Capital Structure and Firms’ Performance. A Review of Quoted Nigeria Banks

Abstract

Capital is vital for any business to survive and its composition matters a lot if the business wants to continue in perpetuity. This paper therefore examines capital structure and firms’ performance of quoted banks in Nigeria for the period of 1981-2019. It drew heavily from the Static Trade-Off Theory, Irrelevance and Relevance Theory of Modigliani And Miller and the Pecking Order Theory. Secondary data with respect to return on assets, equity ratio and leverage ratio were obtained from the Nigerian stock exchange reports. The data were subjected to unit root tests using the Augmented Dickey-Fuller test and were found to be stationary at first difference: 1(1). The Johansen Co-integration test conducted showed that the variable under study were co-integrated in order 1(1). The results of the Error Correction Model indicated that the debt ratio has negative and insignificant relationship to the return on assets, while the equity ratio and leverage ratio had significant positive relationship to the return on assets proxy for firms’ performance. Furthermore, a uni-directional causality was identified between equity ratio and return on assets, equity ratio, debt ratio and leverage ratio and return on assets, after employing the Granger Causality tests. The paper therefore recommends that short-term employment of debt finance is needed so as to easily absorb applicable interest charge and reduce corporate task burden. The paper further suggest that financial managers should rely more on internal funds before exploring other external avenues to source for funds.