IOSR Journal of Business and Management (IOSR-JBM)

e-ISSN: 2278-487X, p-ISSN: 2319-7668. Volume 22, Issue 7. Ser. I (July 2020), PP 42-48
www.iosrjournals.org

Capital Structure and Performance of Selected Industrial Goods

Firms on the Nigerian Stock Market
*ETALE, Lyndon PhD, EDOUMIEKUMO, Adesewa R1, KPOLODE,
Oghenevwo P2, NKAK, Promise E3
*Department of Accountancy, Niger Delta University, Amasoma, Bayelsa State, Nigeria
1
Department of Accountancy, Niger Delta University, Amasoma, Bayelsa State, Nigeria
2Department of Accountancy, Niger Delta University, Amasoma, Bayelsa State, Nigeria
3Ignatius Ajuru University of Education, River State, Nigeria (PhD Student)

Abstract: How really is performance influenced by capital structure? There have being different views by
different scholars on this topic. Therefore this study examined the relationship between capital structure and
firm’s performance of quoted industrial goods onNigeria Stock Exchange (NSE). Five firms were selected for
the study with secondary data covering for six years (2014-2019). We employed the multiple regression model
in testing our hypotheses, return on equity (ROE) serve as the dependent variable for measuring performance
while the independent variables are measured by three variables which Non-current debt to total assets (NCD),
current debts to total assets (CD) and total debts to equity (TDE). Our findings revealed that two of our
independent variables (NCD and TDE) have a statistical significant relationship with ROE however TDE have a
negative relationship with ROE, while the other independent variable CD has no statistical significant on
performance. We therefore recommend that in considering the capital mix/structure of the firms long term
financing should be consider first, while CD should be consider last and also proper matching should be
carried out between equity and debt.
Keywords: Assets, Capital, Debt, Equity, Performance, Long Term, Short Term, Returns
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Date of Submission: 21-06-2020 Date of Acceptance: 10-07-2020
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I. Introduction
In financial management literature, the organization of capital the firms use for its operations is also
known as the capital mix, and is very important finance decisions. Capital mix comprises of all the finance both
debts and equities the firms source to finance its operations, because any wrong combination or decisions taken
may lead the firms into bankruptcy or extinction. Therefore it is essential decision for the survival of any firm
because it has a long effect in determining the prospect, development and viability of firms over a period of
time.Gambo, Ahmad, and Musa (2016) “The capital structure is the overall sources of finance used by a
company in financing its operations ranging from retained earnings to equity and debt finance. Capital structure
has been considered as one of the most important factors in firm financing policy due to its crucial role in
corporate performance”.
The objective of every seeking entity is to maximise the wealth of its shareholders and maintain good
corporate social responsibility with its host community hence the financial managers is concerned in what way
the firm can obtain its sources of finance in order to meet the need the of the various stakeholders and also in
making sure the firms continue as a going concern both in the short and long run, managers therefore will
concentrate how much should they borrow to finance the firms operations however the manager must consider
also the sources of finance available to his disposal and go for the cheapest source after considering all options.
Therefore proper care must be taking in making this crucial decisions in order balance the interest of various
stakeholders because any wrong combination of debts or equity is going to affect the performance and the value
of the firm.
In developing country like Nigeria, majority of the internal and external stakeholders do not look
critically are not interested in the capital mix of the firms because they believe that it does not contribute in
measuring its performance and does not contribute to the value of the firm (Samson &Omotunde, 2017).
Researchers have different views on capital mix in relation to the performance of an entity both in developed
and developing countries like Nigeria. Samson and Omotunde, (2017) in their study found out that capital mix
has no significant effect on return on equity. However Philip (2018) and Ibrahim (2013), have a contrary view.
Although their data only cover different sector and used data from 2002-2015 but this study used most recent
data from 2015 to 2019.

