Effect of Financial Leverage on Financial Performance: A Comparative Study of Deposit Money Banks and Manufacturing Companies in Nigeria
Abstract
The study assessed effect of financial leverage on financial performance of companies. A comparative study of Nigerian Deposit Money Banks and Manufacturing Companies. The population of the study consists of 24 Deposit Money Banks and 54 Manufacturing Companies quoted on the floor of the Nigerian Stock Exchange as at 31st December 2019. A sample of ten Deposit Money Banks and ten manufacturing companies were selected from the population using convenience sampling techniques based on data availability. Secondary data from the financial results of sampled sectors between 2009-2019 was used. Financial performance (dependent variable) was determined using return on assets (ROA) as a metric, total debt ratio (TDR), total debt to equity ratio (TDER) and interest cover ratio (ICR) was used as proxy for leverage. Firm size was also included as control variable since leverage is not the only determinant of performance. Descriptive, correlation matrix and Pooled Ordinary Least square regression were used to analyse the data obtained. The study revealed that the coefficient of TDR for DMB and manufacturing companies were (-0.30 and 0.01) respectively with p-values of (0.00 and 0.76) and TDER were (-0.00 and -0.30) respectively with p-values of (0.00 and 0.00). ICR has coefficient of 1.99 and probability-value of 0.62 for Deposit Money Banks while manufacturing companies have coefficient of -1.73 with probability-value of 0.00. Firm size has coefficient of 0.02 with a p-value of 0.00 for Deposit Money Banks and manufacturing companies have coefficient of -0.12 with probability value of 0.00. The study discovered that total debt ratio and total debt-equity ratio have a strong negative effect on financial performance of selected Deposit Money Banks. Total Debt ratio has insignificant positive effect on financial performance and Total debt to equity ratio is negatively significant on financial performance of selected manufacturing companies in Nigeria. The results of the descriptive analysis indicates that 76% of the overall assets of Deposit Money Banks are financed by debts implying that selected financial institutions are highly geared while 48% of the total assets of Manufacturing Companies are financed by debts. The study concluded that leverage is a determinant of performance and therefore recommended that Deposit Money Banks should be conscious of excessive use of debt in order to improve financial performance while manufacturing companies should use debt optimally to finance their assets in order to gain the advantage of debt as stated in the trade-off theory.
References
Adegbaju, A.A, and Olokoyo, F.O. (2008) Recapitalisation and banks’ performance: A case study of Nigerian Banks. African Economic and Business Review.6(1)1-17.
Afolabi, A., Olabisi, J., Kajola, S.O. and Asaolu, T.O. (2019) Does leverage affect financial performance of Nigerian firms? Journal of Economics and Management.37(3):5-22.
Ajayi, E.O. and Araoye, E.F. (2017) The effect of capital structure on the financial performance of manufacturing firms in Nigeria (2008-2014). Journal of Accounting and Financial Management. 3(3) 37-48.
Ajibola, A., Okere, W. and Qudus, O.L. (2018) Capital structure and financial performance of listed manufacturing firms in Nigeria. Journal of Research in International Business and Management. 5(1) 81-89.
Akintola, A. (2019) Impact of leverage (financial and operating) on corporate performance of selected quoted Nigerian manufacturing firms. International Journal of Research and Innovation in Social Science. 3(9):457-461.
Akinyomi, O.J., Omokehinde, J.O. and Olurin, E.O. (2018) Effect of financial leverage on corporate performance: Evidence from Nigerian hospitality industry. Crawford Journal of Business and Social Sciences. 8(2) 15-21.
Anifowose, A.D., Soyebo, Y.A., Tanimojo, T.A. (2020) Effect of financial leverage on firm’s performance: Case of listed pharmaceutical firms in Nigeria. International Journal of Academic Accounting, Finance and Management Research. 4(4) 1-9.
