Capital Structure and Financial Performance of Listed Manufacturing Firms in Nigeria
Chapter One
Objectives of the Study
The overall objective of this study is to examine the impact of capital structure on the financial performance of listed manufacturing firms in Nigeria. Specifically, the study sought to:
- evaluate the extent to which total debt to total asset ratio affect financial performance of listed manufacturing firms inNigeria;
- determine the effect of total debt to total equity ratio on financial performance of listed manufacturing firms inNigeria;
- examine the impact of short-term debt to total assets ratio on financial performance of listed manufacturing firms in Nigeria; and
- assess the influence of long-term debt to total assets ratio on financial performance of listed manufacturing firms in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
This chapter discusses the concept of capital structure and financial performance. It also reviews empirical literature on the relationship between the total debt to total assets and financial performance, total debt to total equity and financial performance, short term to total assets and financial performance, and long term debt to total assets and financial performance. The chapter finally discusses the theoretical framework that underpins the study.
Concept of Capital Structure
Theoretical literature has documented a number of definitions of the term capital structure. Like most other terms in finance, no consensus exists on any of the definitions. According to Aliu (2010), a firm‟s capital structure refers to the combination of its financial liabilities and its equities. It is the way a corporation finances its assets through some mix of equity and debt. In line with this, Abdul (2010), Saad (2010), Shehu (2011), Miheala (2012) and Ishaya and Abduljaleel (2014) referred to it as a mix of different types of securities (long-term debt, common stock) which are issued by a firm to finance its assets. Semiu and Collins (2011) also referred to it as the proportions of capital at work in a business by type, namely, equity capital and debt capital, each of which having its own benefits and drawbacks. From the foregoing, capital structure is simply a firm‟s financial framework, which comprises of a firms retain earnings, debt financing and equity financing in order to maintain the business entity in financing its operations.
Capital structure is essential to how a firm finances its overall operations and growth by using different sources of funds. Modigliani & Miller (M&M) theorem is the broadly accepted capital structure theory because it is the foundation of capital structure theory which has been used by many researchers. It is recognized as a sort of structure with which firms receive direction and orientation concerning their business activities. It is also the heart of both a market economy and a democratic society. It is said to be the financing performance of a firm (Simon & Afolabi, 2011). In addition, capital structure represents a means for decision making of business firms and facilitates maximization of return on investment, as well as boosting the efficiency of financing and dividend decisions (Chandrasekharan, 2012).
Financing decisions generally facilitate the survival and growth of a business enterprise, which calls for the need to channel efforts of business towards realizing efficient decision, which will protect the shareholders interest. Capital structure decision is thus considered as one of the effective tools of management to manage the cost of capital. A substantial part of wise corporate stewardship and management attempts to find the appropriate capital structure in term of risks and return payoff for shareholders.
The capital structure of a firm consists of debt and equity. Debt is further classified into short and long term. Accounting and finance literature often discuss these components as ratio of total assets and of equity. The components are discussed hereunder.
Total Debt to Total Assets
The total debts to total assets measure the amount of the total funds provided by creditors in relation to the total assets of a firm. Generally, creditors would prefer low ratio for all debts because the lower the ratio the greater is the cushion against creditors losses in the event of liquidation. Total debt to total assets is a debt ratio that defines the total amount of debt relative to assets. This enables comparison of debt to be made across different companies. The higher the ratio the better degree of debt and consequently financial risk. This is a broad ratio that includes long term debt and short term debt (borrowings maturity within one year) as well as all tangible and intangible assets (Akinsulire, 2014).
Debt ratio is a solvency ratio that measures firm‟s total liabilities as a percentage of its total assets. In a sense, the debt ratio shows a company‟s ability to pay off its liabilities with its assets. In other words, this shows how many assets the company must sell in order to pay off all of its liabilities. This ratio also measures the financial debt of a company. Companies with higher levels of liabilities compared with assets are considered highly indebted and more risky for lenders. It helps investors and creditors analyses the overall debt burden on the company as well as a firm‟s ability to pay off its debt in the future especially during uncertain economic times. The debt ratio is calculated by dividing total liabilities by total assets. Both of these numbers can easily be found in the balance sheet. A lower debt ratio usually implies a more stable business with the potential of longevity because a company with lower ratio also has an overall debt posture. Each industry has its own benchmarks for debt, but 0.5 is reasonable ratio (Ojo, 2012)
The debt ratio is a fundamental solvency ratio because creditors are always concerned about being repaid. When companies borrow more money, their ratio increases and creditors will no longer loan them money. Companies with higher debt ratios are better off looking to equity financing to grow their operations. Debt ratios measure a firm‟s ability to repay long term debt. It is a financial ratio that indicates the percentage of a company‟s assets that are provided via debt. It is the ratio total debt, the sum of current liabilities and long term liabilities and total assets as well as the sum of current asset, fixed assets and other assets such as goodwill (Semiu & Collins, 2011).
CHAPTER THREE
RESEARCH METHODOLOGY
This chapter discusses the methodology adopted for the study. The chapter analyses the method and sources of data collection, discusses the research design, population of the study, sample size and sampling technique, statistical tool for data analysis, variables measurement, and model specification of the study. The chapter also highlights the robustness tests conducted on the data used for the study.
Research Design
Correlation research design was adopted based on positivism paradigm. This is because the study attempts to measure the relationship between capital structure and financial performance of listed manufacturing firms in Nigeria. Correlation design does not only establish relationship between variables but show cause and effect relationship between dependent and independent variables.