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 Capital Structure and Performance of Selected Industrial Goods Firms on the Nigerian Stock Market
In Nigeria, different researchers such as Shehu (2011), Ezeoha (2010) and Adesola (2009) to mention
but a few has researched on capital structure and its determinants although there studies focused on the entire
quoted firms of the capital market, with only a few directing their attention to specific sub-sectors of the capital
markets of developing countries like Nigeria. Any wrong capital mix may lead the firm to bankruptcy; hence the
future of capital structure decision is unknown. The determination of capital structure has been a source of
concerned by different stakeholders on which sources of finance would yield the maximum returns with lesser
risk (Akintoye, 2016; Dada &Ghazali, 2016; Gambo et al., 2016). From the above discussion thus far, we can
agree that the exact effect of capital mix on performance is yet to be established therefore further investigation
and survey within the Nigerian context is necessary.
Overtime some firms perform better than the other despite the similarities in the resources available to
them in term of assets, human capital and other resources. We thereby inferred from the above that there is the
need to determine whether high, low or zero leverage, will be the most adequate to enhance financial
performance. Therefore, we investigated the impact of capital structure on the performance of quoted industrial
goods sector on the Nigeria Stock Exchange (NSE). Therefore this study willcontribute to the existing body of
knowledge as it highlighted how corporates managers can take decisions on the appropriate capital mix in order
to maximize shareholders wealth and assist investors and other stakeholders in making informed decisions, this
will also enable government to create credit friendly policy for firms.The study also provides useful insight on
how industrial goods sectors manufacturing contribute to GDP by reducing unemployment.
Thepaper is arranged as follows: section two provides theoretical, conceptual, empirical and theoretical
literatures, section three discuss the methodology and the fourth section discusses the data analysis and
discussion of findings. While in section five is the summary of the findings, conclusion and recommendations.

II. Review of Literature

2.1 Conceptual Clarification
2.1.1 Capital Structure
The subject capital structure has been viewed by researchers from different perspective,Oluwagbemiga
(2013) also sees Capital structure refers to the combination of debt and equity capital that a firm uses to finance
its long-term operations.Nirajini and Priya (2013),alsoopined that a firm’s capital structure is the composition or
structure of its liabilities. This is also in line with Brealey and Myers (2003), as cited by Oluwagbemiga (2013)
“capital structure as the firm’s mix of different securities used in financing its investments”. We can therefore
deduce that the capital structure of a firm is what makes up the firm’sfinancial strength and its viability. Tulsian
(2009), capital structure, that is, financial structure, is referred to as the composition of non-current funds such
as debentures and other sources which include borrowings, preference shares, equity shares (including retained
earnings) in the capitalization of a company. He further stated that the aim of capital structure decision is to
measure the relationship between equity and debt. Equity in broader sense means owner’s funds which can be
raised by issuing of equity shares, preference shares and retained earnings, while debt can be raised by issuing
debentures/bonds or by taking long term borrowing.Tulsian (2009) also postulated that for an appropriate capital
structure to be decided, the capital structure must: be sufficient to influence the profit of the firm (Profitability);
involve minimum financial insolvency risk because excessive debt financing can threatens the solvency of firms
(Solvency);proactive to meet with changes in financial situations (Flexibility) and conservative such that the
debt limit is not exceeded (Conservatism).

2.1.2 Performance Overview

Many approached has been used in the past to measure and account for performance by different entity,
this has made entities to engage in different approach since there is no one to measuring performance, some may
decide to use return on Asset (ROA); Return on Equity (ROE); Earning per share (EPS) to mention but a
few.Dahiru (2013) “Financial performance is the measure of how well a firm can use its assets from its primary
business to generate revenues”.

2.1.3 Profitability
Profitability is also known as the bottom line of every financial statement and is major factor that
motivate stakeholders in taking crucial investment decisions. Owolabi and Obida (2012) “The concern of
business owners and managers all over the world is to devise a strategy of managing their day to day operations
in order to meet their obligations as they fall due and increase profitability and shareholder’s wealth”.

