Abstract
For so long, and most recently, relationship between capital structure and manufacturing firm’s performance has been an issue in financial world. Financial analysts are controversial in advising the investors on the best capital structure to employ while undertaking investment decisions. This paper investigates dynamic relationship between capital structure and quoted manufacturing firms’ performance in Nigeria from 1990-2016. Using panel unit root test to verify the stationarity property of the data, Pedroni conitegration tests and Panel Vector Error Correction Method (PVECM) are employed to examine the equilibrium among the variables as well as analysing the data. There is evidence of long run relationship between capital structure and firms’ performance in Nigeria as revealed by Cointegration test results. Results from PVECM show that, throughout the period i.e. both in the long run and short run, except itself, none of the variables’ shocks in the system significantly accounts for variations in the returns on asset (ROA), given variance error decomposition’s statistics. Also, both in the short run and long run, innovations from only equity (EQU) explains, on average, 1.76% variations to profit margin. Arising from these findings, the study could not find dynamic relationship between capital structure and firms’ performance. The study, therefore, recommends that manufacturing firms should be pragmatic when choosing capital structure outlays to enhance performance in their activities.
Highlights
Appropriate capital structure decision is one of the most crucial decisions often confronted with by financial analysts and managers of firms, especially in developing economies
Secondary data used in this study are obtained from Nigeria Stock Exchange Fact book, 2016 and it includes returns on asset (ROA) measured as net income divided by asset, profit margin (PRM) measured as earnings before tax divided by total asset, short term loan (STD) measured as loans below one year of maturity, long term debts (LTD) as loans above one year of maturity and equity (EQU) as owners’ funds
The development suggests that profit margin (PRM) is an important and strong factor driving returns on asset in the manufacturing firms in Nigeria
Summary
Appropriate capital structure decision is one of the most crucial decisions often confronted with by financial analysts and managers of firms, especially in developing economies. Questions burdening on the choice of debt or equity, optimal capital structure of a firm and potential determinants of such optimal capital structure, require crucial decisions [3]. It is obvious, since firm’s size does not remain stagnant for long and so does the cost of capital due to constant changes in interest rates and inflation, the risks inherent in capital mix perpetually remains dynamic. Evidence on dynamic relationship between capital structure and firms’ performances remains elusive in empirical literature in Nigeria. This study examines the dynamic relationship between capital structures and quoted manufacturing firms performance in Nigeria from 1990 to 2016. Examining the dynamic relationship between firm’s capital structure and its performance becomes necessary as individuals and corporate organisations make investment decisions based on the records of performance of the prospective businesses
Sign-in/Register to view highlights & summary 
Published Version (
Free)
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call