IMPACT OF CAPITAL STRUCTURE ON THE CORPORATE PERFORMANCE OF MANUFACTURING FIRMS IN NIGERIA: A STUDY OF SELECTED FIRMS

IMPACT OF CAPITAL STRUCTURE ON THE CORPORATE PERFORMANCE OF MANUFACTURING FIRMS IN NIGERIA: A STUDY OF SELECTED FIRMS

ABSTRACT

This study is an appraisal of the impact of capital structure on the performance of manufacturing firms in Nigeria. The work attempts to examine the contributions of capital structure on corporate performance. It is prompted by the observation that the capital structure of most companies in Nigeria is sub-optimal and this accounts, in part, for the poor performance of many of the corporations, which has led some to liquidation. Data were collected through primary and secondary sources. The methodology involved the construction of multivariate models, which were analyzed using multiple regression and multiple discriminant analyses. The formulated hypotheses were tested. The results of the models analyzed show that, leverage exerts a significant impact on corporate profitability. We also found that there is a significant tax shield provided when firms undertake leverage. Moreso, there exists a significant relationship between a firm’s corporate performance and its capital structure, and the summary effect of the change in the impact of leverage on profitability with or without corporate taxation, is significant. Factors militating against the effective use of capital structure to improve corporate performance include the non-financial characteristics of the firm, the industry-specific shocks, and the institutional environment in which the firm operates. It is recommended that firms should adopt appropriate Debt/Equity ratios depending on their risk peculiarities. Efforts should be made to improve the management of capital structure variables by manufacturing corporations in Nigeria in order to improve their performance. The firms, as a matter of prudence, should establish regulations that encourage them to increase their capital base by adopting appropriate capital structures that will help improve their performance. The significance of this work lies in the finding that firms with better capital structures perform better. Its major contribution to knowledge is that we have been able to develop a capital structure Prediction model useful in the determination of Corporate Performance amongst manufacturing firms in Nigeria. The study has also shown a remarkable departure from other studies on Capital Structure.

Keywords: Capital Structure, Leverage, Tax shield, Corporate Performance, Gearing, Weighted Average cost of capital, Optimal, Tobin’s Q, Discriminant analysis, Effect models.

 

TABLE OF CONTENTS

Page

Certification —-          …      …      …      …      …      –       ii

Dedication —-                    —–                  —      –       iii

Acknowledgment                                                 –       iv

Abstract                                                             –       vi

List of Tables                                              –       –       xi

 

 

CHAPTER ONE: INTRODUCTION

1.1 Background Information–       …      …      …      …      1

1.2 Problem Statement   … …        …      —     —      —      10

1.3 Research Objectives … …        …      …      …      —      14

1.4 Research Questions … …         …      …      …      —     15

1.5 Research Hypotheses …          …      …      …      —     16

1.6 Justification Of The Study        …      …      …      …      16

1.7 Scope Of The Study        …      …      …      …      …      19

 

CHAPTER TWO: LITERATURE REVIEW

2.1.  Introduction —            —-            —-            —     24

2.2. The Concept Of Capital Structure … …      …              24

2.3. Theoretical Framework Of Capital Structure … …       26

2.3.1 The Traditional View … …     …       …… …      ..       26

2.4 The Net Operating Income Approach …     …      …      27

2.5. Capital Structure As A Measure Of Financial Health .. 29

2.5.1 Capital Ratios And Indicators …     …      …      …      32

2.6.  Capital Structure Theories … …      …      –       –       34

2.7. Capital Structure, Gearing And The Arbitrage Process 35

2.7.1 Gearing Ratios: Low And High Gearing …        …		36
2.7.2 The Effects Of Gearing On Cost Of Capital   … …		36
2.7.3 The Arbitrage Process …       …      …      …	…	38
2.7.4  Arbitrage: An Example …     …      …      …		39
2.8. The Modigliani-Miller Theorem …     …      …	…	44
2.9. Capital Structure And The M-M Theorem …	…	48
2.9.1 Consequences Of The M-M-Theorem … …	…	49
2.9.2 Implications Of The MM Theory … …      …	…	57
2.9.3       Capital Structure as Options — —       —	—	61

