Abstract
This study seeks to examine the impact of capital structure on corporate financial performance of four cement companies in Nigeria for the period 2006 – 2015. Data selected as proxies for the financial performance of the firms, which included return on asset (ROA), return on equity (ROE), and return on sales (ROS) were generated from the firm’s audited annual financial reports. Data on total debt/asset ratio (TDA), long-term debt/asset ratio (LDA), and equity/asset ratio (EQA) were selected as proxies for capital structure of the firms. Also, data on asset-turnover ratio (ATO) (measurement for asset utilization), total asset (TAST) and total sale (TSAL) – measurements for firm size, were selected as control variables. The parameters of the above variables were estimated using Autoregressive Distributed Lag (ARDL) method. The result of the study revealed that all the capital structure variables (TAD, LDA and EQA) have mixed impact on financial performance indicators (ROA, ROE and ROS) used in the study. While there existed positive relationships between the control variables of ATO, TAST and performance, TSAL negatively related to financial performance measures. Following from the findings of the study, corporate decision makers in Nigerian cement industry should be careful in the use of debts. While it is necessary to use debt as a source of finance, such a decision should be a last option as supported by the Pecking order theory. Rather, retained earnings should be preferred.
Highlights
Background of the Study Corporate financing decision, one of the four major corporate finance decisions, are quite complex processes
Using linear regression to analyse secondary data obtained from published audited annual financial reports of sample cement firms, the results indicate that capital structure has significant negative impact on return on equity (ROE), net profit margin (NPM), return on capital employed (ROCE) and return on assets (ROA)
The study investigates the impact of capital structure on financial performance of cement companies in Nigeria using three accounting based measures of performance (ROA, ROE and return on sales (ROS))
Summary
Background of the Study Corporate financing decision, one of the four major corporate finance decisions (others include investment, dividend and liquidity decisions), are quite complex processes. Theories in corporate finance may only have explained certain facets of the diversity and complexity of financing choices. Graham and Harvey (2001) argued that, a lot of studies have been done in investigating capital structure of the firms, the results obtained are still unclear. This, according to them, might be due to wrong measurement of key variables, investigation on wrong models or issues, misspecification of managerial decision process or unresponsiveness of owner-managers. Capital structure is very important for firms because it has an impact on long-term corporate profits, firm’s valuation and capital budgeting decisions
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