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Monday 11 September 2017

CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE OF LISTED MANUFACTURING FIRMS IN NIGERIA

Masters Project Topics in Accounting and Finance

ABSTRACT
There exists divergence of opinion in literature on the relationship between capital structure and firms financial performance. This mix of opinions makes the direction of the relationship between debt holders and equity holders to be controversial. Therefore, this study investigated the impact of capital structure on financial performance of listed manufacturing firms in Nigeria. The study formulated four hypotheses and used generalized least square multiple regression to analyze the secondary data extracted from the annual reports and accounts of the 31 sampled firms for the period 2009 to 2014. The study found that total debt, long-term debt and short-term debt have significant impact on the financial performance of listed manufacturing firms in Nigeria. The study also found that total debt to total equity has no significant effect on the financial performance of the firms. In view of the findings, it is recommended among others that the management of listed manufacturing firms should work very hard to increase the short term debt to total assets component of their capital structure, since it has positive impact on their financial performance. Also, the firms should reduce the level of total debt to total assets and long term debt to total assets in their capital structure components, because they affect their financial performance negatively.


CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The nature and extent of relationship between capital structure and financial performance of firms have attracted attention in the literature of finance. Capital structure involves the decision about the combination of the various sources of funds a firm uses to finance its operations and capital investments. These sources include the use of long-term debt finance called debt financing, as well as preferred stock and common stock also called equity financing. One of the most important goals of financial managers is to maximize shareholders wealth through determination of the best combination of financial resources for a company and maximization of the company’s value by determining where to invest their resources. Capital structure represents the major claims to a corporation’s asset. This includes the different types of equities and liabilities (Riahi-Belkaoui, 1999). The debt-equity mix can take any of the following forms: 100% equity: 0% debt, 0% equity: 100% debt; and X% equity: Y% debt. From these three alternatives, the first option is that of the unlevered firm, that is, the firm shuns the advantage of leverage (if any). Option two is that of a firm that has no equity capital. This option may not actually be realistic or possible in the real life economic situation, because no provider of funds will invest money in a firm without equity capital. This partially explains the term “trading on equity”, that is, the equity element that is present in the firm’s capital structure that encourages the debt providers to give their scarce resources to the business. The third Option is the most realistic one in that, it combined both a certain percentage of debt and equity in the capital structure and thus, the advantages of leverage (if any) is exploited. This mix of debt and equity has long been a subject of debate in finance literature concerning its determination, evaluation and accounting.
Financial performance is the measure of how well a firm can use its assets from its primary business to generate revenues. Erasmus (2008) noted that financial performance measures like profitability and liquidity among others provide a valuable tool to stake holders which aids in evaluating the past financial performance and current position of a firm. Financial performance evaluation are designed to provide answers to a broad range of important questions, some of which include whether the company has enough cash to meet all its obligations, is it generating sufficient volume of sales to justify recent investment. Capital structure is closely linked with financial performance (Tian and Zeitun, 2007). Financial performance can be measured by variables which involve productivity, profitability, growth or, even, customers‟ satisfaction. These measures are related among each other. Financial measurement is one of the tools which indicate the financial strengths, weaknesses, opportunities and threats. Those measurements are return on investment (ROI), residual income (RI), earning per share (EPS), dividend yield, return on assets (ROA),, growth in sales, return on equity (ROE),e.t.c (Stanford, 2009).
One of the main factors that could influence the firm's performance is capital structure. Since bankruptcy costs exist, deteriorating returns occur with further use of debt in order to get the benefits of tax deduction and interest. Therefore, there is an appropriate capital structure beyond which increases in bankruptcy costs are higher than the marginal tax-sheltering benefits associated with the additional substitution of debt for equity. Firms are willing to maximise their performance, and minimise their financing cost, by maintaining the appropriate capital structure or the optimal capital structure.
Previous studies on capital structure have used different proxies to measure capital structure. The measures commonly used in the literature in form of ratios include total debt to total assets, total debt to total equity, short term debt to total assets and long term debt to total assets. Total debt to total assets is the amount of debt used to finance firms‟ assets and other capital expenditure that can improve firms‟ performance. Thus, it is expected that increasing leverage components of a firm’s capital structure may increase the level of efficiency and thereby increasing their performance. Company‟s managers who are able to identify the level of leverages as components of firms‟ capital structure are rewarded by reducing firm‟s cost of finance thereby maximizing the firm’s revenue (Zeitun & Tian, 2007). Total debt to total assets measures the amount of the total funds provided by outsiders in relation to the total assets of the firm. It shows the extent of cover for debts of a company by total assets. It described the extent to which a business or investor is using the borrowed money. Generally, investors would prefer low ratio for all debts, because the lower the ratio the better the cushion against the creditors losses in the event of liquidation. Most firms use debt to finance their operation with the hope of improving their performance. By doing so, a company increases its leverage because it can invest in business operations without increasing its equity.
