Capital Structure and Firm Performance in Nigerian-Listed Companies

: a number of business failures have not been reported in Nigeria arising from inability to payback nor does service debts .This paper empirically investigate the relationship between capital structure and firm performance in the Nigerian listed firms. A sample of 30listed firms out of a population of 173 were examined from 2005 to 2014 using multiple regression tools. Two hypotheses were formulated and tested using descriptive statistics and an econometric panel data technique to analyze the gathered data. An insignificantly negative correlation was found between financial leverage and ROA on one hand and a significantly negative relationship between debt/equity mix and ROE on the other hand. It is therefore recommended that firms should use long term liabilities to finance firm’s activities and mix debt/equity appropriately by ensuring that debt financing ratio is lower to enhance corporate performance and survival.

to the net income model. This approach argued that the firm's value and capital cost are not dependent on capital structure. Thus, mixing debt and equity capital judiciously cannot increase firm's value. These are two extreme approaches to capital structure. Solomon (1963) brought out an intermediate approach to the capital structure. This theory argues that firm's value increases to a certain level of debt capital and after then it tends to remain constant with a moderate use of debt capital, and ultimately the firm's value decreases (Solomon, 1963). Trade-off theory posits that the maximization of firm's value is attainable at an optimal level of capital structure. Whenever a firm has deviated from its optimum, it has several options. It will either be over-levered where it can retire debt or issue equity or under levered where it can repurchase shares or issue debt. For the fact that these actions are costly, altering the leverage ratio becomes burdensome, implying slower adjustment to optimal leverage. For instance, the debt marginal benefits will equal the marginal costs of debt and the maximization of firm's performance is achieved (Tang & Jang, 2007); Jiang et al., 2008). Debt is less expensive because it is tax deductible when compared with equity financing.
Pecking-order propounded by Myers (1984), Naimi, Nor, Rohami & Wan-Hussin (2010) and Iqbal et al. (2012) simply explains why companies behave the way they do in their financing decision. They claimed that firms will first exploit internal financing such as retained profits before considering external sources for rationality and safety, this is less expensive. To reduce asymmetric information and other financing costs, firms should first finance investments with retained earnings, then with safe debt (newly issued debt that is default-risk free), then with risky debt, and finally with equity (Myers, 1984;Ramakrishnan et al., 2015). If outside is needed, firms will first issue the safest security starting with debt, then possibly hybrid securities such as convertible bonds then perhaps equity as a last resort because investors consider equity riskier than debt. From observation, most profitable companies within an industry tend to have the least amount of leverage. According to Myers (1984), firms' concern should be with the future as well as the current financing costs. Possibilities abound for large investment firms to engage in low-risk capacity in order to avoid forfeiting future investments or financing them with new risky securities.
Finally, the agency theory of (Jensen & Meckling, 1976) claimed there is the existence of managers/stockholders personal interest conflict. Companies are established and financed by the owners with the intention of increasing their wealth through the financial performance of the firm. The achievement of this objective becomes complicated as the firm increases in size and scope and because such firm might not be managed directly by the owners, therefore there is a separation between the management and the owners. Then the interest of managers might not align with those of investors thereby leading to managers seeking self-interest. Jensen (1986) argued that managers will use available discretionary amount for perquisites. This relationship will lead to the agency problem with the associated agency cost. Again, as a result of the owners not having full information when a decision is made, may make it impossible