2.10. Application Of The MM Methodology To A Corporate Firm … 63

2.11 The Weighted Average Cost Of Capital …         …	65
2.11.1 Finding The Values Of The Components …    …	68
2.12 Financial Leverage        …      …      …      …      …	70
2.13 The Debt To Equity Ratio      …      …      …      …	77
2.13.1. Is There An Optimal Debt-Equity Ratio …     …	78
2.13.2 Additional Evaluative Debt-Equity Considerations	79
2.14. Capital Structure And Dividend Pay-out Policies	81
2.14.1 Dividends; An Introduction …      …      …      …	81
2.14.2 How Do Firms View Dividend Policy … …       …	82

2.14.3 MM Dividend Irrelevancy Without Personal Taxes… 83

2.14.4 Summary Of Factors That Could Affect Dividend Policy       85

2.15 Capital Structure Of Depository Institutions … …       86

2.16 Corporate Governance, Ownership Structure And Corporate

Performance: Th Case Of Ukraine …       …      …      –       88

2.17. Measures Of Corporate Efficiency  And Performance …… 89

2.18. Firm Performance: Analysis Of Financial Statements …      92

2.18.1 Implication Of Leverage/ Gearing Ratios…     …      –       97

2.19 Firm Performance: Accounting  Profit And Tobin’s Q… –      98

2.20 Capital Structure: The  Concept Of Ownership Structure     101 2.21 Ownership  Structure : The Issue

Of Endogenous Ownership …         …     …       ……         103

2.22 Ownership Structure And Corporate Performance …         105

2.23 The Role Of Financial Capital Structure In The East Asian Financial

Crises        …      …      …      …      …      …              108 2.24 Summary                                                                      110 CHAPTER THREE : RESEARCH METHODOLOGY 3.1 Introduction          …      …      …      …      …      …                112
3.2 Research Design …        …      …      …      …      …		112
3.3 Sample Design and Procedure for Data Collection …		115
3.4 Procedure for Data Analysis …         …      …      —		116
3.4.1. Analysis Of The Primary Data       …      …		116
3.4.2. Analysis Of The Secondary Data …        …      …		117
3.4.2.1. The Simple and Multiple Regression Analysis–		117
3.4.2.2. Variables And Model Specification       …      …		118
3.4.2.3.       Analysis of variance — –       –       –       –		121
3.4.2.4. The multiple Discriminant Analysis — — —		121
3.5.      Test of hypotheses of the study –        –       – CHAPTER FOUR:  RESULT AND DISCUSSION		122
4.1. Introduction —             —              –       –       –	–	124
4.1.1. Results — –       –       –       –       –       –       –		124
4.1.2. Presentation and analysis of primary data –    –		125
4.1.3. Analysis of Primary Data — —       —      —      –	–	127
4.1.4.     Interpretation of primary data results. —     –		134

4.1.5.     Presentation of secondary data –       –       –       —      140

4.1.6.      Analysis of secondary data and Interpretation of results.     146

4.1.7.     Test of Hypotheses. –       –       —      –       –       –       149

4.1.7.1.      Hypothesis one – –       –       –       –       –       –       149

• Analysis of effect of leverage on corporate profitability without tax  150

–  Findings  –          –        –        –        –        –        –        –        –        151 4.1.7.2.      Hypothesis Two. –       –       –               –       –         152 –  Analysis of effect of leverage and tax on corporate profitability —  153
– Findings  –          –        –        –        –        –        –        –	–	154
4.1.7.3 Hypothesis Three. – –         –       –       –       –	–	155
– Discriminant Analysis  –          –        –        –        –        –	–	156
– Findings  –          –        –        –        –        –        –        –	–	157
– Implications –      –        –        –        –        –        –        –	–	157
4.1.7.4.      Hypothesis Four –        —      –       –       –	–	158
–  Summary effect of leverage –        –        –        –        –	–	159
4.1.8.     The Institutional factors  –        –       –       –	–	162
4.2.        Discussion  – –        –       –       —      —      —   CHAPTER FIVE: CONCLUSION AND RECOMMENDATION	–	163
5.1. Conclusion –         –       –       –       –		168
5.2. Recommendations		170
References		172
Appendices		179
Appendix 1: Research Questionnaire –    –       –       –	–	179
Appendix 2 : Market statistics of the NSE  –     –       –	–	185
Appendix 3: Financial Statement of successful firms selected –		189

