EFFECT OF CAPITAL STRUCTURE ON PERFORMANCE OF LISTED FIRMS IN THE NON-FINANCIAL SECTOR IN NIGERIA

Abstract
The study investigated the effect of capital structure on performance of listed firms in the non-financial sector in Nigeria. It focused on seventy two quoted non-financial firms in Nigeria from 2014-2018 using ex-post facto research design. The measures used were long term debt and shareholders fund for capital structure, return on assets for firm performance. Panel regression analysis, using random effects model, which was the appropriate model indicated by Hausman specification test performed, was used for data analysis. The findings were that, there exists a negative and insignificant effect of long term debt on return on assets. However, shareholders fund had a positive and significant effect on return on assets. Based on the results, the study recommended, among others, that owners and managers of firms should note that irrespective of the amount of debt secured for financing if the process of securing the debt and subsequent investment is not planned, organized, well-coordinated, controlled and monitored such loans secured may not likely enhance firm performance. Also, shareholders, managers and would be investors should focus more on shareholders’ fund as a form of firm financing because of the positive and significant impact it has on firm performance.
Keywords: Capital structure, Debt, Equity, Return on Assets, Non-financial sector
Introduction
Firms need funds to execute their economic activities which can be obtained from different sources. The diverse sources of funding available to firms constitute the capital structure of the firm. This capital structure has been a major subject for academic research in corporate finance. This is because financing decision is one of the core business decisions managers make. This may not be unconnected with the role finance plays in the life of every business. How to obtain funds for investment activities is the concern of financial managers. The determination of the proportion of debt to equity is a strategic decision faced by finance managers.
Nwachukwu (2017) has noted that, financial performance is the measure of how well a firm can use its assets from its primary business to generate revenues. The financial performance measures like profitability and liquidity, among others, provide a valuable tool to stakeholders in the evaluation of the past financial performance and current position of a firm. Financial performance evaluation is designed to provide answers to a broad range of important questions, such as whether the company has enough cash to meet all its obligations, or is generating sufficient volume of sales to justify current investment. Capital structure is closely linked with financial performance. The use of debt in an organizations capital structure has both positive and negative effects on its financial performance. Organizations that use an optimum amount of debt in their capital structure have enhanced firm value which is manifested in the form of increased sales, efficiency in production and low taxes. While firms with different cases of sub optimal use of debt in their capital structure usually suffer from a variety of financial ailments which Rajan and Zingales (1995) in Nwachukwu (2017), describe as payment of high taxes, high proportions of accounts payable, large deficits in the firms cash flow and in some cases corporate dissolution. According to Lawan (2017), the use of equity as a form of financing, shield the firms from exposure to erosion of their franchise value and corporate reputation a situation which has the capacity of negatively affecting firm performance (Firms in the non-financial sector inclusive).