An Empirical Analysis of Capital Structure on Firms’ Performance in Nigeria

Topics: Corporate finance, Finance, Capital structure Pages: 18 (5930 words) Published: September 13, 2013
ISSN: 2278-3369

International Journal of Advances in Management and Economics Available online at RESEARCH ARTICLE

An Empirical Analysis of Capital Structure on Firms’ Performance in Nigeria Taiwo Adewale Muritala*
Department of Economics and Financial Studies, Fountain University Osogbo, Osun State, Nigeria. *Correspondence E-mail:

This paper examines the optimum level of capital structure through which a firm can increase its financial performance using annual data of ten firms spanning a five-year period. The results from Im, Pesaran & Shine unit root test show that all the variables were non-stationary at level. The study hypothesized negative relationship between capital structure and operational firm performance. However, the results from Panel Least Square (PLS) confirm that asset turnover, size, firm’s age and firm’s asset tangibility are positively related to firm’s performance. Findings provide evidence of a negative and significant relationship between asset tangibility and ROA as a measure of performance in the model. The implication of this is that the sampled firms were not able to utilize the fixed asset composition of their total assets judiciously to impact positively on their firms’ performance. Hence, this study recommends that asset tangibility should be a driven factor to capital structure because firms with more tangible assets are less likely to be financially constrained. Keywords: Capital structure, Corporate finance, Firms, Performance, Regression Nigeria. Jel Codes: C20; D21; G3; G32; L1; N27

Capital structure is defined as the means by which an organization is financed. It is also a company’s proportion of short and long term debt and is considered when analyzing capital structure. It is the mix of debt and equity maintained by a firm. The capital structure choice has been an issue of great interest in the corporate finance literature. This is due to the fact the mix of funds (leverage ratio) affects the cost and availability of capital and thus, firms’ investment source. To date, much of the empirical research has been applied on companies listed on the stock markets. The modern theory of the capital structure originated from the path breaking contribution of Modigliani and Miller in [1], under the perfect capital market assumption that if there is no bankrupt cost and capital markets are frictionless, if without taxes, the firm’s value is independent with the structure of the capital. Debt can reduce the tax to pay, so the best capital structure of enterprises should be one hundred percent of the debt. This seems to be unreasonable in the real world. The debate over the significance of a company’s choice of capital structure is esoteric. But, in essence, it concerns the impact on the total market value of the Taiwo Adewale Muritala | Sep.-Oct. 2012 | Vol.1 | Issue 5|116- 124

company (i.e.; the combined value of its debt and equity) of splitting the cash flow stream into a debt component and earn equity component. Financial experts traditionally believed that increasing a company’s leverage i.e. increasing the proportion of debt in the company’s capital structure, would increase value up to a point. Modigliani and Miller challenged that view in their famous 1958 article. They argued that the market values the earning power of a company’s real assets and that if the company’s capital investment programme is held fixed and certain other assumptions are satisfied, the combined market value of a company’s debt and equity is independent of its choice of capital structure. Since Modigliani and Miller’s [1] capital structure irrelevancy paper, much attention has focused on the reasonableness of these ‘other assumptions’, which include the absence of taxes, bankruptcy costs and other imperfections that exist in the real world. There are various types of finance each with its individual characteristics. Large firms...

References: Taiwo Adewale Muritala | Sep.-Oct. 2012 | Vol.1 | Issue 5|116-124
Available online at European J
Taiwo Adewale Muritala | Sep.-Oct. 2012 | Vol.1 | Issue 5|116-124
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