Appendix 4: Financial Statement of unsuccessful firms selected -201

 

CHAPTER ONE

 INTRODUCTION

1.1 BACKGROUND INFORMATION

Finance is the life wire of any business. With adequate finances firms can expand already existing business, diversify their operation through new investments, acquire new assets, and pay salaries and wages promptly among others. Its absence or insufficiency could lead to disturbance or a complete stoppage of activities in the firm. A business organization that is adequately financed and with appropriate capital structure will definitely reap the associated benefits with proper management.

 

In Nigeria today, there are about 197 companies quoted (listed) in the first tier securities market of the Nigeria stock exchange. These companies as at January 1,2007 include the following:

Banking sector – 17 (out of the 25 licensed commercial banks);

Building-materials sector – 7; Construction sector –7;

Breweries –7; Chemical & Paints –7; Agricultural sector –5;

Food, Beverages & Tobacco –13; Footwear –2; Insurance Companies – 15; Automobiles and Tyre- 6; Airline – 2; Engineering – 3; Computer/ office equipment –3; petroleum sector – 8; Printing and Publishing – 4; Textiles – 6; Health care – 11; Packaging – 9, among others (GTB Diary; 2007).

 

The methods of financing these companies differ. However, two distinct methods can be identified. These include:  (i) Equity financing, and

(ii)        Debt financing.

Some of these firms rely wholly on equity financing while most of them rely on a combination of both equity and debt financing.

 

During the periods under review, the companies in Nigeria have experienced ugly history. For instance, the financial distress that swept through the economy led to the collapse of more than 80 banks (Chigbu: 2007). This also affected other companies in the other sectors of the economy. However, the Central Bank of Nigeria (CBN) introduced reforms to increase the capital base of banks (from less than N2 billion value to a minimum of N25b in 2005) which reduced the number of banks from 135 to 80 in 2005 and now 25 in 2006 through the current mergers and acquisitions. Also, the number of Insurance companies was reduced from about 25 to 17 following the increase in the capital base of Insurance Companies from less than N2 billion in 2005 to N 5 billion in

Thus, the current reforms in the economy which emphasized dramatic increases in the capital base of companies now raises the question as to the appropriate capital structure of the manufacturing firms operating in Nigeria.

 

However, as a result the oil boom, since 2000, resulting from the dramatic increases in the International price of oil from about $20 per barrel in 2000 to up to $50 per barrel in 2006, many companies in the economy generally experienced positive growth. The growth was also attained with variations in the capital structure of these companies in terms of the debt and equity compositions. However, many companies also experienced a down-turn. For example, in January 2007, the

Corporate Affairs Commission (CAC) threatened to de-list 30,000 of the 400,000 registered companies for failing to comply with the provisions of the Companies and Allied Matters Act (CAMA) of 1990 in their operations (Financial Standard: 2007). Also, government policy shifted mostly to privatization whereby the commanding heights of the economy that were previously under public sector investment were privatized in an effort to make Nigeria, a private- sector led economy. The number of firms in the petroleum sub-sector also increased. The cost of capital in

Nigeria, including interest rate, has also remained a controversial issue.

In the area of bank lending, it has been observed that the difference in lending rate and deposit rate has generally remained very wide thereby discouraging both investment and lending (Chigbu: 2007).

 

This research therefore, investigates the relation between the leverage and the performance of corporations. The connection between capital structure and performance has been the subject of an important and ongoing debate in the corporate finance literature.

 

Capital structuring has for a long time, been a focus of attention in many academic and financial institutions that probe into this area (Cohen: 2005). Academically, the problem is appealing because it is fairly open ended and subject to controversies and criticisms. And, practically, there is great interest, especially in the areas of corporate and project finance, as well as in structured products, as there is a lot of money to be made advising firms on how to improve their capital structure.

