Department of Finance, College of Development Studies, Covenant University, KM 10, Idiroko Road, PMB 1023, Ota, Ogun State, Nigeria
Olokoyo, F.O., Department of Finance, College of Development Studies, Covenant University, KM 10, Idiroko Road, PMB 1023, Ota, Ogun State, Nigeria
This paper presents empirical findings on the impact of leverage (debt's ratio) on firms' performance. Empirical results based on 2003 to 2007 accounting and marketing data for 101 quoted firms in Nigeria lend some support to the pecking order and static tradeoff theories of capital structure. The study employed panel data analysis by using fixed-effect estimation, random-effect estimation and a pooled regression model. The usual identification tests and Hausman's Chi-square statistics for testing whether the fixed effects model estimator is an appropriate alternative to the random effects model were also computed for each model. A firm's leverage was found to have a significant negative impact on the firm's accounting performance measure (ROA). An interesting finding is that all the leverage measures have a positive and highly significant relationship with the market performance measure (Tobin's Q). The study further reveals a salient fact that Nigerian firms are either majorly financed by equity capital or a mix of equity capital and short-term financing. It is therefore suggested that Nigerian firms should try to match their high market performance with real activities that can help make the market performance reflect on their internal growth and accounting performance. © 2013 The Author. African Development Review © 2013 African Development Bank.