The Impact of Capital Structure on Firms’ Performance in Nigeria

Ojah Patrick, Ogebe and Joseph Orinya, Ogebe and Kemi, Alewi (2013): The Impact of Capital Structure on Firms’ Performance in Nigeria.

Abstract

This study seeks to investigate the impact of capital structure on firm performance in Nigeria from 2000 to 2010. We considered the impact of some key macroeconomic variables (gross domestic product and inflation) on firm performance. The traditional theory of capital structure was employed to determine the significance of leverage and macroeconomic variables on firm’s performance.

The study makes a comparative analysis of the selected firms which are classified into highly and lowly geared firms setting a leverage threshold of above 10% as being highly geared. A static panel analysis was used to achieve the objectives of the study. Using fixed effect regression estimation model, a relationship was established between performance (proxied by return on investment) and leverage of the firms over a period of ten years. The results provide strong evidence in support of the traditional theory of capital structure which asserts that leverage is a significant determinant of firms’ performance. A significant negative relationship is established between leverage and performance. From our findings, we strongly recommended that firms should use more of equity than debt in financing their business activities, this is because in spite of the fact that the value of a business can be enhanced with debt capital, it gets to a point that it becomes detrimental. Each firm should establish with the aid of professional financial managers, that particular debt-equity mix that maximizes its value and minimizes its weighted average cost of capital.

• Item Type: MPRA Paper
• Language: English
• Keywords: Capital Structure,Firm Performance and Leverage
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill

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