Effect of Gearing Ratios on Shareholders Value of Consumer Goods Firms in Nigeria

Abstract

This study analyzed the effect of gearing ratio on shareholders’ value of consumer goods firms in Nigeria. The specific objectives were to: determine the effect of capital gearing ratio, income gearing ratio, operating gearing ratio and financing gearing ratio on shareholders’ value of consumer firms. The variables were shareholders’ value as the dependent variables while capital gearing ratio, income gearing ratio, operating gearing ratio and financing gearing ratio were the independent variables. Panel Least Squared (PLS) method of data analysis was used. Ex-post facto research design was employed in this study; secondary source of data was used in the study. From the analysis result the study found that capital gearing ratio has significant effect on shareholders’ value of consumer firms (t,2.194935, p,0.0303) it is significant at 5% level; income gearing ratio has significant effect on shareholders’ value of consumer firms (t,2.184472, p,0.0311); Operating gearing ratio has no significant effect on shareholders’ value of consumer firms. (t,0.500613, p,0.6177); Financing gearing ratio has no significant effect on shareholders’ value of consumer firms. (t,416043, p,0.6782). The study concluded that gearing ratio has positive significant effect on shareholders’ value of consumer firms. The study recommended amongst others that shareholders (or potential investors) should assess the level of capital gearing of a firm before investment. This is primarily important because it give them access to future investment potential of the firm. Adequate and proper monitoring of the income gearing ratio of the firm over time is because funds cannot only be used for paying or servicing debt to the detriment of the residual claimants of the firm. To enable such, finance managers should focus on an acceptable threshold for the income gearing ratio. Managers should aim at an improved operating gearing ratio because of its positive beneficial effect on performance. More so, the operating gearing ratio is an indicator of the earnings potential and trend of a firm over time, which signals to investors of favorable market performance.