Effects of Capital Structure on Firm’s Performance: Empirical Study of Manufacturing Companies in Nigeria

Lawal Babatunde Akeem, Edwin Terer K., Monica Wanjiru Kiyanjui and Adisa Matthew Kayode

Journal of Finance and Investment Analysis, 2014, vol. 3, issue 4, 4

Abstract: This research examines the effect of capital structure on firm’s performance with a case study of manufacturing companies in Nigeria from 2003 to 2012 with the purpose of providing a critical appraisal of the need and importance of capital structure. Descriptive and regression research technique was employed to consider the impact of some key variables such as Returns on asset (ROA), Returns on equity(ROE),Total debt to total asset(TD), Total debt to equity ratio(DE) on firm performance. Secondary data was employed using data derived from ten (10) manufacturing companies. From our findings, we observe that capital structure measures (total debt and debt to equity ratio) are negatively related to firm performance. It is hereby recommended that firms should use more of equity than debt in financing their business activities, in as much as the value of a business can be enhanced using debt capital. Hence firms should establish the point at which the weighted average cost of capital is minimal and maintain that gearing ratio so that the company’s value will not be eroded, as the firm’s capital structure is optimal at this point ceteris paribus.

Date: 2014
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