2.2 Empirical Review

Etale and Ekpulu (2019) revealed that performance is not influenced by capital structure, their data
range from 2009 to 2018 of Aluminum Extrusion Company PLC, therefore advice entities to use internal
sources of finance until it is exhausted before entities can employ external sources. Similarly,

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 Capital Structure and Performance of Selected Industrial Goods Firms on the Nigerian Stock Market
Uremadu&Onyekachi (2019) based their analysis on the consumer goods sector with data to know the impact of
capital structure on corporate performance, the study revealed that capital structure is not a major determinant
for firm’s performance however it influences it. Also, Oladele and Omotosho (2017) there are different views to
capital structure as a result of the different sources of funding employed by firms, their study examined the
effect on capital structure on financial performance, using data from 2004 to 2013, revealed that capital structure
have no significant effect on return on equity although have significant relationship, they also revealed that most
Nigeria firms finance their activities with more short term finance.Muchiri, Muturi, and Ngumi, (2016) their
study revealed return on asset has insignificant negative relationship with capital structure however a positive
insignificant relationship with return on asset, although their research was based on data from East Africa
Securities Exchanges covering from 2006 to 2014, they also discovered that the use of one sources of finance
has no effect on performance however the combination of internal and internal sources influences the
performance of the firms.In the work of Fredrick and Osazemen (2018) investigated capital structure as it relate
to corporate distress, their study revealed that improper matching of capital structure can lead to corporate
failure therefore encourage the use of internal sources of finance as against internal. This is not to say they are
against external funding, although when provided with two sources of funding, the internal source should be
chosen as the first option. Although their data covered manufacturing firms in Nigeria ranging from 2010 to
2016, therefore advice those at the helms of affair to be careful in planning which sources of finance to adopt.
Bashiru (2016) examined the impact of capital structure in the oil and gas industry in Nigeria with data ranging
from 2005 to 2014 and found out that capital structure influenced greatly the performance of entities and firms
should take caution in using debts in financing its activities because this has a great influence on performance.In
the work of Birru (2016) capital is needed by every entity and the source to get it, is a major concern, panel data
was used covering from 2011 to 2015, He found out that capital structure is very important, although have a
negative relationship with performance, hence firms should always monitor their debts used while trying to
achieve its objective. On their part, Oladeji, Tolulope, Ikpefan and Olokoye (2015) revealed that there capital
influenced the performance of the firms however entities should use internal source (equity) to finance its
activities, although their study was based on six major firms in the petroleum industry with data ranging from
2003 to 2012.Similarly, Akinyomi and Olagunju (2014) capital structure is the means the firms used to fund its
activities, it could be through internal financing (equity) or external financing (debts) or the use of the two
methods. They focused on manufacturing sector of the Nigerian economy using secondary data from 24 firms
selected randomly; found a negative relationship performance which in our study is measured by profitability.
This was supported byChandrasekharan (2012), for any business to continue to maximize its owner’s
values,maintain its growth, and to continue as a going concern, capital structure is very important decisions it
must consider, his study revealed that “size, age, growth, profitability and tangibility are strong determinants of
leverage in the Nigerian firms”.

Evidence of research gap

The reviewed of related literatures thus far, the area of interest for this researched have not be covered
to the best of our knowledge, some scholars have also have a contrary view on the issue, hence this has made us
delve into this study to examined the impact of capital structure on the performance of selected firms quoted in
the industrial goods sector on the NSE using data ranging from 2015 to 2019.

III. Methodology
We adopted ex-post factor to analysed secondary data of selected industrial goods sector firms quoted
on the Nigeria Stock Exchange, this approached was to ensure data used are reliable as the researchers have no
power to manipulate the data.Descriptive statistics and regression analysis was adopted by the researchers
following the specified model above using E-view 10 software. The hypotheses were tested using the analysed
result from the study; the decision rule was to reject the hypotheses if the calculated the p-value is less than 5%
(0.05).

3.1 Population of the Study

As at the time of carrying out this research, the total industrial companies listed on Nigeria Stock
Exchange are 13, and they include Austin Laz& Company Plc, Berger Paints Plc, Beta Glass Plc,BUA Cement
Plc,CAPPlc; CUTIXPlc,Dangote Cement Plc,Greif Nigeria Plc, Lafarge Africa Plc; Meyer Plc,Notore Chemical
Industry Plc,Portland Paints & Products Nigeria Plc, And Premier Paints Plc.

