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An Empirical Examination of the Relationship between Capital Structure and the Financial Performance of Firms in Nigeria

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  • Uwuigbe UWALOMWA, Olayinka Marte UADIALE

    (1Department of Accounting, Covenant University, Department of Accounting, University of Lagos)

Abstract

This paper basically investigates the relationship between capital structure and the financial performance of listed firms in Nigeria. The study considered a total sample of 31 listed firms on the floor of the Nigerian stock exchange. The annual reports for the period 2005-2009 were analyzed using the Ordinary Least Squares (OLS) technique of model estimation to test the research propositions stated in this study. The study observed that two of the explanatory variables in this study (i.e. short-term debt and shareholders’ funds) have a significant positive impact on the financial performance of listed firms in Nigeria. In addition, the study observed that long-term debt has a significant negative impact on the financial performance of firms. To this end the study concludes that employing high proportion of long-term debt in firms’ capital structure will invariably result in a low financial performance of a firm.

Suggested Citation

  • Uwuigbe UWALOMWA, Olayinka Marte UADIALE, 2012. "An Empirical Examination of the Relationship between Capital Structure and the Financial Performance of Firms in Nigeria," EuroEconomica, Danubius University of Galati, issue 1(31), pages 57-65, February.
  • Handle: RePEc:dug:journl:y:2012:i:1:p:57-65
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    File URL: http://journals.univ-danubius.ro/index.php/euroeconomica/article/view/1250/1070
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    References listed on IDEAS

    as
    1. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April.
    2. Joshua Abor, 2005. "The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana," Journal of Risk Finance, Emerald Group Publishing, vol. 6(5), pages 438-445, November.
    3. Titman, Sheridan & Wessels, Roberto, 1988. " The Determinants of Capital Structure Choice," Journal of Finance, American Finance Association, vol. 43(1), pages 1-19, March.
    4. Wald, John K, 1999. "How Firm Characteristics Affect Capital Structure: An International Comparison," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 22(2), pages 161-187, Summer.
    5. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    6. Laurence Booth, 2001. "Capital Structures in Developing Countries," Journal of Finance, American Finance Association, vol. 56(1), pages 87-130, February.
    7. Joshua Abor, 2007. "Debt policy and performance of SMEs: Evidence from Ghanaian and South African firms," Journal of Risk Finance, Emerald Group Publishing, vol. 8(4), pages 364-379, August.
    8. John K. Wald, 1999. "How Firm Characteristics Affect Capital Structure: An International Comparison," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 22(2), pages 161-187, June.
    9. Jensen, Michael C, 1988. "Takeovers: Their Causes and Consequences," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 21-48, Winter.
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