SECTOR ANALYSIS OF CAPITAL STRUCTURE AND FIRM PERFORMANCE IN NIGERIA 1997-2012

SECTOR ANALYSIS OF CAPITAL STRUCTURE AND FIRM PERFORMANCE IN NIGERIA 1997-2012

ABSTRACT

The purpose of this study is to empirically analyze the impact of capital structure on firm’s performance in Nigeria; A sector by sector analysis. The annual financial statements of 15 firms listed on the Nigerian Stock Exchange from Four (4) sectors of the Nigerian economy were used for this study which covered the period between  1997-2012. Multiple regression analysis was applied on performance indicators such as Return on Asset (ROA) as well as Short-term debt to Total assets (STDTA), Long term debt to Total assets (LTDTA) and Total debt to Equity (TDE) as capital structure variables. The hypotheses were tested with ordinary least square regression estimation technique and analyzed. Generally, the results showed a negative and non-significant impact of capital structure on firm’s performance. The study therefore, concludes that statistically, capital structure is not a major determinant of firm performance. It recommends that managers of firms should exercise caution while choosing the amount of debt to use in their capital structure as it affects their performance negatively. That firms should try to finance their activities with retained earnings and use debt as a last option as this is consistent with the pecking order theory. Finally, the study strongly recommends that firms should use more of equity than debt in financing their business activities, this is because in spite of the fact that the value of a business can be enhanced with debt capital, it gets to a point that it becomes detrimental (negative) or unfavorable to the business.