EFFECT OF FINANCIAL LEVERAGE ON CORPORATE PERFORMANCE: EVIDENCE FROM NIGERIAN HOSPITALITY INDUSTRY

Abstract

Funding is critical for the existence and survival of every business. Essentially, businesses obtain necessary funding from any of equity, debts, or a combination of both. Appropriate combination of equity and debts is not an easy task. The optimum combination of equity and debts remains a cardinal feature of profitable businesses. Despite several studies carried out on the relationship between financial leverage and financial performance;these studies have not been able to present a uniform conclusion which is appropriate for businesses in all situations. Therefore, this study attempts to fill this gap in knowledge by surveying the effect of financial leverage on performance in the context of Nigerian hospitality industry. The objective of this study is to examinethe relationship between financial leverage and performance in the Nigerian hospitality industry. The target population of this study includes the three (3) hotels that are quoted in the Nigerian stock exchange as at December 2017. Using quasi-experimental research design, a census setting comprising of all the three companies was carried out. Data obtained from the audited financial statements between 2008 and 2017 of the companies were utilized for the study. The variables considered include leverage (independent variable) and financial performance (dependent variable). Leverage was measured with a total debt to equity ratio, financial performance was measured by return on assets, while the log of total assets served as the control variable. Regression analysis was carried out using SPSS version 21 software. The findings indicate the existence of a positive and statistically significant relationship between leverage and financial performance in the Nigerian hospitality industry. The study recommended that financing decisions should be taken with due consideration given to shareholders’ wealth maximization objective.