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Capital Structure And Firm Financial Performance In Nigeria: Empirical Evidence Of The Causal Link

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  • Agbonrha-Oghoye Imas IYOHA

    (Edo University, Iyamho, Auchi-Abuja Expressway, Edo State, Nigeria)

  • David UMORU

    (Edo University, Iyamho, Auchi-Abuja Expressway, Edo State, Nigeria)

Abstract

The paper examines the link between capital structure and firm financial performance in Nigeria on basis of panel research design with secondary data spanning 2010-2014 financial year for seventy (75) sampled companies quoted in the Nigerian Stock Exchange was analysed. The data estimation technique was the 2SLS which is suitable in study perceived not be devoid of endogeneity. The result revealed that leverage as proxy by ratio of noncurrent liability to equity (NCLEQ) seems not to exhibit causality with financial performance (RETOA) vice-versa. However, there seems to be the presence of bidirectional causality between current liability expressed as a ratio to equity (CULEQ) and RETOA. Also, there is simultaneous causal link between Equity express as a ratio to overall assets (EQTTA) and RETOA. The study therefore concludes that capital structure (CULEQ and EQTTA) determines financial performance (RETOA) while simultaneously, financial performance determines capital structure in Nigeria. The study recommends that firms should have apposite capital structure mix, specifically ratio of NCLEQ to CULEQ and a good spread of both institutional and insider shareholdings.

Suggested Citation

  • Agbonrha-Oghoye Imas IYOHA & David UMORU, 2017. "Capital Structure And Firm Financial Performance In Nigeria: Empirical Evidence Of The Causal Link," Contemporary Economy Journal, Constantin Brancoveanu University, vol. 2(4), pages 69-83.
    • Handle: RePEc:brc:brccej:v:2:y:2017:i:4:p:69-83
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    Cited by:

    1. Abdullah, Hariem & Tursoy, Turgut, 2021. "Capital structure and firm performance: a panel causality test," MPRA Paper 105871, University Library of Munich, Germany.
    2. Rishi Kapoor Ronoowah & Boopendra Seetanah, 2023. "Corporate governance, capital structure, and firm performance: a panel VAR approach," SN Business & Economics, Springer, vol. 3(1), pages 1-30, January.

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