 

The major breakthrough in capital structuring theory came with Modigliani and Miller’s (M & M) propositions (Modigliani & Miller: 1958). These, not unexpectedly, have led to a considerable amount of literature both theoretical and practical, on how to determine and locate the appropriate capital structure. Overall, the approaches range from being purely subjective to all analytical, with the former comprising qualitative descriptions and comprehensive graphs of the Weighted Average Cost of Capital  (WACC) and Firm’s Value (FV).

Although these results are mixed, one prominent finding, among others, is that the appropriate capital structure is not a unique point, but rather a range of values along the Firm’s Value (FV) or Weighted Average Cost of Capital (WACC) curves (Cal& Ghosh:2003). This, essentially, implies that it is difficult, if not impossible, for a firm to be able to achieve its optimum by simply interchanging debt, equity and assets the way the classical M&M methodology dictates. The cause of this is perhaps better attributed to a number of underlying factors and limitations; namely; credit, balance sheet constraints and financing decisions (Targgart:

1977), agency costs (Leland: 1998), debt maturity (Berglof and Von Thadden: 1994), asset’s life (Yi: 2005), firm’s size (Hutchinson: 1995); manager’s judgement and risk profile (Chu: 1996), and market dynamics (Welch: 2004, Hovakimian: 2004), to name just a few.

 

With such limitation in place, therefore, it is not surprising that firms typically deviate from M&M’s classical framework in their pursuit of the appropriate capital structure.

 

In Nigeria particularly, some of the authorities have argued that during periods of economic prosperity and recovery, that is, when the economy is expanding and firms are selling brisk, debt financing may be more appropriate, while during periods of economic fluctuations and recession or when profits are declining, the appropriate capital structure should be more of equity finance (Anyaogu: 1999; Nakamura: 1992). In reaction to this, several policies have been adopted by individual companies and government as a regulator of economic activities within the economy. These include: the Central Bank of Nigeria (CBN) Recapitalization policies (since 2004) for the Banks and Insurance Companies, the

Companies and Allied Matters Act (CAMA) 1990, the Securities and Exchange Commission  (SEC) Reforms on how companies in Nigeria should operate, among others.

 

Moreso, as the recommendations of previous authors have not fully solved the problem of inappropriate capital structure, nevertheless, it is commonly taken for granted that an appropriate capital structure, even under constrained conditions, should indeed exist and but the objective of this work to try to appraise the impact of capital structure on overall corporate performance.

 

However, judging by the performance of many companies now, the increasing phenomena of liquidations, mergers and acquisitions; the problem of optimal capital structure in Nigeria seems to persist.

Essentially, there is need to find out whether capital structure is a significant factor accounting for the corporate performance of manufacturing firms in Nigeria.

The general purpose of this study is therefore to examine the capital structures of quoted firms in Nigeria, in order to evaluate their impact on the performance of these firms.

 

This work leans more towards the analytical side, focusing on how we could use the capital structure of a corporation to serve as a useful metric to appraise a company’s performance in accordance with Cohen (2004a). We thus hope to present here a generalized analytical process for assessing the impact of capital structure on corporate performance for corporate firms in Nigeria.

Capital structure refers to the way a corporation finances itself through some combination of equity sales, equity options, bonds and loans (Http/wikipedia.org:2007). Optimal capital structure refers to the particular combination that minimizes the cost of capital while maximizing the stock price. It is in fact, the combination that maximizes the value of the firm.

A firm capitalization describes the   composition of its permanent or long-term capital, which consists of debt and equity. A healthy proportion of equity capital, as opposed to debt capital ,in a company’s capital structure is an indication of financial fitness (Loth:2006).  According to Investopedia.com (2006), capital structure means “a mix of a company’s long-term debt, specific short-term debt, common equity and preferred equity”. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure. Thus, a company’s proportion of short and long-term debt is considered when analyzing

capital structure.

 

When people refer to capital structure, they are most likely, referring to a firm’s debt-to- equity ratio, which provides insight into how risky a company is. Usually, a company more heavily financed by debt poses

greater risk, as this firm is relatively highly levered.

