THE EFFECT OF CAPITAL STRUCTURE ON ORGANISATIONAL VALUE OF CONSUMER GOODS FIRMS IN NIGERIA

Abstract

The study assessed the effect of capital structure on the organizational value of consumer goods firms in Nigeria. Specifically, it examined the effects of Short Term Debt (STD), Long Term Debt (LTD), and Total Equity (TEQ) on Profit for the Year (PFY) of these firms. Descriptive statistics, Unit Root tests, Pairwise Granger Causality tests, and Panel Least Squares Regression models were used to analyze ninety (90) panel data observations extracted from the audited annual reports of nine (9) firms selected from a population of twenty-one (21) consumer goods firms quoted on the Nigeria Exchange Group during the period 2013–2022. Research findings indicate that Short Term Debt (STD) positively and significantly affects Profit for the Year (PFY) {STD coefficient = 0.137544, p-value = 0.0003 (< 0.05)}. Findings also show that Total Equity (TEQ) positively and significantly affects Profit for the Year (PFY) {TEQ coefficient = 0.074695, p-value = 0.0273 (< 0.05)}. Results further reveal that Long Term Debt (LTD) positively but insignificantly affects Profit for the Year (PFY) {LTD coefficient = 0.018702, p-value = 0.5479 (> 0.05)}. The implication of these findings is that the firms are likely to witness growth in profitability as any of the explanatory variables increase. Based on these findings, the study recommends that consumer goods firms in Nigeria should meet their short-term business obligations and maximize firm value by using short-term debts, such as bank overdrafts, short-term loans, and trade credit, to finance their working capital needs. The study also recommends that firms increase returns on investment and organizational value by using long-term debt to finance long-term investments. However, debt financing should be limited to an optimal capital structure to avoid bankruptcy risk. Finally, the study recommends that firms improve profitability and organizational value by combining equity financing with debt financing to fund various business operations. Each firm should first identify its optimal capital structure in using debt and equity to finance its operations.