Abstract

The paper explores the long and short run dynamic relationships between capital structure and firm’s performance variables based on financial statements’ data of (62) non-banking firms quoted on the Nigerian Stock Exchange. The study reveals that quoted firms use long term debts in the short run to boost profitability and earnings but in the long run, as they become more profitable, they resort to internal source of financing. It further reveals that while the combination of debt and equity capital that optimizes return on assets differ from that which optimizes return on equity, it submits that long term debts contribute positively and significantly to enhancing returns to equity owners. It recommends that a firm should determine the appropriate mix of capital that optimizes its own performance suggesting that the combination of debts and equity that optimizes return to equity owners should represent that optimum structure.

Keywords:

Debt, equity, error correction mechanism, leverage, optimum capital structure, return on assets and return on equity,

References

1. Ajakaiye, O. and T. Fakiyesi, 2009. Global financial crisis discussion series. Paper 8, Nigeria Overseas Development Institute, London.
   
2. Akinlo, O., 2011. Determinants of capital structure: Evidence from Nigerian panel data. Afr. Econ. Bus. Rev., 9(1): 1-12.
   
3. Arowoshegbe, A.O. and J.O. Idialu, 2013. Capital structure and profitability of quoted companies in Nigeria. Int. J. Bus. Soc. Res., 3(3): 99-106.
   
4. DeAngelo, H. and R.W. Mausulis, 1980. Optimal capital structure under corporate and personal Staxation. J. Fin. Econ., 8: 3-29.
   CrossRef    
5. Duran, D., 1952. Costs of debt and equity funds for business: Trends and problems of measurement. Proceeding of the Conference on Research in Business Finance, NBER, Universities-National Bureau, pp: 215-262.
   
6. Eldomiaty, T., C. Choi and P. Cheng, 2007. Determinants of financial signalling theory and systematic risk classes in Egypt: Implications for revenue management. Int. J. Rev. Manag., 1(2): 154-176.
   CrossRef    
7. Engle, R.F. and C.W.J. Granger, 1987. Co-Integration and error correction: Representation, estimation and testing. Econometrica, 55: 251-276.
   CrossRef    
8. Ghosh, S., 2007. Leverage, managerial monitoring and firm valuation: A simultaneous equation approach. Res. Econ., 61: 84-98.
   CrossRef    
9. Ghosh, C., R. Nag and C. Sirmans, 2000. The pricing of seasoned equity offerings: Evidence from REITs. Real Estate Econ., 28: 363-384.
   CrossRef    
10. Grossman, S.J. and O. Hart, 1982. Corporate Financial Structure and Managerial Incentives. In: Mccall, J. (Ed.), The Economics of Information and Uncertainty. University of Chicago Press, Chicago.
    
11. Holz, C.A., 2002. The impact of the liability-asset ratio on profitability in China's industrial state-owned enterprises. China Econ. Rev., 13: 1-26.
    CrossRef    
12. Jensen, M., 1986. Agency costs of free cash flow, corporate finance and takeovers. Am. Econ. Rev., 76: 323-329.
    
13. Jensen, M.J. and W.R. Meckling, 1976. Theory of the firm: Managerial behavior, agency cost and ownership structure. J. Fin. Econ., 3: 305-360.
    CrossRef    
14. Karadeniz, E., S.Y. Kandir, M. Balcilar and Y.B. Onal, 2009. Determinants of capital structure: Evidence from Turkish lodging companies. Int. J. Contemp. Hosp. Manag., 21(5): 594-609.
    CrossRef    
15. Khan, A.G., 2012. The relationship of capital structure decisions with firm performance: A study of the engineering sector of Pakistan. Int. J. Account. Fin. Report., 2(1).
    
16. Krishnan, V.S. and R.C. Moyer, 1997. Performance, capital structure and home country: An analysis of Asian corporations. Glob. Fin. J., 8: 129-143.
    CrossRef    
17. Majumdar, S.K. and P. Chhibber, 1999. Capital structure and performance: Evidence from a transition economy on an aspect of corporate governance. Pub. Choice, 98: 287- 305.
    CrossRef    
18. Margaritis, D. and M. Psillaki, 2010. Capital structure, equity ownership and firm performance. J. Banking Fin., 34(3): 621-632.
    CrossRef    
19. Modigliani, F. and M. Miller, 1958. The cost of capital, corporation finance and the theory of investment. Am. Econ. Rev., 48: 261-297.
    
20. Modigliani, F. and M. Miller, 1963. Corporate income taxes and the cost of capital: A correction. Am. Econ. Rev., 53: 433-443.
    
21. Myers, S., 1984. The capital structure puzzle. J. Financ., 39: 575-592.
    CrossRef    
22. Myers, S. and N. Majluf, 1984. Corporate financing and investment decisions when firms have information that investors do not have. J. Financ. Econ., 13: 187-221.
    CrossRef    
23. Onaolapo, A.A. and S.O. Kajola, 2010. Capital structure and firm performance: Evidence from Nigeria. Eur. J. Econ. Fin. Admin. Sci., 25: 70-82.
    
24. Petersen, M.A. and R.G. Rajan, 1994. The benefits of lending relationships: Evidence from small business data. J. Financ., 49(1): 3-38.
    CrossRef    
25. Rajan, R.G. and L. Zingales, 1995. What do we know about capital structure? Some evidence from international data. J. Financ., 50: 1421-1460.
    CrossRef    
26. Roden, D. and W. Lewellen, 1995. Corporate capital structure decisions: Evidence from leveraged buyouts. Financ. Manag., 24: 76-87.
    CrossRef    
27. Ross, S.A., 1977. The determination of financial structure: The incentive signaling approach. Bell. J. Econ., 8(1): 23-40.
    CrossRef    
28. Shen, G., 2012. How does capital structure affect firm performance? Recent evidence from Europe countries. Higher Degree Thesis, Tilburg School of Economics and Management, Tilburg University, Tilburg.
    
29. Simerly, R. and M. Li, 2000. Environmental dynamism, capital structure and performance: A theoretical integration and an empirical test. Strat. Manag. J., 21: 31-49.
    CrossRef    
30. Toraman, C., Y. Kiliç and S. Reis, 2013. The effects of capital structure decisions on firm performance: Evidence from Turkey. Proceeding of the International Conference on Economic and Social Studies (ICESoS'13), pp: 137-145.
    
31. Twairesh, A.E., 2014. The impact of capital structure on firm's performance evidence from Saudi Arabia. J. Appl. Financ. Banking, 4(2): 183-193.
    
32. Warokka, A., J.J.D. Herrera and H.H. Abdullah, 2011. East Asian Corporate Governance: A test of the relation between capital structure and firm performance. Int. J. Econ. Financ. Stud., 3(2): 1-10.
    
33. Zeitun, R. and G. Tian, 2007. Capital structure and corporate performance: Evidence from Jordan. Austr. Account. Bus. Financ. J., 1(4): 40-61.
    

Competing interests

The authors have no competing interests.

Open Access Policy

This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.

Copyright

The authors have no competing interests.