Financial Leverage and Systematic Risk of Listed Manufacturing Firms in Nigeria

The study examined the effect of financial leverage on systematic risk of listed manufacturing firms in Nigeria. The specific objective was to examine the effect of debt to equity ratio and debt to asset ratio on systematic risk of listed manufacturing firms in Nigeria. The study utilized an ex-post facto research design. The population consisted of 44 manufacturing firms listed on the Nigerian Exchange Group, from which a purposive sample of 25 firms was selected. Secondary data were gathered from the annual reports of these firms for the period spanning 2012 to 2023. The hypotheses were evaluated using Panel Estimated Generalized Least Squares (EGLS). The findings showed that: debt-to-equity ratio significantly and positively affects the systematic risk of listed manufacturing firms in Nigeria (β = 0.0000681, p-value = 0.0012); debt-to-asset ratio has a significant positive effect on the systematic risk of listed manufacturing firms in Nigeria (β = 0.0000138, p-value = 0.0076). In conclusion, firms that choose to increase debt financing may enjoy the potential for higher returns in favorable market conditions, but this comes with the trade-off of increased exposure to systematic risk, which could translate into greater price volatility and consequently lower investor confidence. The study recommends that the Nigerian Securities and Exchange Commission (SEC) should implement guidelines or monitoring mechanisms that encourage manufacturing firms to limit their overall debt levels in relation to their assets. This would mitigate the systemic risk faced by these firms and contribute to greater financial stability within the sector.