 

According to Harvey(1995), “there are many methods for the firm to raise required funds. But the most basic and important instruments are stocks and bonds. The firm’s mix of different securities is known as its capital structure”.

 

A natural question arises: Is there an optimal capital structure, one that allows a corporation to extract maximum values from its funds?. If so, what is the structure and on what factors does this depend? What is the optimal debt-equity ratio? For example, if you need $100 million for a project, should all this money be raised by issuing stocks, or 50% of stocks and 50% of bonds (debt-equity ratio equals 1), or some other ratios?. These are important question for further research. The identity of the factors that affect this optimum, if one exists, is important for the discipline of Financial Management.

 

In addition, attention should be given to risk, as excessive leverage can endanger the business through insolvency in adverse circumstances, and in turn adversely affect the stock price by increasing risk premium.

These and other factors were left out of the Modigliani –Miller theorem

(www.wikipedia.org: 2007).

 

Modigliani and Miller(1958) showed that the financing or capital structure decision does not matter in perfect capital markets. Their famous proposition 1 states that the total value of a firm is the same with whatever debt-equity ratio (assuming no taxes). If this is true, the basic exercise in Capital budgeting (bond valuation) can be directly applied to project evaluation for firms with different debt – equity ratios. However, in practice, capital structure does matter. The MM theory is only valid under certain conditions. If the theory is far from true, so are the conditions. An understanding of the MM theory helps us to understand those conditions, which in turn, helps us to understand why a particular capital structure is better than another. In addition, the theory tells us what kinds of market imperfections we need to look for and pay attention to.  The imperfections that are more likely to make a difference are taxes, the costs of bankruptcy and the costs of writing and enforcing complicated debt contracts.

 

1.2 PROBLEM STATEMENT

The capital structure of most companies in Nigeria is sub-optimal and thus accounts in part for inefficiency of many corporations and this has led some to liquidations and shutdown (Titman: 1984, Ukaegbu: 1994). The problem of many businesses in Nigeria has for long been traced to inappropriate capital structure in terms of the ownership capital and debt capital which formed the financing structure for managing such firms.

 

Financial management is concerned with the control of liabilities and stockholders equity, and as such with the control of assets. Since liabilities and stockholders equity are the major sources of assets, the two aspects of financial management are interrelated. This is because the following decisions concerning both must be made.

• What kind and amount of assets to be acquired and maintained.
• From what sources should the assets be sought.

 

Successful financial management therefore requires the judicious selection and administration of assets and sources.

 

A corporation with the right kinds and amount of assets may run into serious financial problems in periods of general business contraction, if it depend too much on creditors to supply the assets, that is, it may find itself with heavy debts.

 

On the other hand, a corporation that has made serious errors in acquisition and administration of assets can be saved from bankruptcy if its liabilities management has been wise. Also a corporation may suffer losses year after year due to poor asset management and yet survive long enough for the correction of its mistakes, if the creditors’ claims were held to a minimum and if most of the assets were supplied by stockholders. This is because stockholders are much more  willing than creditors to wait for the correction of mistakes.

 

The liabilities, and stockholders’ equity of a business corporation, as the sources of its assets, constitute its financial structure or capital structure. The management of liabilities and stockholders’ equity is the building of financial or capital structure. The objective of sound liability and equity management is to erect and maintain the forms of the financial structure, that is, the various combination of amounts and types of liabilities and equity that is best suited to the individual corporation.

 

To achieve this objective, various decisions are required to be made, such as:

• What proportion of the assets can be sought from creditors?
• What proportion must be obtained from stockholders?

 

• For those to be sought from creditors, what proportions to be sought for short, intermediate and longterms; and on the classes of creditors (trade suppliers, commercial banks, other classes of lenders)?
• On those to be sought from stockholders – are they to be sought from only one class or two or more, common stockholders or preferred stockholders?
• Decision on the extent to which the corporation should depend on contribution from accumulated profits, that is, retained earnings. Common stockholders are the residual owners of the business.  They neither receive promised dividends nor have any guarantee that their capital will ever be returned or refunded. Although there is no promise that any dividend will be paid on common stockholders, there is also no limit to the amount they will be paid as dividends.

