The Effect of Capital Structure on Financial Performance of Listed Deposit Money Banks in Nigeria
DOI:
https://doi.org/10.56180/jbsms.vol1.iss1.59Keywords:
Capital Structure, Financial Performance, Deposit Money Banks, NigeriaAbstract
This study examined the effect of capital structure on the financial performance of listed deposit money banks in Nigeria. Specifically, the study analysed the effect of capital structure (total debt ratio, debt-equity ratio, short-term debt ratio, long-term, and capital adequacy ratio) on Return on Assets (ROA) and Return on Equity (ROE) of DMBs in Nigeria; 14 deposit money banks were purposive with the focus of period spanning from 2000-2019. During the period of the study, the sampled deposit banks used secondary data sources from the panel. Data collated were analysed using static panel-based methods of analysis including pooled OLS, fixed effect estimation, and random effect estimation, while the most consistent and efficient estimation result for the study was evaluated based on the result of the Hausman test. The result showed that DER, LDR, SDR, LIA, AST, and LFIS have a negative effect on the return on assets of the sampled DMBs in Nigeria. However, the negative effect was only significant for LDR and SDR to the tune of -0.0498319 (p=0.044 < 0.05) and -0.0410352 (p=0.004 < 0.05) respectively as against the insignificant negative effect of DER, LIA, AST and LFIS with the coefficient and probability values of -0.0000106 (p=0.797 > 0.05), -0.0000496 (p=0.677 > 0.05), -0.0002901 (p=0.786 > 0.05) and -0.0006534 (p=0.189 > 0.189) respectively. Also, TDR and CAA have a positive effect on the return on assets of the sampled DMBs in Nigeria. However, the positive effect was only significant for TDR to the tune of 0.0400245 (p=0.042< 0.05) as against the insignificant positive effect of CAA with the coefficient and probability values of 0.0000496 and 0.677 respectively. Results also showed that TDR, AST, and LFIS have a negative effect on the return on equity of the sampled DMBs in Nigeria. However, the negative effect was only significant for AST to the tune of -0.0892859 (p=0.026 < 0.05) as against the insignificant negative effect of TDR and LFIS with the coefficient and probability values of -0.3435003 (p=0.667 > 0.05) and -0.0191278 (p=0.303 > 0.05) respectively. Also, DER, LDR, SDR, CAA, and LIA have a positive effect on the return on equity of the sampled DMBs in Nigeria. However, the positive effect was only significant DER with the coefficient and probability values of 0.0036989 and 0.017 respectively as against the insignificant positive effect of LDR, SDR, CAA and LIA to the tune of 0.3323679 (p=0.667 > 0.05), 0.3323679 (p=0.667 > 0.05), 0.3814529 (p=0.659 > 0.05), 0.093209 (p=0.245 > 0.05) and 0.0000162 (p=0.997 > 0.05) respectively. This study thus established that there is a statistically significant effect of capital structure on firms' performance in Deposit Money Banks (DMBs) in Nigeria. Theoretically, this study confirmed that the principles of agency theory, pecking order theory, trade-off theory, and Modigliani–Miller (M & M) theory are valid. Firms should use more equity than debt in financing their business activities because in as much as the value of a business can be enhanced using debt capital, it might get to a point that it becomes detrimental to the value of the business. Firms should set a debt level that will maximize their performance. Government should create an enabling business-friendly environment so that businesses can thrive and thus increase the firm's performance levels.
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