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The Impact of Capital Structure and Liquidity on Corporate Returns in Nigeria: Evidence from Manufacturing Firms

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  • Sebastian Ofumbia Uremadu

    ()
    (Michael Okpara University Of Agriculture)

  • Rapuluchukwu Uchenna Efobi

    (Convenant University)

Abstract

The importance of capital structure to corporate financial stability, growth and adequate returns and liquidity cannot be undermined most especially in the midst of recent global financial crises has led to urgent need to embark on this study. The paper used microdata sourced from the financial statements of 10 selected firms covering 2002-2006 to pursue its investigations. The data were arranged in a cross-sectional time series fashion. Specifically, the microdata were analyzed using OLS methodology that included log-linear least squares application to conduct its tests and analyses. We found negative and significant influence of value of long-term debt, ratios of long-term debt to total liability, and ratios of short-term debt to total liability, and ratios of short-term debt to total liability; and equity capital to total liability, on returns; and positive and significant effects of domestic liquidity rate, ratios of long-term debt to equity capital and value of short-term debt, on profitability. Overall, results showed that long-term debt values lead profits under normal OLS function, followed by ratios of long-term debt to equity; short-term debt to total liability, and long-term debt to total liability in descending order of magnitude. Under log-linear function, domestic liquidity leads returns on equity, closely followed by ratios of long-term debt to total liability, and long-term debt values ranked third. It is therefore recommended that corporate firms in Nigeria (including other African countries) should strive to always maintain a balanced proportion of long-term debts in their capital structure mix; and that both the financial system (including economic system) and the corporate enterprises should always endeavor to uphold a policy of maintaining an adequate domestic liquidity rating for there to be sustained increases in corporate growth and profitability in the years ahead.

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Bibliographic Info

Article provided by Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences in its journal International Journal of Academic Research in Accounting, Finance and Management Sciences.

Volume (Year): 2 (2012)
Issue (Month): 3 (July)
Pages: 1-16

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Handle: RePEc:hur:ijaraf:v:2:y:2012:i:3:p:1-16

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Web page: http://hrmars.com/index.php/pages/detail/Accounting-Finance-Journal

Related research

Keywords: Capital structure; liquidity; long-term debt; short-term debt; profitability; corporate returns; Interest rates; inflation rate; reserves;

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References

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  1. Marsh, Paul, 1982. " The Choice between Equity and Debt: An Empirical Study," Journal of Finance, American Finance Association, vol. 37(1), pages 121-44, March.
  2. Julio Pindado & Chabela De La Torre, 2011. "Capital Structure: New Evidence from the Ownership Structure," International Review of Finance, International Review of Finance Ltd., vol. 11(2), pages 213-226, 06.
  3. Tarek Ibrahim Eldomiaty & Chong Ju Choi & Philip Cheng, 2007. "Determinants of financial signalling theory and systematic risk classes in Egypt: implications for revenue management," International Journal of Revenue Management, Inderscience Enterprises Ltd, vol. 1(2), pages 154-176.
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  6. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. Jalilvand, Abolhassan & Harris, Robert S, 1984. " Corporate Behavior in Adjusting to Capital Structure and Dividend Targets: An Econometric Study," Journal of Finance, American Finance Association, vol. 39(1), pages 127-45, March.
  8. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  9. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
  10. Harris, Milton & Raviv, Artur, 1991. " The Theory of Capital Structure," Journal of Finance, American Finance Association, vol. 46(1), pages 297-355, March.
  11. Frank, Murray Z. & Goyal, Vidhan K., 2003. "Testing the pecking order theory of capital structure," Journal of Financial Economics, Elsevier, vol. 67(2), pages 217-248, February.
  12. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May.
  13. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
  14. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
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