 

The fundamental concepts that shape modern capital structuring theory were first put together by Modigliani & Miller (1958) in a series of propositions.  These propositions have for many years, dominated the thought process by which firms choose their leverage ratio to enhance value.

A major contribution of M&M’s proposition is that they allow one to select, via a formalized process, the right balance between debt, equity and assets that raises the overall value of a firm. Its major weakness is that it assumes a no-tax scenario.   Unfortunately, things are not so in real life, as evidenced by the fact that taxation exists and debt interest is a tax-deductible expense, whereas equity dividends are not. Large number of studies on how a firm’s leverage generally tend to affect their overall performance is lacking in Nigeria.  More so, the possible effect of a tax shield on corporate leverage and profit is yet to be ascertained on

Nigerian firms. This study tends to fill this gap.

 

1.3 OBJECTIVES OF THE STUDY

This study is set to appraise the impact of capital structure on the performance of corporate firms in Nigeria.

 

Based on the above statement of the research problem, the specific objectives of this study will include:

• To examine if there is any relationship between the capital structure and the corporate performance of manufacturing firms in

Nigeria.

• To evaluate the impact of leverage on general corporate performance.
• To assess the effects of a possible tax shield on corporate leverage and the performance of business organizations in Nigeria.
• To draw conclusions and make recommendations based on the above, for policy makers and other investors and for further education.

 

1.4 RESEARCH QUESTIONS

This research is meant to provide answers to the following questions relating to capital structure and the performance of corporate firms in Nigeria.

• To what extent is there any significant relationship between the financing structure and firm’s performance?
• To what extent does leverage exert any significant impact. on the profitability of corporate firms?
• To what extent is there any tax shield provided to firms that undertake leverage in their capital structure?

 

 

 

1.5 RESEARCH HYPOTHESES

This research is based on the following Null Hypotheses, which will be tested:

HO₁: Leverage does not exert any significant impact on the profitability of corporate firms in Nigeria.

HO₂: There is no significant difference between the effects of tax shield and leverage on company performance.

HO₃: There is no significant impact between the corporate performance and the capital structure of manufacturing firms in Nigeria.

HO₄: The summary effect of the change on the leverage-impact on corporate performance brought in by the introduction of tax is not significant.

 

1.6 JUSTIFICATION OF THE STUDY

Basically, the main objectives of firms include profit maximization and shareholders’ wealth maximization. These are achieved through the adoption of optimization strategies either by minimization of cost, increases in revenue (marginal or total) or increase at increasing rates of  revenue/ incomes and increase at a decreasing rate of costs. This is achieved by adopting a cheaper but effective, efficient and reliable forms of financing.

 

Thus the significance of this work is all embracing and cuts across the banks, the companies, the regulatory authorities, the economy, the investors, and the public in general.

To the Banks: The banks will increasingly be challenged to become more innovative in their intermediation function and especially to increase financing to the productive sector. Also the banking system will proactively be positioned to become sound and reliable catalysts for development.

To the regulatory authorities: On the part of the regulatory authorities, appropriate capital structure will further restructure the regulatory framework and strengthen the supervisory capacity to ensure a sound, stable and efficient system.

To the business organizations: This research will also benefit the business organizations in understanding better the defects, impacts, expectations and payoffs of each of the various forms of financing vis-àvis other forms of financing options.

To the economy: The changes will move the Nigerian economy forward and proactively stimulate the entire productive system. Hence, Nigeria as a country will be better positioned to be part of the global economic change.

To the general public: Nigerian with money abroad will be encouraged to repatriate their funds back home for investment. This will create investment consciousness amongst the populace, especially in the real sector of the economy.

To other researchers: This work will be very beneficial to other researchers who may wish to carry out further studies in this area.

