Effect of Capital Structure on Financial Performance of Listed Banks in Nigeria

Abstract

Corporate entities all over the world are faced with the problem of determining appropriate finance that will boost the value of the entity and maximize the wealth of shareholders. However, for overall wealth of shareholders to be met and consistent increase in value of Banks to be achievable, capital either debt in form of customers deposit or equity capital raised from investors is inevitable. This study therefore examined the effect of capital structure on the performance of some selected banks in Nigeria. The objectives were to examine the relationship that exists between capital structure and financial performance and to investigate the effect of capital structure on the financial performance of quoted deposit money banks in Nigeria. To achieve these, a cross sectional time series secondary data covering the period of seven years (2012-2018) was extracted from the audited financial statement of ten (10) banks listed on the floor of stock exchange. The descriptive statistics, Pearson moment correlation and multiple linear regressions were used. The correlation results showed that capital structure is negatively correlated with financial performance (ROA and ROE). Result from panel regression revealed that debt to equity though significant, impacted negatively on return on assets and return on equity ( = −0.1266, < .01; = −5.3571, > .01) , asset tangibility significantly impacted return on asset but 2 insignificantly impacted return on shareholder's equity ( = −0.0235, > .05; = −0.3527, > .10) and also Age have a significant impact on return on asset and insignificant effect on return on equity ( = −0.0141, < .01; = −0.1497, > .10). This study therefore concluded that capital structure have a negative effect on the financial performance of deposit money banks in Nigeria and recommended that appropriate proportion of capital should be tailored towards viable investment opportunities for maximum return of shareholders wealth and increase in value of the firm. More so, while finance manager is alert to the movement in the stock market, banks should take precautionary measures for mitigating credit risk associated with lending and borrowing.

Impact of Capital Structure on Financial Performance of Selected Quoted Food and Beverages Manufacturing Industries in Nigeria

“…Adeoye and Olojede [2] define capital structure as the integration of various sources of funds within or outside the firms' terrain in financing its worthwhile investments or projects with positive net present value. It implies how a firm finances its overall operations and sustains its growth by using different sources of funds.…”

“…Adeoye and Olojede [2] empirically looked into the effect of capital structure on firms' financial performance using panel regression analysis and granger causality test in achieving their stated objectives. They focused their attention on ten (10) listed deposit money banks (DMBs) in Nigeria and the results of their study shows that capital structure have a negative effect on the financial performance of deposit money banks in Nigeria and recommended that precautionary measures be taken by the management in mitigating credit risk associated with borrowing.…”

Capital Structure and Financial Performance of Quoted Manufacturing Firms in Nigeria

“…By applying and sustaining an optimal structure of capital, organizations are motivated to ensure performance maximization and finance cost minimization. Adeoye and Olojede (2019) and Ajayi and Obisesan (2020) are some of the existing capital structure studies that has utilized many proxies to examine capital structure of organizations. Total debt to total assets/total equity, short term/long term debt to total assets/equity are examples of ratios that are frequently applied in existing literatures.…”

Capital Structure and Financial Performance: Panel Evidence from Quoted Manufacturing Firms in Nigeria (2011–2020)

“…Appah et al (2013) argued the significant negative relationship with performance by short term debt, long term debt and total debt. Adeoye and Olojede (2019) and Ajayi and Obisesan (2020), including existing literature on capital structure, explored many substitutes to examine the effect of capital structure on performance of firms. Commonly used ratios in existing literatures are debts to total assets ratio or equity shares ratio, and short or long term debts to total assets or equity (shareholdings).…”