IMPACT OF CAPITAL STRUCTURE ON FIRM PERFORMANCE: EMPIRICAL EVIDENCE FROM NIGERIA
ABSTRACT
    We examine the impact of capital structure on firm’s performance in Nigeria for a period 2010 to 2014.Statistical and econometric techniques of descriptive statistics and panel data analysis were employed in the analysis of the data. Results from the empirical analysis show that firm debt/equity ratio has a significant negative impact on corporate performance; firms’ debt/total capital has an insignificant impact on corporate performance; firm’s debt/total assets have a significant positive impact on corporate performance; and firm’s size measured by its total assets has a significant positive impact on its performance in Nigeria.
    The study recommends that enhancing the equity shareholders’ wealth is a function of the combination of debt and equity. Where firms are made to pay out funds regularly in terms of dividends, they may have to forgo negative present value projects.
TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
Background to the Study                    
Statement of the Research Problem                
Research Questions                
Objectives of the Study                    
Hypotheses of the Study                    
Significance of the Study                    
Scope of the Study                        
Limitation of the Study                
CHAPTER TWO: LITERATURE REVIEW
2.1    Introduction                            
2.2    Conceptual Framework                    
2.2.1    Concept of Capital Structure                    
2.2.2    Concept of Profitability                        
2.2.3    Capital Structure and Firm’s Performance        
2.2.4    Debt/Equity Ratio and Firm’s Performance        
2.2.5    Debt/Total Capital and Firm’s Performance        
2.2.6    Debt/Total Asset and Firm’s Performance            
2.3    Theories of Capital Structure                    
2.3.1    The Trade-Off Theory                        
2.4    The Empirical Literature                    
CHAPTER THREE: METHODOLOGY OF THE STUDY
3.1    Introduction                                
3.2     Research Design                            
3.3     The Population of the Study                
3.4     The Sample of the Study                    
3.5    Model Specification                        
3.6    Method of Data Analysis                    
3.7    Sources of Data                    
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1    Introductions                            
4.2     Descriptive Statistics                 
4.3     Empirical Results on the Regressions                
4.3.1     The Baseline Result                    
CHAPTER FIVE: SUMMARYOF FINDINGS, RECOMMENDATIONS AND CONCLUSION
5.1     Summary of Findings                        
5.2     Recommendations                        
Conclusion                            
Bibliography                            
Appendix                            
CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND TO THE STUDY
    Firm’s capital structure decision represents the combination of debt and equity finance in the day-to-day operation of its business (Damodaran, 2001). The relationship between capital structure and corporate performance has been extensively investigated in the extant literature across the globe. According to Modigliani and Miller (1958), in a world without friction, firms’ capital structure is irrelevant in the determination of corporate value. In other words, financing decision does not add any value and are therefore of no concern to corporate managers. Gordon (1963) and Walter (1963) argue otherwise as they submitted that capital structure of a firm is very relevant in the determination of its performance over time. However, in real life situation coupled with several empirical evidences this does not hold. Till date, capital structure remains one of the most important financial decisions for any business organization who wants to survive and remain in business for a very long time. This decision is important because the firm needs to maximize returns in order to enhance its overall market value.
    In the literature, there exist several other theories that seek to explain the capital structure of firms and its relevance to its profitability. Some of these include the pecking order theory, static tradeoff theory, and the agency cost theory. Pecking order theory according to Myers and Majluf (1984), suggests that firms will initially rely on internally generated funds, and then they will turn to debt if additional funds are needed and finally they will issue equity to cover any remaining. Hence, the idea of pecking order hypothesis suggests that firms that are profitable and therefore generate high earnings are expected to use less debt capital than those who do not generate high earnings. Therefore, internal funds are used first, and when that is depleted, debt is issued, and when it is not sensible to issue any more debt, equity is employed (Myers and Majluf, 1984; Ahmad, Abdullah and Roslan, 2012).
    To this end, Gleason, Mathur and Mathur (2000) concluded that the use of different levels of debt and equity in the firm’s capital structure is one such corporate-specific strategy used by managers to improve the overall corporate performance. Thus, many firms strived to achieve an optimal capital structure in order to minimize the cost of capital so as to improve its competitive advantage in the marketplace through a mixture of debt and equity financing. Therefore, choosing the right type of debt is an equally important issue as opting for an appropriate debt to equity ratio (Ahmad, Abdullah and Roslan, 2012). This was why Myer (2001) concluded that each theory works under its own assumptions and propositions, and none of these theories has been able to completely explain or provide the best or optimal capital structure that is most appropriate to all firms across the globe today.
