Capital Structure and Corporate Performance of Nigerian Quoted Firms: A Panel Data Approach

Abstract

This paper presents empirical findings on the impact of capital structure (leverage) on performance of quoted firms in Nigeria. The main objective of this study is to determine the overall effect of capital structure on corporate performance of Nigerian quoted firms by establishing the relationship that exists between the capital structure choices of firms in Nigeria and their return on assets, return on equity and tobin’s Q (a market performance measure). The effect of institutional factors such as size, tax and industry on firms’ performance was also established. The study employed panel data analysis by using Fixed-effect estimation, Random-effect estimation and Pooled Regression Model. The usual identification tests and the Hausman’s Chi-square statistics for testing whether the Fixed Effects model estimator is an appropriate alternative to the Random Effects model were also computed for each model. The empirical results based on 2003 to 2007 accounting and marketing data for 101 quoted firms in Nigeria lend some support to the pecking order and static tradeoff theories of capital structure. A firm’s leverage was found to have a significant negative impact on the firm’s accounting performance measure (ROA). An interesting finding is that all the leverage measures have a positive and highly significant relationship with the market performance measure (Tobin’s Q). It was also established that the maturity structure of debts affect the performance of firms significantly and the size of the firm has a significant positive effect on the performance of firms in Nigeria The study further reveals a salient fact that Nigerian firms are either majorly financed by equity capital or a mix of equity capital and short term financing. It is therefore suggested that Nigerian firms should try to match their high market performance with real activities that can help make the market performance reflect on their internal growth and accounting performance