EFFECT OF CAPITAL STRUCTURE ON LIQUIDITY OF NIGERIAN LISTED FIRMS

Abstract

This study examines the effect of Capital Structure on Liquidity of Nigerian Listed Firms in Nigerian Stock Exchange for the period of 2013-2017. Secondary data were collected and extracted from the financial reports of the 28  Nigerian Listed Firms in Nigeria for the data analysis. Data were analyze using regression analysis the results show a significant effect of capital structure on financial performance. The debt-equity ratio of the firm appears a more important factor that determines the financial performance of  Nigerian Listed Firms in Nigerian Stock Exchange. The result shows that debt-equity ratio had a significant positive effect on return on equity while debt ratio found significant but negative effect on return on equity. The study recommended that top management of every liquidity firm should make prudent financing decision in order to remain profitable and competitive.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Capital structure decision for any business organization in private and public sectors as well as economy played a prominent role. It is regularly complex for business firms to make out the right combination of debt and equity. Modern-day corporate finance managers of Listed Firms in Nigeria continue to face the dual challenge of poor financial performance of their firms and finding optimum business financing options. These managers also have to tackle with the triple demands of creating wealth for investors, sustaining business operations and contributing to the growth of an economy.

However, it is important to note that, in Nigeria, various legislation have been put in place to ensure that the industry runs smoothly but these legislations have ended up constraining the Listed Firms in issues relating to capital, for example a minimum paid up capital is required for the Listed Firms before register a company. Then also constrain in share capital to be deposited with the central bank. These issues are very specific to Listed Firms only, and they have an influence on the capital structure of the firms thus having an impact on the overall performance of these firms. This study is likely to give a practical contribution were the finding will be used by the Listed Firms policy-makers in Nigeria to identify the appropriate financing mix that can go well with and overcome the constrains by examining how the capital structure affect the financial performance of liquidity firms. Theoretically, the finding is also expected to contribute to validate the theories under consideration in this study.

1.2 Statement of the Research Problem

Capital structure, according to various researchers has been a study of significance in the corporate finance field for a number of decades. Financial managers have complexity in determining the optimal or favourable capital structure. The Nigerian Listed Firms have had a number of constraints in regard to how their capital ought to be structured. This is due to the legislation on minimum of paid up capital requirement and share deposit with the Nigerian central bank. These legislations have an influence in deciding what the capital structure should look like. However, other studies present different opinion about what type of fund and the optimum capital structure that will improve a firm performance. Vincent (2013) and Mahfuzah and Raj (2011), and Abdul (2012) considered debt financing as a more appropriate form of financing the business of high risk firms because of the advantage of tax shield available on interest payment, in contrary Athenia and Bongani (2015) sees equity financing as more appropriate means of financing high risk firms with a lower success probability and higher cash flow. Other researchers such as Mohammed (2013) and Serrasqueiro and Marcia, (2015), see the use of both debt and equity as a more appropriate means of financing a firm''s operation.