Effect of Capital Structure on Firm Performance (A Study of Selected Quoted Banks in Nigerian Stock Exchange)

Abstract

The rationale of this study is aimed at investigating the relations between capital structure and firm performance within the banking industries in Nigeria using a sample 15 quoted banks in Nigerian stock exchange. Annual time series data were sourced from stock exchange fact book including the annual financial statements of 15 banks quoted in Nigerian stock exchange. This study covers 29 years period between 1985 -2013. Econometric procedure of ordinary least square (OLS) Augmented Dickey Fuller (ADF), Unit Root test, Johansen co integration test and Error Correction Model (ECM) were employed in the empirical analysis. R², Regression Coefficient, Probability value, T-Statistics and F-Statistics were used to determine the extent to which the independent variable can affect dependent variable. Return on investment was used as a measure of firm's performance. The capital structure measure includes (long-term debt and equity capital) as independent variables. The results indicate that firm performance which is measured by return on investment have a positive and significant relationship on equity capital. Moreover there exist a negative and significant relationship between debt capital and return on investment. Consequently, it is recommended that firms should use more of equity capital than debt in financing their business activities.