Total debt to total equity is also expected to have an influence on a firm’s performance. Total debt to total equity assesses the extent to which a firm is using borrowed funds. It shows the extent to which a firm is using borrowed funds in relation to its equity. It indicates the solvency of the business and the extent of cover for external liabilities. It also measure of a company’s financial leverage calculated by dividing its total liability, by stockholders equity, it indicates what proportion of equity and debt a company is using to finance its assets (Ojo, 2012). Total debt to total equity is a measure of how much firm uses equity and debt. Investors prefer the ratio to be lower; because the lower ratio the higher the level of firms financing that is being provided by shareholders and the larger the cushion (margin of protection) in the event of shrinking asset values or outright losses. From the creditor‟s point of view, it is possible that debt to equity helps in understanding business risk management strategies and how firms determine the likelihood of default associated with firms‟ financial performance (Kurfi, 2003). Semiu and Collins (2011) see equity capital as including share-capital, share premium, reserves and surpluses (retained earnings).
Short term debt to total assets is another item in a firm’s capital structure that affects its financial performance. Short term debts to total assets affect the financial performance of a firm either negatively or positively. Short-term debt to total asset measures the relative short-term debts to total assets of a firm are to meet it financial obligation over the accounting period. Some scholars argue that the shorter the debt the better the firm is in improving its performance. Understanding the relationship between long term debt to total assets and performance of various sectors of an economy is important to all stakeholders. Long-term debt to total assets measures the relative weight of long-term debt to the capital structure (long-term financing) of the firm in long run. The level of long-term debt of a firm is also believed to be one of the forces expected to influence the performance of a firm. A firm that has a higher long-term debt as proposed by previous studies would have little resources to take care of some other objectives and vice versa (Kurfi, 2013).
As firm financial capital is an uncertain but critical resource for all firms, providers of finance are able to exert control over firms. Debt and equity are the major classes of capital structure, with debt holders and equity holders representing the two types of investors in a firm. Each of them is associated with different levels of control, benefits and risk. While debt holders exert lower control, they earn a fixed rate of return and are protected by contractual obligations with respect to their investment. Equity holders are the real owners of a firm, bearing most of the risk and correspondingly, have greater control over decisions (Aliu, 2010).
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) described as payment of high taxes, high proportions of accounts payable, large deficits in the firms cash flow and in some cases corporate dissolution. Accordingly Modigliani and Miller (1963) suggested that firms should incorporate more debt in their capital structure in order to maximize the firm‟s value which is manifested through high profits, increased share prices and efficiency in management. The capital structure theory originated from the famous work of Modigliani and Miller (M & M) (1958). They argued that, under certain conditions, the choice between debt and equity does not affect a firm‟s value and hence, the capital structure decision is irrelevant; but in a world with tax-deductible interest payment, firm value and capital structure are positively related. M & M (1958) pointed out the direction that capital structure must take by showing under what conditions the capital structure is irrelevant. Titman (2001) lists some fundamental issues that make the M & M proposition hold as: no taxes, no transaction cost, no bankruptcy cost, perfect contracting assumptions and complete and perfect market assumption. The M & M presentation became a subject of considerable debate both in theoretical and empirical research. The work of M & M has been criticized by many scholars in view of the fact that in the real world situation, the main assumptions never hold. They argued that in a „non-perfect‟ world, there are factors influencing capital structure decision of a firm.
Since the presentation of M & M‟s irrelevance propositions, a lot of issues have been raised with respect to capital structure. Many researchers have attempted to establish whether their theory is realistic and capable of resolving basic financing decision problems regarding optimal capital structure for individual firm and the effect of an appropriate financing mix on firm performance and in what condition is the choice of capital structure relevant (Aliu 2010). Their studies however, have provided different opinion on the direction of their association. The mixed and inconclusive findings provided motivation for further studies in this area to determine whether capital structure has an influence on financial performance of firms in different sectors of the economy. The fact that manufacturing firms in Nigeria frequently use leverage to finance their operation through debt or equity or both, the extent to which capital structure affects their operation has been an issue of concern. It has been argued that the fastest trend through which a nation can achieve sustainable economic growth and development is neither by the level of its endowed material resources nor that of its vast human resources but technological innovation, enterprise development and industrial capacity. In the modern world, manufacturing sector is regarded as a basis for determining a nation economic efficiency.

Arising from the strategic importance of the manufacturing sector to an economy such as Nigeria‟s, it is important for investors and shareholders to understand the effect of capital structure on the performance of manufacturing firms. This is because capital structure decision on how to finance their assets by debt or by equity will affect relationship with the final result for any given period since it influences the returns and risks of shareholders and consequently affects the market value of the shares. In view of this, it becomes imperative to study the relationship between capital structure and financial performance of manufacturing firms in Nigeria.

M.Sc Project Topics in Accounting and Finance

CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE OF LISTED MANUFACTURING FIRMS IN NIGERIA

Department: Accounting and Finance (M.Sc)
Format: MS Word
Chapters: 1 - 5, Preliminary Pages, Abstract, References, Appendices.
Delivery: Email
No. of Pages: 91

NB: The Complete Thesis is well written and ready to use. 

Price: 10,000 NGN
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