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,

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Competing interests

The authors have no competing interests.

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