefer to run their businesses with long-term debts since this provides them with sufficient time for the exploration of new business opportunities. The third school of thought maintains that moderation is the key to achieving success in all aspects of life. The polarization of opinions held by financial managers along these key fault lines presents an opportunity for more empirical research to be conducted in this field. In addition, discussions in this field have become inconclusive as a consequence of contradicting results from studies conducted on the subject matter, particularly in recent times; this has subsequently compelled the conduct of more researches. The real influence that capital structure has on the performance of corporations in Nigeria has been a major source of debate among academics in the country. The research carried out by Babalola (2014), which was in agreement with the preeminent paradigm of corporate finance, demonstrated that the choice of capital structure is determined by a trade-off between the costs and advantages of debt. He claims that this suggestion has been challenged on the grounds that large organizations are more likely to retain greater performance than middle companies under the same level of debt ratio. This argument is based on the fact that large companies have more employees. There is no conclusive evidence to support the assertion that the superior performance of huge corporations can be attributed, in any structure, to their financial structures. It is also unknown whether the existing differences in performance measures and other traditional economic factors that are internal to the companies and have been ignored up until this point would translate into factors that could impact performance. This is something that has not been investigated. These are some of the things that keep people interested in learning more about this subject area. Based on what has been discussed up to this point, the basic difficulty of this investigation may be summed up in the following question: to what degree can short-term and long-term debts, in addition to leverage, effects the financial performance of listed food and beverage firms in Nigeria?

1.3 Objectives of the study

The overall objective of the study is to find out the effect of capital structure on financial performance of food and beverage companies in Nigeria. The specific objectives are to;

i. Examine the effect of short-term debt on profitability of listed food and beverage companies in Nigeria.

ii. Examine the effect of long-term debt on profitability of listed food and beverage companies in Nigeria.

iii. Examine the effect of leverage on profitability of listed food and beverages companies in Nigeria.

1.4 Research questions

The following research questions guided the study:

i. To what extent does short term debt affect profitability of listed food and beverage companies in Nigeria?

ii. To what extent does long term debt affect profitability of listed food and beverage companies in Nigeria?

iii. To what extent does leverage affect profitability of listed food and beverage companies in Nigeria?

1.5 Hypotheses of the study

Based on the above objectives, the following hypotheses were formulated:

H01: Short term debt has no significant impact on profitability of listed food and beverage companies in Nigeria.

H02: Long term debt has no significant impact on profitability of listed food and beverage companies in Nigeria.

H03: Leverage has no significant impact on profitability of listed food and beverage companies in Nigeria.

1.6 Scope of the study

The study covered the effect of short and long term debts as well as leverage on profitability of food and beverage companies in Nigeria. The period of study is 10 years (2007- 2016).

1.7 Significance of the study

This study will be of immense benefit to business organization because it will expose them to variety of benefits that comes with capital structure in the company. This study will also add to existing literature on this topic and shall serve as a reference material to students, scholars and researchers who wishes to carryout further research on this topic or related domain in the future.

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