3.2 Sample and Sampling Techniques

Through a convenient sample Five (5) of the companies in the study population were selected to
constitute in the study sample (representing well over 30% of the study population). Thus the sample companies
include Austin Laz& Company Plc, Berger Paints Plc, CAP Plc, Dangote Cement Plc, and Portland Paints &
Products Nigeria Plc. The sampled companies were selected because they appear to gain the patronage of
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 Capital Structure and Performance of Selected Industrial Goods Firms on the Nigerian Stock Market
consumers better than most others and this can further be supported by the volume of their shares usually traded
on the stock market, other reason was the availability of data required for the study.

1.3 Model of Specification

The study adopted a model which applied by other researchers such as Ajibola, Wisdom and Qudus (2018). The
model is as follows:
ROE = 𝑓(NCD, CD, TDE)
The above was modified and transformed into regression equations as follows:
ROE = α + β1NCD + β2CD + β3TDE + µ
Where:
ROE = refers to Return on Equity, which is a dependent variable employed in measuring firms performance.
NCD = Non-current debt ratio, independent variable that serve as component of capital structure
CD = Current debt, independent variable ratio that serves as a component of capital structure
TDE = Total debt to equity ratio, independent variable ratio that serves as a component of capital
structure.
α = constant in the equation above
µ = residual
β1 – β3 = the slope of the equation or coefficient of the independent variables

IV. Results andDiscussion of Findings

Data were extracted from the published annual report of the sampled companies which are presented in
Table 1 below. These figures represent aggregate figures of the five (5) samples companies for the period
covering 2014 to 2019, the absolute aggregate figures of book values was used.

Table 1: AggregateAnnual Figures of the Study Variables

Dependent Independent
Variable Variables
Year ROE NCD CD TDE
2014 27 16.2 27 66.5
2015 28.2 26.4 67.1 72.3
2016 23.4 30.5 68.3 91.5
2017 26.1 59.1 83.3 112.8
2018 39.5 60.9 86.5 71.7
2019 38.8 53.1 62.8 72.8
Source:Researchers’ Computations from Sampled Companies’ Annual Reports, 2020

Table 2: Correlation Analysis

ROE NCD CD TDE
ROE 1.0000 0.6028 0.2726 -0.4856
NCD 0.6028 1.0000 0.7966 0.3974
CD 0.2726 0.7966 1.0000 0.5147
TDE -0.4856 0.3974 0.5147 1.0000
Source:Researchers’ Computations, 2020
Table 2 show the relationship between the dependent variable (ROE) and the independent variables (NCD. CD,
TDE) respectively, it reveals the positive correlation between variable except for TDE ratio that have negative (-
0.4856) relationship with the variable.

Table 3: Descriptive Statistics

ROE NCD CD TDE
Mean 30.50000 41.03333 65.83333 81.26667
Median 27.60000 41.80000 67.70000 72.55000
Maximum 39.50000 60.90000 86.50000 112.8000
Minimum 23.40000 16.20000 27.00000 66.50000
Std. Dev. 6.887670 19.01827 21.24671 17.66767
Skewness 0.538183 -0.131276 -1.014596 1.072760
Kurtosis 1.535713 1.324523 3.002935 2.628759
Jarque-Bera 0.825674 0.719039 1.029408 1.185269
Probability 0.661770 0.698012 0.597678 0.552869

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 Capital Structure and Performance of Selected Industrial Goods Firms on the Nigerian Stock Market
Sum 183.0000 246.2000 395.0000 487.6000
Sum Sq. Dev. 237.2000 1808.473 2257.113 1560.733
Observations 6 6 6 6
Source:Researchers’ Computations, 2020

Table 3 summarized the descriptive statistics of the Mean 30.50000, 41.03333, 65.83333, 81.26667
Median 27.60000, 41.80000, 67.70000, 72.55000, Maximum 39.50000, 60.90000, 86.50000, 112.8000,
Minimum 23.40000, 16.20000, 27.00000, 66.50000 and Standard deviation 6.887670, 19.01827, 21.24671,
17.66767 of the variables (ROE, NCD, CD and TDE) for the study respectively. The indication is that CD the
most dispersed variable in the study while ROE is the least dispersed among the variables. Jarque-Bera statistics
and the associated probability values also showed that the ROE, NCD, CD and TDE are normally distributed
with probabilities of 0.661770, 0.698012, 0.597678 and 0.552869 (which are greater than 5%) respectively.

