Abstract
The Nigerian downstream oil and gas sector in the last few years have witnessed a plethora of challenges such as infrastructural decay, rising cost of importation of petroleum products (fuel, diesel, aviation fuel and kerosene) which is a fallout of breakdown of the nation’s refineries. The study examined the impact of capital structure on the profitability of firms in the downstream sector of the oil and gas industry in Nigeria from 2000 to 2018. This study adopted an ex-post facto research design. The study employed a dynamic panel system equation of generalized method of moment. Secondary data were sourced from the annual reports of the 8 selected oil and gas companies listed in Nigeria. The study applied descriptive statistics, correlation, and unit root test as well as inferential statistics. Inferences were made at 5 percent significant level. Results showed that Debt Capital ratio had a negative and significant relationship with ROA ( β = -0.0257, t=-5.147, p <0.05). Also, Equity Capital ratio had a positive and significant relationship with current ROA ( β = 0.228, t=5.3015 p <0.05). Lastly, Interest Rate had a positive and insignificant relationship with current ROA ( β = 0.247, t=4.3521, p <0.05). The study concluded that while debt capital ratio had a significant inverse effect on firms’ profitability, equity capital ratio had a positive and significant effect on the profitability of the selected oil and gas firms. The result also affirmed that interest rate had a positive and insignificant effect on profitability of selected oil and gas firms. The study recommended that Oil and Gas sector should increase equity financing and reduce debt financing. This equity can be enhanced through increased in the amount of ploughed back profit/retained earnings and bonus issue. Word counts: 281 Keywords: Capital Structure, Profitability, Equity capital ratio, Debt Capital ratio DOI: 10.7176/RJFA/11-8-02 Publication date: April 30 th 2020
Highlights
Capital is an important and critical resource for all companies
The main question is why are the downstream oil and gas companies not as profitable as they should be considering the fact that the oil and gas sector is naturally a lucrative industry? Can the problem be attributable to their sources of finance? This study seeks to determine how capital structure has affected the profitability of companies in the downstream oil and gas sector in Nigeria, the main objective of this study is to examine the impact of capital structure on the profitability of firms in the downstream oil and gas companies listed in Nigeria
The dynamic panel in a generalized method of moment (GMM) framework follows approach developed by Arrllano and Bond (1991) and Blundell and Bond (1998) to obtain robust results
Summary
Capital structure of a corporate firm usually comprises equity and debt components. Equity is the component of a firm’s capital that provides funds to the firm through the sale of some part-ownership rights to investors. Debt as a component of firm’s capital structure is a contractual agreement, whereby a firm or company borrows an amount of money, pays agreed interests on the borrowed sum, and repays the borrowed amount of money on maturity or at a stipulated time. The firm employs part of the debt amount to finance its assets. The amount of debt that a firm uses to finance its assets is called leverage. A firm with a lot of debt in its capital structure is said to be highly leveraged. Interest rate, security price determination and regulation are examples of macro-level implications while corporate governance and company development constitute micro-level implications (Green, 2004)
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