Effect of capital structure on firms' performance: The Nigeria performance
European Journal of Economics, Finance and Administrative Sciences
Department of Economics, Faculty of the Social Sciences, University of Ibadan, Ibadan, Nigeria
In this paper, we examined the effect of capital structure on firms performance. We address the following questions: Does higher leverage lead to better firm performance? Is the effect of performance on leverage similar across the distribution of different capital structures? Using a sample of 10 Nigerian quoted firms with consideration of their financial statements for three years, we discover that an evenly distributed capital structure has positive effect on firms performance, while the effect of performance on leverage varies across the distribution of different capital structure as seen from the companies understudied. Most of the equity financed firms in this study performed as much as those who employed debt in their structure in term returns on equity and assets. Although we cannot generalize this fact as few other firms with debt finance performed more efficiently as in the case of Nestle Nig. Plc, Northern Nig Flour Mills Plc, hence the effect of leverage on efficiency varies across the distribution of different capital structure lending credence to the agency cost theory of Jensen and Meckling(1976). We therefore recommend that investors should concentrate on engagement of efficient management team, motivation and other developmental programmes so as to achieve goal congruence in the long run.