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Does leverage affect the financial performance of Nigerian firms?

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Afolabi A., Olabisi J., Kajola S. O., Asaolu T. O.
Journal of Economics and Management
|
2019
|
vol. 37
5-22
EN
Aim/purpose – This study examines the relationship between leverage and financial performance of Nigerian firms between the years 2007 and 2016. Design/methodology/approach – The study adopted ex-post facto research design to retrieve and study data for events which were already in existence. Inferential statistics adopted econometrics models with a concentration on panel data using regression analysis to achieve the three specific objectives of the study. The surrogates for the independent variable (financial leverage) were Debt Ratio (DR); Debt-Equity Ratio (DER); and Interest Cover Ratio (ICR) while Return on Capital Employed (ROCE), the only dependent variable, was used as financial performance proxy. Three control variables – Firm Size (SZ), Sales Growth (SG) and Growth in Gross Domestic Product (GGDP) were included in the model to capture other firms – specific and macroeconomic variables that may have an influence on the financial performance of the selected firms. Findings – The Random Effects Generalised Least Squares (REGLS) revealed a positive and significant effect between leverage (DR and DER) and ROCE (p < 0.05). However, ICR has a positive but insignificant effect on ROCE (p > 0.05). The outcome of the study was consistent with the Static trade-off theory of capital structure. Research implications/limitations – The study suggests that firms should continuously employ debt capital in order to benefit from available tax shields which ultimately enhance profitability. The limitation of the study is that only firms in the food and beverage sector in Nigerian business environment were covered by the study. Originality/value/contribution – The study contributed to the existing theory and literature by using empirical evidence from an emerging market to bridge the existing gap in knowledge of the effect of leverage on the performance of firms.
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