THE RELATIONSHIP AND EFFECT OF CAPITAL STRUCTURE ON FINANCIAL DISTRESS OF PUBLIC QUOTED NON-FINANCIAL FIRMS IN NIGERIA

Abstract

This paper focuses on capital structure and its relationship and effect on distress of public quoted non-financial firms in Nigeria. The study's major objective is to explore the effect of capital structure on the financial distress of publicly quoted non-financial firms on the Nigeria Exchange (NGX). Independent variables, financial leverage (debt to assets), short-term debt to equity, and long-term debt to equity, were considered to represent the capital structure. The Altman Z-score was used to measure financial distress. The assumptions of trade-off theory, pecking order theory, and agency theory guided this study. The study adopted an ex post facto research design. Secondary data from the financial statements of publicly quoted non-financial firms in Nigeria from 2011 to 2021 were used. A fixed-effects regression analysis technique has been employed to help answer the hypotheses. The study discovered that converting short-term debt to equity has an insignificant positive effect on financial distress. In contrast, long-term debt to equity has an insignificant negative effect on the financial distress of publicly quoted non-financial firms in Nigeria. As a result, this study recommends considering other factors such as the operating environment not included in the analysis, which could also influence financial distress. It also recommended that businesses should promote prudent financial management.