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EFFECT OF MACROECONOMIC VARIABLES ON THE PROFITABILITY OF FOOD AND BEVERAGE FIRMS IN NIGERIA

Project topic for Financial Studies department.

CHAPTER ONE

INTRODUCTION

  • Background of the Study

Profitability is the operational phenomenon of every profit making organization. It constitutes both the short and long-run management planning and operating strategies. Profitability is a qualitative measure of input-output relationship of management and management efficiency in maximizing investor Return on Investment, Return on Assets, Return on Capital Employed and Earnings per share. Firms’ profitability can be appraised at the macro and micro level (Aburime, 2008).

At the macro-level, firms profit is a critical function of management, composition of assets, capital structure, ownership structure and dividend policy (Farsio, Gearry& Moser,2004).

Macroeconomic indicators are statistics published regularly by government with the primary purpose of indicating the present economic status. They are external variables which firm managements cannot control. Macroeconomic indicators can be classified as either leading indicators if they can be used for future economic prospects or lagging indicators if they can be used to measure their influence on past performance. The leading economic indicators include: manufacturing companies activities, retail sales, inventory levels, building permits, housing markets conditions, and levels of new business start-ups while the lagging macroeconomic indicators include: inflation rate, exchange rate, gross domestic product, levels of unemployment, consumer price index, home currency strength, balance of trade, interest rate, corporate profits as well as value of commodities in relation to US dollar (Bellalah, Levyne&Masood, 2013).

Performance of a firm or an industry is very important as it shows the results achieved over a time period. It is generally dependent upon the microeconomic and macroeconomic variables. The microeconomic variables are internal firm specific variables which the management is able to control, while the macroeconomic variables are external variables which the management is not able to control. Whenever the economy is performing well, the general expectation of most investors and shareholders is that companies would perform well and thus overall growth in wealth. The economic performance is judged by the stability in macroeconomic variables, such as its exchange rate, rate of inflation, consumer price index, Gross Domestic Product, stock market index and interest rates. It is the expectation of policy makers at both the macro and micro levels in an economy that these variables would remain stable and favorable to sustain business growth. Moreover, it is the wish of potential and existing investors that these macroeconomic elements remain favorable so as not to threaten the returns of their securities.

The effect of macroeconomic indices on the profitability of food and beverage firms can be of a reversible model, depending on the indices considered. The common belief is that firms’ financial performance is influenced by changes in money supply, exchange rate, interest rates, inflation and other macroeconomic indicators (Akbas&Karaduman, 2012).

While economic literature has been devoted to studies on the relationship between firms’ profitability and macroeconomic indices in the developed economies, there are very few attempts at unraveling this linkage in developing economies such as Nigeria. The nature of the relationship between firms’ profitability and macroeconomic variables may differ between developed and developing economies. Consequent upon these, the study attempts to examine the effect some macroeconomic variables [exchange rate, inflation rate, and interest rate] on the profitability of food and beverage firms in Nigeria covering the period 2000-2015.

1.2       Statement of the Problem

The effect of macroeconomic variables on the profitability of food and beverage firms has long remained unresolved especially in developing country like Nigeria. Several researchers have attempted to determine this though with much concern on the banking sectors. While some researchers found positive and significant result others found negative and significant or insignificant relationship as the case may be.

The Nigerian economy has been characterized by fluctuations in the macroeconomic indices such as interest rates, inflation rates and the exchange rate hence there could not be a steady outcome. The researcher is however, motivated to examine the effect of some macroeconomic variables on the profitability of food beverages and tobacco firms in Nigeria. Particularly, we ask, what is the effect of Exchange Rate (EXR) on Returns on Asset (ROA) of food and beverage firms in Nigeria, what is the effect of Inflation Rate (INFR) on Returns on Asset (ROA) of food and beverage firms in Nigeria, and what is the effect of Interest Rate (INTR) on Returns on Asset (ROA) of food and beverage firms in Nigeria? Generally, the problem is, since the Nigerian economy has been characterized by fluctuations in the macroeconomic indices, what effect do they have on the profitability of food and beverage firms in Nigeria?

  • Objectives of the Study

The broad objective of this study is to ascertain the effect of macroeconomic variables on the profitability of food and beverage firms in Nigeria. The specific objectives are:

  • To determine the effect of Exchange Rate (EXR) on Return on Asset (ROA) of food and beverage firms in Nigeria.
  • To examine the effect of Inflation Rate (INFR) on Return on Asset (ROA) of food and beverage firms in Nigeria.
  • To investigate the effect of Interest Rate (INTR) on Return on Asset (ROA) of food and beverage firms in Nigeria.
  • Research Questions
  • How does Exchange Rate (EXR) affect Return on Asset (ROA) of food and beverage firms in Nigeria?
  • What is the effect of Inflation Rate (INFR) on Return on Asset (ROA) of food and beverage firms in Nigeria?
  • What is the effect of Interest Rate (INTR) on Return on Asset (ROA) of food and beverage firms in Nigeria?
  • Statement of the Hypotheses

The following null hypotheses will guide the study

  • Exchange rate does not have significant effect on Return on Asset of food and beverage firms in Nigeria.
  • Inflation rate does not significantly affect Return on Asset of food and beverage firms in Nigeria.
  • Interest rate does not have significant effect on Return on Asset of food and beverage firms in Nigeria.

1.6       Significance of the Study

The study will be beneficial to the many groups like government, central bank, manufacturing firms and body of academic/researchers.

Federal Government of Nigeria will find the outcome of this study useful in terms of making decisions relating to the macroeconomic environment; in other words, it will help the government to regulate the interest rate, inflation rate, exchange rate and other macroeconomic indices with a view to achieving macroeconomic stability so as to assist the companies operating in Nigeria.  The Central Bank of Nigeria definitely will find the study very much useful in terms of devising good monetary policy so as to enhance company’s performance and foreign investors into the Nigeria economy.

The manufacturing firms will find the outcome of the study relevant as it will help them in their decisions pertaining to the survival of their firms in the fluctuating economy.

Lastly, future researchers will find the study useful in terms of reference materials on a similar subject matter as this.

1.7       Scope of the Study

The study will examine the effect of macroeconomic variables on the profitability of food and beverage firms in Nigeria. The researcher used three (3) food and beverage firms in Nigeria. The variables considered include: return on assets (proxy as measure of profitability), and some macroeconomic variables such as exchange rate, inflation rate, and interest rate. The return on assets was used as the dependent variable while the macroeconomic variables were used as independent variables. The study spanned from 2000-2015. The choice of the year 2000 was because some of the selected firms started recording their transactions from 2000 while the reason for extension to 2015 is to ensure currency of information and for robust analysis.

1.8       Limitations of the study

This study is focused on the effect of macroeconomic variables on the limited to food and beverage firms in Nigeria. It is constrained to food and beverage firms in Nigeria. However, the finding of the study is relevant only to food and beverage firms.


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