Table 4:Regression Output

Dependent Variable: ROE
Method: Least Squares
Date: 05/25/20 Time: 04:09
Sample: 1 6
Included observations: 6

Variable Coefficient Std. Error t-Statistic Prob.

NCD 0.371740 0.037593 9.888486 0.0101

CD -0.037550 0.036017 -1.042580 0.4066
TDE -0.325084 0.028534 -11.39285 0.0076
C 44.13684 2.067791 21.34493 0.0022

R-squared 0.992129 Mean dependent var 30.50000

Adjusted R-squared 0.980322 S.D. dependent var 6.887670
S.E. of regression 0.966186 Akaike info criterion 3.003800
Sum squared resid 1.867031 Schwarz criterion 2.864973
Log likelihood -5.011400 Hannan-Quinn criter. 2.448064
F-statistic 84.03111 Durbin-Watson stat 2.076868
Prob(F-statistic) 0.011783
Source:E-view 10 output

From the analytical output in Table 4, the independent variables combined significantly explained the
variations in the dependent variable with F-statistics probability value of 0.011783 (at 5% significant level). The
R-squared (coefficient of determination) value 0.992129 indicates that 99% of changes in the dependent variable
are accounted for by the combined effect of variations in the independent variables. Also, the adjusted R-
squared value of 0.980322 indicates that the model used in testing the hypotheses for the study is a proper and
good fit, with a confidence level of approximately 98% for acceptance of the goodness of the study model.
Durbin- Watson statistics value 2.076868 is approximately equal to the 2.0 benchmark, which indicates the non-
existence of serial auto correlation among the independent variables.The regression showed that NCD is
positively statistical significant (coefficient 0.371740, p-value 0.0101) with ROE, this implies thatNCD will
help improve performance of the firms this agreed with Birru (2016), on the other hand, TDE is negatively
statistical significant (coefficient -0.325084, p-value 0.0076) which implies that increased in TDE will leads to a
decline in the performance. This agreed with Muchiri, Muturi, &Ngumi, (2016). However, CD has no
significant statistical (coefficient -0.037550, p-value 0.4066) relationship with performance this also agreed with
Etale and Ekpulu (2019), holistically the model is significant.

V. Conclusion and Recommendations

We examined the impact of capital structure and performance of selected industrial goods sector firms
quoted on the Nigeria Stock Exchange from 2014 to 2019, data were extracted from the published financial
statement of the companies, the regression showed a statistical significant relationship between capital structure
and performance, this implies that capital structure help in influencing the performance of firms, this study
concur with other researchers such as Oladeji, Tolulope, Ikpefan&Olokoye (2015) However,our study contradict
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 Capital Structure and Performance of Selected Industrial Goods Firms on the Nigerian Stock Market
with the findings ofEtale&Ekpulu (2019).Therefore,we recommended that managers of industrial goods sector
companies in deciding the sources of finance should consider Non-current debt first (NCD) because it has a
significant positive association with performance; Managers of the industrial goods sector companies in
deciding the sources of finance should consider Current debt as its last option because it does not impact on
performance; and Managers of industrial goods sector companies should properly match its debts and equity
because any improper matching will influence performance.

Further research
Further research can be carried out by interested researchers by increasing the sample size and also by using
other performance proxy variable.

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ETALE, Lyndon PhD, et. al. “Capital Structure and Performance of Selected Industrial Goods
Firms on the Nigerian Stock Market." IOSR Journal of Business and Management (IOSR-JBM),
22(7), 2020, pp. 42-48.

DOI: 10.9790/487X-2207014248 www.iosrjournals.org 48 | Page