– Capital Structure and Financial Performance of Listed Manufacturing Firms in Nigeria –
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ABSTRACT
There exists divergence of opinion in literature on the relationship between capital structure and firms financial performance. This mix of opinions makes the direction of the relationship between debt holders and equity holders to be controversial.
Therefore, this study investigated the impact of capital structure on financial performance of listed manufacturing firms in Nigeria. The study formulated four hypotheses and used generalized least square multiple regression to analyse the secondary data extracted from the annual reports and accounts of the 31 sampled firms for the period 2009 to 2014.
The study found that total debt, long-term debt and short-term debt have significant impact on the financial performance of listed manufacturing firms in Nigeria.
The study also found that total debt to total equity has no significant effect on the financial performance of the firms. In view of the findings, it is recommended among others that the management of listed manufacturing firms should work very hard to increase the short term debt to total assets component of their capital structure, since it has positive impact on their financial performance.
Also, the firms should reduce the level of total debt to total assets and long term debt to total assets in their capital structure components, because they affect their financial performance negatively
TABLE OF CONTENTS
Title page- – – – – – – – – – – i
Declaration- – – – – – – – – – – ii
Certification – – – – – – – – – – iii
Acknowledgements- – – – – – – – – – iv
Dedication- – – – – – – – – – – v
Abstract- – – – – – – – – – – vi
Table of Contents- – – – – – – – – – vii
List of Tables– – – – – – – – – – ix
List of Appendices- – – – – – – – – – x
CHAPTER ONE: INTRODUCTION
1.1 Background to the Study – – – – – – – – 1
1.2 Statement of the Problem- – – – – – – – 8
1.3 Objectives of the Study- – – – – – – – – 10
1.4 Hypotheses of the Study- – – – – – – – – 11
1.5 Scope of the Study- – – – – – – – – 11
1.6 Significant of the Study- – – – – – – – – 12
CHAPTER TWO: LITERATURE REVIEW
2.1 Introduction- – – – – – – – – – 14
2.2 Conceptual of Capital Structure – – – – – – – 14
2.3 Concept of Financial Performance- – – – – – – 21
2.4 Review of Empirical Studies- – – – – – – – 23
2.5 Theoretical Framework- – – – – – – – – 39
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction- – – – – – – – – – 44
3.2 Research Design- – – – – – – – – – 44
3.3 Population and Sample Size- – – – – – – – 44
3.4 Sources and Method of Data Collection- – – – – – – 45
3.5 Technique of Data Analysis- – – – – – – – 46
3.6 Variables Measurement- – – – – – – – – 46
3.7 Model Specification- – – – – – – – – 47
3.8 Diagnostic and Robustness Test- – – – – – – – 48
CHAPTER FOUR: DATA PRESENTATION and ANALYSIS
4.1 Introduction- – – – – – – – – – 49
4.2 Descriptive Statistics- – – – – – – – – 49
4.3 Correlation Matrix- – – – – – – – – 51
4.4 Analysis and Discussion of Regression Results- – – – – – 52
4.5 Policy Implication of the Research Findings – – – – – 57
CHAPTER FIVE: SUMMARY, CONCLUSIONS and RECOMMENDATIONS
5.1 Summary- – – – – – – – – – – 59
5.2 Conclusions- – – – – – – – – – 60
5.3 Recommendations – – – – – – – – – 61
5.4Limitations of the Study – – – – – – – – 62
5.5 Areas for Further Research- – – – – – – – 62
References- – – – – – – – – – – 64
Appendices- – – – – – – – – – – 72
LIST OF TABLES
Table 3.1 List of Population Firms- – – – – – – 45
Table 3.2 Variables Measurement and Definition- – – – – 47
Table 4.1 Descriptive Statistics- – – – – – – – 49
Table 4.2 Correlation Matrix- – – – – – – – 51
Table 4.3 Regression Results- – – – – – – – 53
Table 4.4 Summary of Pooled ols, Fixed and Random effects Models- – 57
INTRODUCTION
Background to the Study
The nature and extent of relationship between capital structure and financial performance of firms have attracted attention in the literature of finance.
Capital structure involves the decision about the combination of the various sources of funds a firm uses to finance its operations and capital investments.
These sources include the use of long-term debt finance called debt financing, as well as preferred stock and common stock also called equity financing.
One of the most important goals of financial managers is to maximize shareholders wealth through determination of the best combination of financial resources for a company and maximization of the company‟s value by determining where to invest their resources. Capital structure represents the major claims to a corporation‟s asset.
This includes the different types of equities and liabilities (Riahi-Belkaoui, 1999). The debt-equity mix can take any of the following forms: 100% equity: 0% debt, 0% equity: 100% debt; and X% equity: Y% debt.
From these three alternatives, the first option is that of the unlevered firm, that is, the firm shuns the advantage of leverage (if any).
Option two is that of a firm that has no equity capital. This option may not actually be realistic or possible in the real life economic situation, because no provider of funds will invest money in a firm without equity capital.
This partially explains the term “trading on equity”, that is, the equity element that is present in the firm‟s capital structure that encourages the debt providers to give their scarce resources to the business.
The third Option is the most realistic one in that, it combined both a certain percentage of debt and equity in the capital structure and thus, the 13 advantages of leverage (if any) is exploited.
This mix of debt and equity has long been a subject of debate in finance literature concerning its determination, evaluation and accounting.
Financial performance is the measure of how well a firm can use its assets from its primary business to generate revenues.
REFERENCES
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Abdullah,E.M. (2014). The Impact of Capital Structure on Firms Performance: Evidence from Saudi Arabia. Journal of Applied Finance and Banking, 4(2), 183-193.
Abolfazl, M., Ali, R.Y., Hamid, R.R., & Kambiz, B. (2013). Relationship between Capital Structure and Firm Performance. Journal of Business Research, 5(8), 421-432.
Abor, J. (2008). Determinants of the Capital Structure of Ghanaian Firms. Research Paper African Economic Research Consortium, 179.
Akinyomi, O.J. (2013). Effect of Capital Structure on Firm Performance: Evidence from Nigeria Manufacturing Industry. International Journal of Innovation research and studies, 2(9), 1-13.
Akinsulire, C. O. (2014). Financial management. ET-TODA Venture Ltd: Logos.
Aliu, N.O. (2010). Effect of Capital Structure on the Performance of Quoted Manufacturing Firms in Nigeria. Unpublished M.sc Thesis, Ahmadu Bello University Zaria.
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