Effect of Inflation and Exchange Rates on Financial Performance of Selected Quoted Manufacturing Companies in Nigeria

Abstract

The financial performance of manufacturing companies in Nigeria has been increasingly unstable, marked by fluctuating profitability, declining returns, and rising costs. This instability is largely attributed to persistent inflation and exchange rate volatility, both of which have intensified in recent years. The study examines the effect of inflation and exchange rates, on the financial performance of selected quoted manufacturing companies in Nigeria, using Tobin's Q as a proxy for firm performance. The study adopts ex-post factor research design and covered 43 quoted manufacturing firms in Nigeria. Utilizing panel data from 2014 to 2023 which was extracted from published annual reports of Statistical Bulletin of the Central Bank of Nigeria, National Bureau of Statistics and Nigerian Stock Exchange and applied regression analysis through the least squares method. The study found that both inflation and exchange rates have negative and significant effect on financial performance (Tobin's Q) of selected quoted manufacturing firms in Nigeria 5% significant level. The study concludes that inflation and exchange rates negatively influence financial performance (Tobin's Q) of selected quoted manufacturing firms in Nigeria. the study therefore, recommend that manufacturing companies in Nigeria should strengthen their resilience to rising inflation-related production costs by enhancing operational efficiency through energy-efficient technologies and waste reduction. The study also recommends that manufacturing companies in Nigeria should implement strong foreign exchange risk management strategies, such as hedging with forward contracts or options, to protect against exchange rate volatility.