for the owner to determine whether the manager is acting in the best interest of the firm or not. (Atrill & McLaney, 2009) also confirm the existence of agency problem even when the managers are out to take decisions that will optimize the owners' interest. In bid to optimize firm's value managers are confronted with the agency problem. For instance, to increase the return on investment the manager must expose the firm to high level of risk that might not be convenient to the owner. Consequently, solution can be offered to agency problems through capital structure decision, such as debt leverage increase. A positive correlation is assumed between leverage and firm performance in this theory.
Capital structure and firm performance: The combination of firm's debt (long-term and short term), common equity and preferred equity is known as capital structure and it is relevant to how a firm finances its overall operations and growth through the employment of different fund sources. Optimum capital structure simply mean a minimum weighted-average cost of capital that will maximize the firm's worth (San, Theng and Heng, 2011). For the attainment of optimal capital structure therefore, numerous mixture of various securities will have to be issued. (Varcholova & Beslerova, 2013) claimed that capital structure and corporate performance are closely linked. De Jong & Zhejia (2013) claimed that capital structure and firm performance association is endogeneous. While (McConnell & Servaes, 1995) argued that Tobin's q is endogeneous and leverage exogeneous , Smith and Watts affirmed that leverage is endogeneous sand Tobin's q is exogeneous. This showed that capital structure decisions impact firm performance and firm performance also influences capital structure meaning that there is a bi-directional causal relationship. Capital structure and firm relationship was examined by Kinsman & Newman, (1999) they noted that capital structure choice(i.e. debt level) and firm's performance association is very significant because shareholders wealth being the primary goal of a manager cannot be maximized until this relationship is critically examined .In the same manner, the effect of capital structure in 64 Egyptian firms were regressed against their firm performances from1997 to 2005 by (El-Sayed Ebaid, 2009). A weak association was found between them. Abbadi and Abu-Rub (2012) studied the impact of market efficiency and capital structure on return on assets (ROA) and return on equity (ROE) in eight out of ten Palestinian financial institutions from 2007 to 2010. A negative effect was found between leverage and market value of the bank while market value, ROA and bank deposits to total deposits were found to be positive and strongly associated. (La Rocca, 2007)) and (Maghyereh, 2005)in their studies affirmed the link between firm's value and its capital structure. Both studies observed that the efficiency of firm's corporate governance policy could be influenced by the capital structure choice for instance; there could be a deliberate use of debt financing to reduce the information asymmetry problem (La Rocca, 2007). Akintoye (2008) studied the sensitivity of performance to capital structure on selected food and beverage companies in Nigeria. Significantly sensitive effects were found among performance indicators such as turnover, Earnings before Interest and Taxes, Earnings per Share, Dividend per Share, and the measures of leverage (Degree of operating leverage, Degree of Financial Leverage and Dividend per Share PER represents the different measures of performance (ROA, ROE) LEV showing the Ratio of Total Debt to Total Assets S is the size of the firms represented by the Log of Turnover Lag_Pat represent change in PAT over time Debt/Equity Mix connotes the Ratio of the Total Debt to the Shareholders Fund and Tax represents the corporate tax of the firms to the PAT. Where: ROA = Return on Asset and is measured by earnings before interest and tax (EBIT) divided by total assets ROE = Return on Equity, measured by earnings before interest and tax (EBIT) + Preference dividend), all divided by equity S = Size of the firm measured by Log of Turnover T = Tax measured as Total Corporate tax to earnings before interest and tax.
PER components and the different independent measures inter play can be re-written thus: The following models are therefore relevant to the results of the tests of the stated hypotheses:

Methods of Estimation
Descriptive statistics and an econometric technique of Panel data method were used to analyze the gathered data. Regression model in form of the Fixed Effects Model, Random Effects Model and the Pooled Ordinarily Least Square (OLS) model was employed to establish the most appropriate regression with the highest explanatory power that is better suited to the data set that is a balanced panel (Greene, 2003;Chen, 2004;Salawu, 2007). The Pooled Ordinary Least Square (POLS) was used in the first instance. However, in view of the weaknesses associated with it, Fixed Effects Model (FEM) and Random Effect Model (REM) were used to capture the performance of the firms. The Hausman's Chi-square statistics tested whether the Fixed Effects model estimator is an appropriate alternative to the Random Effects model (Judge et al., 2007;Zeitun and Tian, 2007).

Data analysis and Findings
The descriptive statistics of the dependent variable and the explanatory variables which shows a brief but concise sum of the distribution is given by table 1. The Regression Analyses between the period 2005 to 2014 showing the relationship between the dependent and independent variables in order to test the earlier stated hypotheses were also presented.

Descriptive Statistics:
The table below shows the descriptive statistics of the data for the period under review. meaning that the corporations are less efficient in the utilization of its asset base showing an un-solid financial and operational performance in the period under. This abysmal performance can also be attributed to the high tax rate of 30% being levied against corporations in the country. The ratio of debt to equity deviated however from this general principle evidenced by the excessively high figure recorded as 16.43190. The conclusion from this is that Nigerian firms perhaps maintain a high level of debt equity mix. The results of the skewness and kurtosis equally indicated that all the variables deviated from the one obtainable from a normal curve. Given the results therefore, all the variables are skewed more both to the right and left. Indicating more positive and negative observations because it is far above the 0.0 normal level of skewness for distributions showing to a large extent how the instability in the socio, economic and political situations in the country affects organizations in the country.

Test of Hypotheses:
In order to confirm the veracity or otherwise of the stated hypotheses, Unit root test, cross sectional test, Hausman test and correlation analysis tests are conducted.

Test For Stationary (Unit Root Test):
To test for stationary the Augmented Dickey-Fuller (ADF) Unit Root Test Approach was used to ensure that the various parameters are estimated using stationary time series data. Thus, the study seeks to avoid the occurrence of bogus and unrealistic outcome.
This position can be further demonstrated by the graphs below: A graphical presentation of the dependent and the independent variables used for the study (Source: E-View Generated Output by the Researcher, 2016) Form table 2 above, it can be observed that the data does not suffer any stationary problem at first differential level at 1%, 5% and 10% level of significant. Therefore, the result of the regression model can be relied upon at these levels. The study concluded that all the variables under consideration did not have unit root and were therefore used in levels instead of their first difference. This means that the results obtained were not spurious (Gujarati, 2003).  Cointegration Test: The purpose of the cointegration test is to determine whether a group of non-stationary series is cointegrated or not. As explained below, the presence of a cointegrating relation forms the basis of the VEC specification. E-Views implements VAR-based cointegration tests using the methodology developed in (Johansen, 1995).   Decision: The probability 0.0000 is less than the 5% critical level, meaning that the null hypothesis will be accepted i.e. there is co-integration. Therefore the assumption of the panel VAR model has been fulfilled. Hence it can be concluded that there is long run association between the dependent variable and independent variables.

Test of hypothesis:
In order to establish the veracity or otherwise of the stated hypotheses, Regression analysis and Co-efficient of Correlation tests were conducted between the dependent and the independent variables.

Hypothesis One
Ho: Financial Leverage does not significantly affect the profitability of Nigerian-listed companies.

Hypothesis Two
Ho: There is no significant correlation between Financial Leverage mix and the financial performance of Nigerian-listed companies.

Conclusion and Recommendations
This study focused on capital structure and Nigerian listed firm's performance with the aims of ascertaining the relationship between their performances by looking at some components of capital structure in their finances. Leverage was found to impact negatively on profitability at 1% significant level from the first objective. This is contrary to the aprori expectation for a direct association between profit and debt ratio as supported by agency cost theory preference for increased in financing when agency problem becomes pronounced. This also is a behavioral justification for the traditional approach that claimed that debt and equity should be mix appropriately in order to enhance firm's performance. It is therefore recommended that firms should ensure that finance mix should keep debt ratio lower even when facing agency problems. Secondly, the study set out to ascertain the relationship between Equity/Debt mix financing and performance of Nigerian listed firms. Just like the debt ratio, the result in the second objective showed an insignificantly indirect association between leverage and firm's performance. That is, equity/debt finances influences performance negatively. This is in conformity with our apriori expectation because from agency cost theory angle, firm's performance will be worsen by debt financing. From this result, it can be deduced that profitability will be enhanced in the Nigerian listed firms with equity financing hence the rejection of the null hypothesis 2 for predicting there is no relationship between Financial Leverage mix and the financial performance of Nigerian companies. Nigerian government should provide financial succor through the Central bank of Nigeria Policy by encouraging financial institutions to grant affordable debt finance to boost corporate growth. Firms should use long-term liabilities to finance firms' activities because current liabilities will negatively affect firms' performance. Equally, managers should gauge the cost of debt vis-à-vis profitability and taxation to select the best mix. Debt and equity should be mixed appropriately and ensure that debt financing ratio is lower to enhance corporate financial performance.