    In the Nigerian corporate environment today, a lot still needed to be done with respect to the right capital structure that will continuously enhance the overall performance of firms in the country. Hence, this study is an attempt to empirically investigate the impact of capital structure on the overall performance of Nigerian firms with the hope of providing relevant data and information that will assist corporate managers to better the lots of their firms.
1.2    STATEMENT OF THE RESEARCH PROBLEM
    The place of corporate organizations in the rapid socio-economic development of a nation cannot be overemphasized in view of their sensitive roles in providing relevant products that enhance the standard of living of the people as well as provision of employment opportunities for the timid population. In the literature, the connection between capital structure and firm value comes from the former financing activities that increase the latter. Capital structure is a mix of operating funds, debt financing, and equity financing that pays for new projects or activities that increase revenues and a firm’s economic wealth (Vitez, 2013). Capital structure and firm value has a connection with physical assets on the balance sheet as these items are usually the result of funds from external sources. In some cases, it is possible that the total liabilities of a firm are higher than the total assets listed on the balance sheet. The end result is a negative total economic value due to inefficient financial processes resulting from business activities (Vitez, 2013; Kenneth and Michael, 2003).
    According to Muritala (2012),capital structure choice has been an issue of great interest in the corporate finance literature, in view of the fact that the mix of funds (leverage ratio) affects the cost and availability of capital and hence, firms’ investment source. Najjar and Petrov (2011) on the other hand, opine that the capital structure decision is of critical importance to organizations, because it affects insurance firms’ value and stockholder's wealth. Indeed, recent empirical studies such as Chen, Chen and Lin (2004), Nivorozhkin (2005), Eriotis, Neokosmidi and Vasilou (2007), and Naveed, Zulfqar and Ishfaq (2010)  have shown that there is a significant relationship between firm value and its capital structure, which implies that capital structure affects financial performance and shareholder value. However, Modigliani and Miller (1958, 1963), Modigliani (1982) and Changjiang (2001), all assumed away many important factors in the capital structure decision and hence, submitted that, in a perfect market, the value of a firm is irrelevant to how that firm is financed.
    Now, in view of these mixed arguments and submissions, it is therefore necessary to empirically test the validity of capital structure as it relates to corporate performance in Nigeria. To this end, the study seeks to provide answers to the following research questions:
1.3    RESEARCH QUESTIONS
What is the relationship between total debt/total equity ratio and corporate performance in Nigeria?
Is there any significant relationship between total debt/total capital and corporate performance in Nigeria?
Does corporate total debt/total asset have any significant relationship with corporate performance in Nigeria?
OBJECTIVES OF THE STUDY
    The main objective of this study is to determine the relationship between capital structure and corporate performance in Nigeria. However, other sub-objectives are to:
Determine the relationship between total debt/total equity ratio and corporate performance in Nigeria.
Determine the relationship between total debt/total capital and corporate performance in Nigeria.
Examine the relationship between total debt/total asset and corporate performance in Nigeria.
HYPOTHESES OF THE STUDY
The hypotheses of the study are as follow:
There is no significant relationship between total debt/total equity ratio and corporate performance in Nigeria.
There is no significant relationship between total debt/total capital and corporate performance in Nigeria.
There is no significant relationship between total debt/total asset and corporate performance in Nigeria.
1.6    SIGNIFICANCE OF THE STUDY
    Asset tangibility is a driven factor to capital structure because firms with more tangible assets are less likely to be financially constrained. Hence, the outcome of this study will provide useful information to corporate managers in the best way possible to manage the total assets of their companies in such a way as to enhance the overall profitability of the firms.
    The study will be relevant to investors and potential investors and management in understanding the impact of capital structure on the profitability of firms in Nigeria. Again, it will provide guidance to policy makers in national financial decisions as it affects corporate organizations in the economy.
    Finally, the results from this study will constitute viable data base for students of management sciences, the academia and researchers alike, who will like to carry out further investigations on the subject matter.
1.7    SCOPE OF THE STUDY    
    This study examines the impact of capital structure on corporate performance in Nigeria. It covers a period of five years (2010 to 2014); and relevant data will be sourced from banks financial statements and reports, and Central Bank of Nigeria Statistical Bulletin.
1.8    LIMITATIONS OF THE STUDY    
    The first limitation of the study is time. The time limit for this study may not be enough for a study of this magnitude.
    Secondly, the study relies heavily on secondary data. However, there are often conflicting values, for some of the variables under investigation, from different sources. Any such shortcomings in the values of the variables occasioned by the source of data used may constitute a constraint to the results of the study. However, this constraint will be minimized by trying as much as possible to stick to data from the Nigerian stock exchange and the Central Bank of Nigeria statistical bulletin, where available, since the two sources are credible.