Abstract
This study was carried out to determine the effect of financial leverage on the financial performance, using secondary data obtained from the annual reports of 7 quoted Oil and Gas firms in Nigeria, and the Nigerian stock exchange (NSE) daily official lists over the period 2005- 2016. Descriptive statistics such as mean, median, minimum, maximum, standard deviation, coefficient of variation, skewness and kurtosis were used in data presentation, while random effects panel estimator is applied in determining the effect of financial leverage variables as short-term debt ratio (STDR), long-term debt ratio (LTDR) and total-debt equity ratio (TDER) on the financial performance measured by the return on equity (ROE). The regression results from the random effects model (REM), the best panel estimator in this study as revealed by the F-test and the Hausman test for best model selection, indicate that STDR and LTDR have no significant effect on the financial performance, and TDER has a negative significant effect on the financial performance denoted by ROE. The study concludes that higher financial leverage in the capital structure of quoted Oil & Gas firms in Nigeria deteriorates shareholders wealth measured by ROE. The study recommends that firms in the Oil & Gas sector should substitute at least 90 per cent of debt in the capital structure with equity, through bonus issue, right issue and higher proportion of retained earnings in the capital structure.
 Abubakar, A. | Department of Business Management, Federal University Dutsin-Ma, Katsina State, Nigeria
Highlights
Financial leverage is the extent to which firms employ debt in the capital structure
The results indicate that short-term debt ratio (STDR) has a mean value of 0.29, implying that during the period 2005- 2016, approximately 29 per cent of the capital of the firms utilized in this study was financed by short-term debt
Minimum, maximum, median, standard deviation, coefficient of variation, skewness and kurtosis are used for descriptive analysis, while following the results of the tests for best model selection, Random Effects Model was applied to analyze the effect of the financial leverage variables on the return on equity (ROE)
Summary
Financial leverage is the extent to which firms employ debt in the capital structure. Firms can take advantage of tax shields benefits of debt by employing more debt in the capital structure. Interest on debt is tax deductible and the use of debt in the capital structure of firms unlike equity does not lead to dilution of ownership. They are certain costs associated with debt financing vis-à-vis fixed interest payments, cost of financial distress and bankruptcy costs arising from inability of firms to meet up their debt obligations as at when due. Trade-off the tax shields benefits of debts against the financial distress and bankruptcy costs of debt (Abubakar, 2016)
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