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AUTHOR(S): Rita I. Sike, Umar A. Ibrahim, Faiza Maitala
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TITLE Capital Structure and Firm Performance: Empirical Evidence from Nigeria Listed Non - Financial Firms |
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ABSTRACT The high lending rates, high level of inflation, volatility of exchange rate and insecurity makes the business environment in Nigeria very challenging and impacts on the ability of firms to raise equity or access debt to finance their operations. Debt could be either short tenured or long tenured depending on the maturity structure. The associated cost of each form of capital differs, therefore the mix of debt and equity that a firm uses to finance its operations will impact on the financial performance. Establishing an appropriate mix of debt and equity that will optimize financial performance is thus a critical issue for firms and it is for this reason that the study seeks to assess the effect of capital structure on the financial performance of listed non-financial firms in Nigeria. The study was based on positivism philosophy and adopted the ex-post factor research with historical data obtained from financial statements of all non- financial companies listed on the Nigerian Stock Exchange over a period of twelve years from 2010 to 2021. Panel data analysis was employed for the study by using the pooled regression model, the fixed effects model and the random effects model. Using the Hausman’s Chi square test statistic, the fixed effects model was selected as the appropriate model for the study. The empirical evidence from the results shows that at 5% level of significance short term debt which had significant, positive effect on return on assets and Tobin’s Q, while long term debt had a significant negative effect on the return on assets. Total equity also had significant positive effect on the Tobin’s Q. However, the effect of long-term debt on Tobin’s Q and total equity on return on assets was negative and insignificant. The results suggest that the effect of the short-term debts on financial performance supports the trade-off theory of capital structure which states that debt has a positive effect on performance while the effect of long-term debt on return on assets supports the pecking order theory of capital structure which states that profitable firms rely initially on internally generated funds before looking for external financing. The study concludes that the listed non-financial firms are financed by a mix of short-term debt, long term debts and equity which have mixed effects on their financial performance. The study therefore recommends that firms in Nigeria should have appropriate policies to guide their capital structure decision that will ensure that they have the appropriate mix of debt and equity that will optimize their performance. |
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KEYWORDS Capital Structure, Firm Size, Long Term Debt Ratio, Return on Assets, Short Term Debt Ratio and Tobin’s Q |
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Cite this paper Rita I. Sike, Umar A. Ibrahim, Faiza Maitala. (2022) Capital Structure and Firm Performance: Empirical Evidence from Nigeria Listed Non - Financial Firms. International Journal of Economics and Management Systems, 7, 549-557 |
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