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Does Capital Structure Enhance Firm Performance? Evidence from Nigeria

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  • Muritala Taiwo Adewale
  • Oguntade Busola Ajibola

Abstract

The relationship between capital structure and firm performance has received considerable attention in finance literature. This study examines the impact of capital structure on performance of some selected manufacturing companies in Nigeria using the annual data of five firms for a period of eleven years (2002-2012). The study hypothesizes a negative relationship between capital structure and firm performance measured in terms of return on equity and return on investment. However, the results of Panel Least Square (PLS) regression confirm that debt ratio, asset turnover and size of the firm are positively related to firm performance, while evidence of a negative and significant relationship is found between asset tangibility and measures of firm performance in the model. This implies that the sampled firms are not able to utilize the fixed asset of their total assets judiciously to impact positively their performance. Hence, it is suggested that although asset tangibility shows a negative relationship with both the performance indicators, it should be considered as a driving factor to capital structure because firms with more tangible assets are less likely to be financially constrained. Finally, the results show that growth fails to have a significant effect on either of the performance indicators.

Suggested Citation

  • Muritala Taiwo Adewale & Oguntade Busola Ajibola, 2013. "Does Capital Structure Enhance Firm Performance? Evidence from Nigeria," The IUP Journal of Accounting Research and Audit Practices, IUP Publications, vol. 0(4), pages 43-55, October.
    • Handle: RePEc:icf:icfjar:v:12:y:2013:i:4:p:43-55
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    Cited by:

    1. Viorela Ligia VAIDEAN, 2014. "On Financial Performance and Capital Structure of Romanian Companies," Finante - provocarile viitorului (Finance - Challenges of the Future), University of Craiova, Faculty of Economics and Business Administration, vol. 1(16), pages 151-157, December.
    2. Jay Desai & Rajesh Desai, 2019. "Capital Structure As Determinant Of Financial Performance: Review Of Literature," Copernican Journal of Finance & Accounting, Uniwersytet Mikolaja Kopernika, vol. 8(4), pages 133-148.

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