Abstract
There are two components of corporate capital. This paper examined the effect of debt financing on the financial performance of quoted firms in Nigeria stock exchange using time series data from 2000-2017. The objective was to examine the controversial findings of scholars on the effect of capital structure on corporate performance of firms. Return on assets and return on equity was modeled as the function of debt equity ratio, debt ratio, equity ratio, total liability ratio and long term debt ratio. Multiple regressions with the aid of statistical package for social sciences were used as data analysis techniques. Model one found that a correlation coefficient (r) of .872 this implies that a very strong correlation exists between return on assets and explanatory variables. The coefficient of determination (r²) is .678 which shows that 67.8% of the variation in Return on Assets is attributable to the variations in the financial leverage. Also, the F- value calculated of 8.338 has a correlation corresponding value of .004 which implies a good model utility. The test of significance conducted as shown in the tables above states that ROA has a calculated value of 242.032 and a corresponding significance value/probability value of .014. The positive sign of t-value (1.653) shows the direction of the variables. This therefore implies that when a financial leverage is well used, this leads to a better, reliable and fairer financial result that is objective and represent the true state of affairs in the food and beverage companies proportionately. Model two found that a correlation coefficient (r) of .772 this implies that a very strong correlation exists between return on assets and explanatory variables. The coefficient of determination (r²) is .639 which shows that 63.9% of the variation in return on equity is attributable to the variations in the financial leverage. Also, the F- value calculated of 7.644 has a correlation corresponding value of .004 which implies a good model utility. The test of significance conducted as shown in the tables above states that ROE has a calculated value of 568.906 and a corresponding significance value/probability value of .003. The positive sign of t-value (3.310) shows the direction of the variables. This therefore implies that when a financial leverage is well used, this leads to a better, reliable and fairer financial result that is objective and represent the true state of affairs in the food and beverage companies proportionately. We recommend that management of the firms should work very hard to optimize the capital structure in order to increase the returns on equity and assets and that Management of Nigerian firms should increase their commitments into capital structure in order to improve earnings from their business transaction.
Highlights
Every corporate organization exists to maximize shareholders wealth
While the effect of financial leverage has well been documented in literature, empirical findings remain controversial, inconclusive and difficult to be adopted for policy making, this study investigated the effect of financial leverage on the financial performance of quoted Nigeria firms
This study investigates the effect of financial leverage on the profitability of quoted food and beverage firms in Nigeria
Summary
Every corporate organization exists to maximize shareholders wealth. This operational philosophy depended on internal factors of the firms such as financing decision and external factors such as monetary and macroeconomic variables. Financial leverage is traditionally viewed as the use debt component capital structure, through the use of fixed income securities, such as loans and bonds It has a significant influence on the company’s ability to achieve its ultimate goal, such as maximizing the shareholders wealth (Taani, 2012). Financial leverage have the advantages of tax shield benefits and the risk level associated with the debt financing makes it less expensive than equity financing., from investors point of view investing in debt securities is less risky than investing in publicly trading stocks, as debt securities is not subjects to the risks associated with the stock market, through debt financing the company is no longer affected by changes in the interest rate that occur in the market, the cost of issuing long-term securities such as: bonds & loan contracting is lower than the cost of stock issuing while the disadvantages includes increase in the company’s financial risk, the nature of some of the types of debt financing (bonds) requires the company to have a large amount of money at maturity, as a result of the high risk that associate the use of the use of debt securities, the company becomes subject to more restrictions and obtaining long-term loans may be difficult for small companies that are new in the market. While the effect of financial leverage has well been documented in literature, empirical findings remain controversial , inconclusive and difficult to be adopted for policy making, this study investigated the effect of financial leverage on the financial performance of quoted Nigeria firms
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