EFFECT OF CAPITAL STRUCTURE ON PROFITABILITY OF LISTED INDUSTRIAL GOODS COMPANIES IN NIGERIA

Abstract

For such a long time, the relationship between capital structure and firm’s performance has conferred a puzzle in the world of finance. Researchers have looked into this puzzle and put forward controversial results. Financial managers are being provided with no clear-cut guideline on the optimum mix of capital structure elements which yields optimum firm performance. This study sought to examine the effect of capital structure on the profitability of listed industrial goods companies in Nigeria. The study covered all firms listed under the industrial goods sector in the Nigerian Stock Exchange over a 5-year period, from 2014 to 2018. Equity Finance and Firm Leverage represented capital structure indicators while Return on Assets (ROA) was used as a measure of firm performance. Firm size constituted the moderating variable. A correlational research design was adopted. Secondary data were collected from the firms’ annual report and the corporate websites. The panel data was then analyzed using moderated regression analysis to test the relationship between capital structure variables and ROA. Other statistical techniques, such as correlation and linear regression were also used to analyze the results. Variable computations were carried out using Statistical Package for Social Sciences (SPSS) version 22. The results of this study revealed mixed results, a significant positive correlation between equity finance and profitability. Another result showed no significant relationship between firm leverage and profitability. Other results showed no significant moderating effect of firm size on the relationship between capital structure and profitability. However, it is dependent on how the size expansion is financed. It was concluded that regardless of the size of the firm, equity finance has a significant positive impact on profitability. This study recommends that firms should use bonus issue to compensate the shareholders instead of cash dividends.