Aza, I.E. (2018). The influence of financial leverage, customer deposit and capital adequacy on the financial sustainability of some selected Nigerian Micro Finance Banks. Global of Management and Business Research: C Finance 18 (3).
Bhunia, A., Mukhuti, S. and Roy, S. (2011), Financial performance analysis– A case study, Current Research Journal of Social Sciences 3(3) 269-275.
Gadzo, S.G. and Asiamah, S.K. (2018) Assessment of the relationship between leverage and performance: Am empirical study of unlisted banks in Ghana. Journal of Economics and International Finance. 10(10)123-133.
Imeokparia, L. (2015) Capital base and performance of deposit money banks in Nigeria: Pre and post consolidation era. International Journal of Management Studies and Research 3(1) 74-82.
Jeleel, A. and Olayiwola, B. (2017) Effect of leverage on firm performance in Nigeria. a case of listed chemicals and paints firms in Nigeria. Global Journal of Management and Business Research. 17(2) 15-24.
Kajola, S.O., Alao, A., Sanyaolu, W.A. and Ojurongbe, O.J. (2019) Effect of liquidity and leverage on financial performance of Nigerian listed consumer goods firms. The journal Contemporary Economy, 4(3) 91-102.
Kajola, S.O., Alao, A., Sanyaolu, W.A. and Ojurongbe, O.J. (2019) Effect of liquidity and leverage on financial performance of Nigerian listed consumer goods firms. The journal Contemporary Economy, 4(3) 91-102.
Kithandi, C.K. (2020) Financial leverage and financial performance of the energy and petroleum sector companies listed in the Nairobi Securities Exchange. International Journal of Scientific and Research Publications10(3) 559-566.
Marandu, K.R. and Sibindi, A.B. (2016) Capital structure and profitability. An empirical study of South African Banks. Corporate Ownership and Control.14(1)8-19.
Mike, J.A. (2010) Banking sector reform and the manufacturing sector: The manufacturers’ association of Nigeria perspective. Economic and Financial Review.48(4)57-65.
Mule R.K. and Mukras, M.S. (2015) Financial leverage and performance of listed firms in a frontier market: Panel evidence from Kenya. European Scientific Journal. 11(7) 534-550.
Murikwa, D.E. (2017). The relationship between leverage and financial performance of commercial banks listed at the Nairobi Security Exchange. University of Nairobi.
Okegbe, T.O, Eneh, O.M-R., Ndubuisi, A.N. (2019) Effect of firm characteristics on capital structure of deposit money banks listed on Nigerian stock. International Journal of Academic Research in Accounting, Finance and Management Sciences. 9(2) 198-210.
Okere, W., Isiaka M., & Ogunlowore A. J. (2018). Risk management and financial performance of Deposit Money Banks in Nigeria. Eur J Bus, Econ Accountancy. (6):30-31.
Okoye, G.O. (2019) Financial leverage and profitability performance of financial institutions in Nigeria. Global Journal Education, Humanities and Management Sciences.1(2) 203-225.
Pandey, I.M. (2010). Financial Management (10th ed.) New Delhi India Vikas Publishing House PVT Ltd.
Sadiq, M. N. and Sher, F. (2016) Impact of capital structure on the profitability of firms (Evidence from Automobile sector of Pakistan). Global Journal of Management and Business Research: C Finance 16(1) 61-68.
Singh, N.P. and Bagga, M. (2019) The effect of capital structure on profitability: An empirical panel data study. Jindal Journal of Business Research 8(1) 65-77.
Taqi, M., Khan, R. and Anwar, I. (2020) Financial leverage and profitability: Evidence from oil and gas sector of India. GIS Business.15(4) 665-587.
Usman, M. (2019) The impact of capital structure on financial performance of consumer goods industry in Nigeria. Open Journal of Accounting. 8,47-62.
Uzokwe, G.O. (2019) Debt financing and corporate finance performance: investigation from Nigeria quoted firms. American International Journal of Business and Management Studies. 1(1):48-59.
