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Capital Structure and Profitability of Quoted Firms: The Nigerian Perspective (2000-2011)

Author

Listed:
  • BABATUNDE YUSUF

    (LAGOS STATE UNIVERSITY)

  • AKINWUNMI ONAFALUJO

    (LAGOS STATE UNIVERSITY, OJO, LAGOS)

  • KHADIJAH IDOWU

    (LAGOS STATE UNIVERSITY, OJO, LAGOS)

  • YUSUF SOYEBO

    (LAGOS STATE UNIVERSITY, OJO, LAGOS)

Abstract

The study investigates the relationship between capital structure and profitability of conglomerate, consumer goods, and financial services firms quoted in Nigeria Stock Exchange. In this paper, the sample data collected from the ten randomly selected firms among the three industries were from 2000 to 2011. This comprises a sample size of 120 used for the study. The study used Return on Asset (ROA) and Return on Equity (ROE) as performance proxies. In addition, debt equity ratio (DER) and debt asset ratio (DAR) were used as capital structure proxies. The relationship between the performance and capital structure proxies were analysed using correlation coefficient and regression techniques. According to the results, the relationship between capital structure (both DER and DAR) and return on asset (ROA) is not significant across all firms except for 7up and Nestle. It also shows an insignificant relationship between return on equity (ROE) and DAR. However, there is a significant relationship in almost all firms between return on equity and debt to equity. This justifies that a highly geared firm tends to have high profitability. Moreover, the nature of the industry also determines the effect of capital structure on their profitability. In the financial firms, there is a negative significant relationship between return on equity and debt to assets ratio. In the conglomerate firms, there is also a negative relationship between return on assets (ROA) and debt to equity ratio however not significant. This explains that highly geared firms have significant relationship with return on equity while insignificant with return on assets. The study recommends that firms that want to maximise shareholders wealth should increase their leverage while firms that ensure stakeholders performance should increase their assets. Conclusively, a mix of the firms? leverage and assets at an appropriate ratio will be considered a good capital structure for the firms.

Suggested Citation

  • Babatunde Yusuf & Akinwunmi Onafalujo & Khadijah Idowu & Yusuf Soyebo, 2014. "Capital Structure and Profitability of Quoted Firms: The Nigerian Perspective (2000-2011)," Proceedings of International Academic Conferences 0202135, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:iacpro:0202135
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Equity; Debt; Asset; Returns; Capital structure; Firm profitability;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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