 

Above all, corporate executives, organization development specialists, regulatory authorities, and others, who are interested in organizational efficiency, will be provided with an additional model. This will assist them as a useful guide on organization development activities.    Specifically, this investigation into the relationship between capital structure and corporate performance in Nigeria is timely, because:

 

1. The capital structure of most corporations in Nigeria has been observed to be sub-optimal.
2. There is need to incorporate the effects of tax on corporate leverage and general corporate performance.
3. Some argue that during periods of economic expansion, more of debt securities are preferable, while more of equity securities should be adopted during periods of economic decline or recession.
4. Not much have been done in this area, especially in the Nigerian situation.
5. This might be the reason why most of the companies in Nigeria are having problems and liquidating.
6. There is need to find out whether the problem of poor corporate performance is as a result of the capital structure, as well as finding ways of controlling them.
7. Practically, this is of great interest as it will save a lot of money spent on advising firms on how to improve their capital structure.
8. This calls for further studies in this area so as to find out what other factors are responsible for the problems of business organizations in Nigeria.

 

1.7 SCOPE OF THE STUDY

This work is generally designed to investigate and analyze the impact of capital structure on corporate performance for corporate firms in

Nigeria.

 

It is delimited to some selected corporate organizations, which are quoted in the First-tier securities market of the Nigerian Stock Exchange

(NSE) market. However, this study is intended to cover twenty (20) companies which will be selected from each of the sectors of the Nigerian economy, that is, at least, a company will be selected from each of the sectors of the companies listed in the First-tier securities market of the NSE.  This will be for the purpose of questionnaire administration as well as for secondary data collection.  The results obtained will be analyzed in subsequent chapters. As is common in cross-sectional studies of capital structure determinants (Cohen:2004a), we excluded the financial institutions and firms because of the differences in the ways the two types of organizations operate.

 

Also, for the twenty firms specially selected, the current position of each of their Financial Statements – including an income statement and a balance sheet, for five years – will be expunged in details. For each of these firms, both the value of debt, and, the leverage ratio, will be analyzed in details. Their Profit After Tax (PAT), Earnings Per Share (EPS), Dividend Per Share (DPS), and Net Asset Per Share (NAPS) will as well be determined and analyzed for the sake of testing our research hypotheses.

This is considered an adequate sample to represent the population of corporate organizations in Nigeria.

One major limitation of this study is the paucity of reliable and dependable data is the country as a whole.  However, effort will be made to reduce the inaccuracies to the barest minimum by using  alternative, usually reliable data from published Financial Statements  of the selected firms, and also through questionnaire administration. The study also involved spending a lot of money in the collection of statistical data through visiting the selected companies, and business centres to surf the Internet.

 

The limitations of this study thus includes such factors as:

1. Time: The researcher was faced with the problem of apportioning her limited time between writing this thesis and other personal but vital responsibilities.
2. Funding: The funding of this research was not an easy one, and is constrained by limited resources. However, with the available resources at our disposal, we were able to arrive at reasonable conclusions
3. Paucity of data: The paucity of data in this area was a handicap to the research. This is because information relating to this study is yet to have many publications researched on.
4. Attitude of respondents: Some respondents exhibit biased

attitudes in their answers. This will however be reduced given the friendly disposition of the researcher in allaying the respondents’ fears.

Sample errors: The researcher cannot claim perfect sampling technique as to remove entirely the presence of some errors in sampling. Again, the smallness of size is a limitation. The researcher will however be careful in choosing the sample and reviewing most available

literature in this field.

 

The study is presented in five chapters. Chapter one briefly lays out the background of the study and gives an insight into the meaning of the core variables – capital structure and firm’s performance as well as issues relating to the determination of the optimal capital structure. This chapter also addresses the objectives of the study and states a case for the justification of the study. It also provides the set of possible hypotheses to be tested.

 

Chapter two is a review of related literature and the analysis of other researchers scholarly views in the area of capital structure, corporate performance, and optimal capital structure.

 

The next chapter outlines the methodology used for the study which includes the research tool, and the analytical approaches to be adopted in data analysis.

 

Chapter four is the analysis of the data collected, testing of the hypothesized relationships, analyzing the process for generating the optimal capital structure, and interpretation of results.

 

Chapter five provides the summary, conclusions and recommendations

for general policy formulation and implementation.

 

IMPACT OF CAPITAL STRUCTURE ON THE CORPORATE PERFORMANCE OF MANUFACTURING FIRMS IN NIGERIA: A STUDY OF SELECTED FIRMS

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