Population and Sampling Procedure of the Study
The population of this study consists of the 102 manufacturing firms listed on the Nigerian Stock Exchange as at December 2014. The firms are classified into eight (8) sub- subsectors. For the purpose of this study, stratified and random sampling techniques are used considering the sectorial grouping of firms in the stock market. The sample size of the study is thirty-one (31) manufacturing firms drawn from the defined population and it is arrived at by using Yamane sample size formula, which is represented thus:
n = N / (1 + Ne^2)
Where n = Number of samples
N = Total population e = Error tolerance
Hence: n = 102/1 + 100 (0.15)2 = 31
Table 3.1 presents the summary of listed manufacturing firms based on their strata and the basis of computation used to arrive at the number of sampled firms in each of the eight strata.
CHAPTER FOUR
DATA ANALYSIS AND INTERPRETATION
Introduction
This chapter analyses and interprets the results obtained for the study. The chapter begins with descriptive statistics and correlation matrix. It then presents the regression results and discusses the findings in light of previous studies. The chapter concludes with highlight of the policy implications of the findings.
Descriptive Statistics
The summary of the descriptive statistics of the variables are presented in table 4.1.
The full results are contained in appendix (IIA).
CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
Summary
This study was conducted to investigate the impact of capital structure on financial performance of listed manufacturing firms in Nigeria. The study was divided into five chapters. The first chapter discussed the background issues, which led to developing four objectives and formulating four hypotheses for the research with a scope covering six (6) years, from 2009 to 2014. The review of conceptual literature and empirical studies on capital structure and financial performance was carried out. Also, the concept and measurement of firm performance was discussed as well as the review of the relationship between each of the proxies of the independent variables and the dependent variable. The theoretical framework that underpinned the study was also discussed.
Correlation research design was used in measuring the relationship among the variables of the study. Data was collected from secondary source through the annual reports and accounts of 31 sampled firms out of a population of 102 listed manufacturing firms in Nigerian Stock Exchange that have complete financial records either on their website or in the office of the Nigerian Stock Exchange. Multiple regression was used to test the four hypotheses formulated by the study. The result of the descriptive statistics, correlation matrix and regression were presented, analysed and discussed in chapter four. The regression result could not provide sufficient evidence for the rejection of hypotheses two that hypothesized that total debt to total equity ratios have no significant impact on the financial performance of manufacturing firms in Nigeria. The result however provided sufficient evidence for rejecting the first, third and fourth hypotheses on total debt to total asset, long term debt to total assets and short term debt to total assets ratios. Finally, the chapter discussed the findings of the research in light of previous studies and highlighted the policy implications of the findings.
Conclusion
As a corollary of the discussion and analysis in the preceding chapter, the study concludes as follows:
Firstly, the study found a negative significant association between total debt to total assets ratio and financial performance. It is therefore concluded that total debt to total asset is one of the variable of capital structure that contribute in influencing financial performance of listed manufacturing firms in Nigeria.
In addition, the study found a negative insignificant association between total debt to total equity ratio and financial performance of listed manufacturing firms in Nigeria. Thus, the study concluded that total debt to total equity is not one of the factors that influence the financial performance of listed manufacturing firms in Nigeria.
Furthermore, long-term debt to total assets ratio was found to have negative significant impact on financial performance of listed manufacturing firms in Nigeria. The study therefore, concluded that long-term debt to total assets ratio is one of the strong determinants of the financial performance of listed manufacturing firms in Nigeria.
More so, the study found a positive significant relationship between the ratio of short-term debt to total assets and the financial performance of listed manufacturing firms in Nigeria. Thus, the study concluded that short- term debt to total asset is amongst the determinants of the financial performance of listed manufacturing firms in Nigeria.
Recommendations
In line with the findings of the study, the following recommendations are made:
- The management of Nigerian listed manufacturing firms should work very hard to optimize the capital structure of their listed manufacturing firms in order to increase the financial performance. They can do that through ensuring that their capital structure is optimal.
- The Management of Nigerian listed manufacturing firms should increase their commitments into short term debt to total asset in order to improve financial performance from their business operation. This is in line with the findings of this study that the short term debt of listed manufacturing firms in Nigeria influences their financial performance positively.
- The Management of Nigerian listed manufacturing firms should be concerned about the level of their total debt to total equity, for better financial performance. This is because the findings of this study revealed a negative insignificant relationship the variables and financial
- Stakeholders of listed Manufacturing firms in Nigeria should also reduce the level of total debt to total assets and long term debt of any firm in order to improve financial performance. This is in line with the findings of this study that revealed a negative significant impact of total debt and long term debt on financial performance of listed manufacturing firms in
Limitations of the Study
As it is the case with all studies, this study is associated with some limitations. The findings of this study are therefore to be considered in light of the following limitations:
- The study intended to use the entire population of listed manufacturing firms in Nigeria to constitute the population of the study. But some firms do not have complete financial records either on their website or in the office of Nigerian Stock Exchange during the period of the study. The study considered only those firms that meet up with the criterion to form the adjusted population. Therefore, the findings and recommendations of the study may not apply to the firms that were not covered by the
- The study considered only four proxies of capital structure without considering other proxies that determine capital structure such as short term debt to total equity and long term debt to total equity. The result may be different if other variables were to be
Areas for Further Research
The issues involved in this study area cannot all together be covered by a single research, and hence, the need for further research. The following research areas are hereby recommended:
- The study covered only listed manufacturing firms in Nigerian for the period of six Therefore, there is the need for further research using other sectors and more years in Nigeria.
- Researchers in the area can carry out similar studies using other performance measures suchas return on equity, return on investment and Tobin‟s Q as their dependent variables to assist in providing a clear guidance to finance managers in Nigeria on the appropriate financing mix that could optimize the value of a firm as most of the previous studies have been based on evidences from foreign countries.
REFERENCES
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