Optimal Capital Structure and Firm’s Performance: Evidence from Nigerian Banking Sector
DOI:
https://doi.org/10.56180/jbsms.vol1.iss1.61Keywords:
Optimal Capital Structure, Firms performance, Nigeria, Banking SectorAbstract
In this survey, the researcher investigated the best corporate performance and capital structure. Evidence from the banking industry in Nigeria. Best specifically looked at the effect of capital structure on the Q ratio of EPS in Nigeria and DMB in Tobin (total debt ratio, debt ratio, short-term debt ratio, long-term debt ratio, capital adequacy ratio). Secondary data was gathered for the 20 years from 2000 to 2019 from a few DMB public financial reports and the Nigerian Stock Exchange (NSE) factbook. Of the 22 DMBs in Nigeria, only 14 out of a total of 22 DMBs were sampled for investigation. Correlation analysis and panel regression analysis were used in this study. Earnings per share are negatively affected by LDR, SDR, LIA, AST, and LFIS, which have coefficient values of -78.98107, -69.48881, -0.5662436, -6.598608, and -11.21091, respectively. In contrast to the non-significant probability values of 0.490 and 0.585 for LDR and SDR, the negative effect was only statistically significant for LIA, AST, and LFIS with probability values of 0.005, 0.004, and 0.000, respectively. The DER, TDR, and CAA values, on the other hand, were 0.0127729 (p = 0.955> 0.05), 75.74633 (p = 0.520> 0.05), and 4.28459 (p = 0.734> 0.05). Tobin's Q is negatively impacted by TDR, CAA, AST, and LFIS, however the coefficient and probability values are -0.7803843 (p = 0.027 0.05), -0.0730884 (p = 0.039 0.05), and -0.0618592 (p = 0.000), respectively. Tobin's Q of the DMB studied in Nigeria, however, was positively impacted by DER, LDR, SDR, and LIA, with coefficient values of 0.0000177, 0.7910435, 0.760221, and 0.0016593, respectively. In contrast to the non-significant probability values of 0.978 and 0.739 for DER and LIA, the positive effect was only significant for LDRs and SDRs with probability values of 0.021 and 0.046, respectively. According to the report, the Nigerian Deposit Money Bank's capital structure significantly affects its corporate performance (DMB). The agency theory, pecking order theory, trade-off theory, and Modigliani-Miller (M & M) theory are all supported by this result. Therefore, a company must determine a minimum weighted average cost of capital and maintain its leverage ratio so that the value of the company is not compromised. If all other conditions are the same, the capital structure of the company is optimal at this point. This is because highly leveraged companies are likely to experience poor performance due to high debt levels. Therefore, the Nigerian Stock Exchange should endeavour to eliminate rigorous guidelines that may prevent effective bank participation. Economic policies need to be developed to help develop capital markets so that they can absorb the growing demand for financial resources. Companies need to set debt levels that maximize performance.
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