Effect of Financial Performance on Capital Structure of Non-Financial Firms in the Nigerian Stock Exchange

Abstract

The main objective of this thesis was to examine the effect of financial performance on capital structure of non-financial firms on the Nigerian Stock Exchange (NSE). This was guided by assessing the effect of earnings per share, market to book value of equity, return on assets and return on capital employed on capital structure choice while size was included as the moderating variable. The causal research design was adopted. Panel data involving the 186 listed companies on the NSE as at December 2015 for a period of 16 years (1999 to 2015) was extracted from the annual reports and financial statements of the firms, Central Bank of Nigeria statistical bulletins, NSE fact books and bulletins. Due to the nature of business of some organisations and incomplete data a total of 87 samples were included in the study. Both descriptive which involve tables, graphs, virtual plots and inferential statistics with the application of the general method of moments (GMM) were used to interpret and estimate the capital structure regression equation. The effects of all the explanatory variables are statistically significant at all levels of capital structure measure except for return on capital employed (ROCE), total debt ratio (TDR) and debt to equity ratio (DER) whose conclusions are statistically insignificant. Based on the significance of these results it was concluded that both the efficiency risk and franchise value hypotheses of the reverse causality hypothesis are observable in the capital structure choice of the non- financial firms in the NSE. However, the dominance of the efficiency risk hypothesis cannot be overlooked. In view of this, the study therefore recommend that managers should strive more towards financial performance to be able explore more the best option available in capital combination be able to achieve the wealth maximization goal of the shareholders while those saddled with the responsibility of enabling a conductive atmosphere for financing and investment in the country should not just sit and create regulations but to see that it is effectively implemented so as to make an upward impact on government revenue. It is further recommended that researchers in the field of corporate finance and the entire academia in this area should strive to explore the suggested reverse causality from capital structure and firms’ financial performance.