Effect of Capital Structure on Financial Performance of Quoted Non-Financial Companies in Nigeria

Abstract

A great dilemma for management and investors alike is whether there exists an optimal capital structure and how various capital structure decisions, both short-term and long-term, influence business performance. This paper therefore investigates the effect of capital structure decisions on financial performance using a sample of 10 quoted Non-financial companies on the Nigerian Stock Exchange for a period of five years (2016–2020). The study used secondary panel data contained in the annual reports and financial statements of the quoted non-financial companies. The study examined the effect of debt equity (being the explanatory variable) on return on equity (ROE) and return on assets (ROA) which represents the dependent variables. The panel dataset were analysed using pooled, fixed effect and random effect models while Hausman’s test were used to select the appropriate model. Correlation and regression analysis were employed in the statistical analysis that was carried out with the aid of STATA version 13. On both the ROE and ROA models, there is a positive relationship with debt equity ratio. The results showed that the financial performance of firms increases with the increase in the changes in debt in the capital structure. This implies that, the inclusion of debt in the capital structure of a firm positively affect the equity shareholders in terms of firm performance; and this thus supports debt financing in running the firms. The study recommended that firms should increase debt financing in their capital structure in order to enhance financial performance and increase value to the companies’ stakeholders.