The Effect of Capital Structure on the Performance of Listed Manufacturing Firms in Nigeria

The Effect of Capital Structure on the Performance of Listed Manufacturing Firms in Nigeria

¹Mohammed, Badamasi Idris, ²Mohammed, Jibril

¹Department of Banking and Finance, Nasarawa State University, Keffi.

²Department of Accounting, Federal University of Lafia

DOI: https://dx.doi.org/10.47772/IJRISS.2025.908000240

Received: 16 August 2025; Accepted: 22 August 2025; Published: 05 September 2025

ABSTRACT

This study investigates the impact of capital structure on the performance of listed manufacturing firms in Nigeria. As manufacturing plays a crucial role in national development, understanding the optimal mix of debt and equity financing is vital for strategic financial decisions. Drawing on secondary data from selected Nigerian manufacturing companies, the study which covers a 10 year period from 2015 to 2024, evaluates key performance indicators such as return on assets (ROA), return on equity (ROE), and profit margin in relation to leverage ratios. Using regression analysis, the research identifies the degree to which capital structure affects firm performance. Findings suggest a statistically significant relationship between capital structure and financial performance, emphasizing the need for prudent capital structure management in the Nigerian context. The study contributes to financial management literature and offers policy recommendations for firm managers and financial regulators.

INTRODUCTION

The capital structure decision remains a central issue in corporate finance, particularly in emerging markets such as Nigeria where firms face financial constraints and macroeconomic instability. Capital structure refers to the proportion of debt and equity that a firm uses to finance its operations. For manufacturing firms, which typically require substantial capital investments, determining an optimal structure is critical for long-term sustainability and profitability.

In Nigeria, the manufacturing sector plays a significant role in employment generation, value addition, and economic diversification. However, challenges such as limited access to long-term financing, volatile interest rates, and infrastructural deficits have complicated capital sourcing decisions for firms. This paper examines how capital structure decisions affect firm performance, with a specific focus on listed manufacturing firms in Nigeria.

The study seeks to answer the question: To what extent does capital structure influence the financial performance of manufacturing firms in Nigeria? By analyzing financial data from selected firms, the research aims to establish empirical relationships and draw policy implications that can enhance financial decision-making in the sector.

Objectives of the Study:

To analyze the capital structure of manufacturing firms in Nigeria.

To examine the relationship between capital structure and firm performance indicators.

To identify the optimal capital structure mix for improved performance.

Research Hypotheses:

H0: There is no significant relationship between capital structure and the financial performance of manufacturing firms in Nigeria.

H1: There is a significant relationship between capital structure and the financial performance of manufacturing firms in Nigeria.

LITERATURE REVIEW

Conceptual Framework

Capital Structure refers to the mix of debt and equity that a firm utilizes to finance its operations and growth. The optimal capital structure balances the cost and benefits of debt and equity to maximize firm value. Firm Performance is commonly assessed using financial metrics such as Return on Assets (ROA), Return on Equity (ROE), and Earnings Per Share (EPS).

Total Debt to Total Equity

The Total Debt to Equity Ratio is a financial metric used to assess the company’s total debt relative to its shareholders’ equity (Igwebuike & Onyali, 2023). This ratio is crucial in understanding the financial leverage and risk associated with a company’s capital structure. Specifically, it evaluates how much of a company’s funding is derived from debt compared to the equity invested by shareholders. Total debt includes long-term debt like loans, bonds, and other forms of debt that are due beyond one year, and short-term debt are obligations that are due within one year, such as short-term loans, accounts payable, and other current liabilities, while equity consists of the capital provided by shareholders plus any retained earnings (Rascher, 2021). A high Debt to Equity Ratio indicates that a company relies heavily on borrowed funds to finance its activities, which can signal higher financial risk (Aghaebe & Oranefo, 2024). This elevated leverage implies that a significant portion of the company’s capital comes from debt rather than equity, potentially leading to higher interest obligations and increased vulnerability to economic downturns. Conversely, a low ratio suggests that the company is less reliant on debt financing and has a more conservative approach to leveraging. Such companies might be better positioned to weather economic fluctuations due to lower financial commitments (Olaoye & Omodara, 2023).

Agency Cost Theory highlights the conflicts of interest between managers and shareholders, suggesting that debt can be used as a tool to discipline management and reduce agency costs, potentially enhancing firm performance.

Empirical Review

Empirical studies on the impact of capital structure on firm performance in Nigeria’s manufacturing sector have yielded mixed results:

Adewoye et al. (2025) investigated the effect of capital structure on financial performance of listed manufacturing companies in Nigeria. The study adopted ex-post facto research design using panel data extracted from the 26 selected listed manufacturing companies in Nigeria out of 52 listed manufacturing companies in NEG as at 31st December, 2023. Purposive and stratified sampling techniques were used to select 26 listed manufacturing companies. Panel data were extracted from the annual reports of the selected listed manufacturing companies in Nigeria from 2014 to 2023. Descriptive statistics, correlation, Variance Inflation factors and inferential statistics were used to analyze panel data. The study found that: Debt-Equity Ratio, Debt Asset Ratio, Capital Gearing Ratio, Interest Coverage and Firm Size have insignificant influence on Asset Turnover ratio with t= 0.49 (pv=0.621); -1.08 (pv=0.278); -0.06 (pv=0.952), 0.24 (pv=0.807) and 0.81 (pv=0.419).Wald statistic value of 236.24 (pv =0.000) showed that all capital structure variables have joint significant effect on Asset Turnover ratio. DER, DAR and FS have significant impact on Earnings before Interest, Tax, Depreciation and Amortization with t-statistic of 1.96 (pv=0.050); 4.48 (pv= 0.000) and 9.15 (pv=0.000) while CGR and ICR have insignificant impact on EBITDA with t-statistic value of -0.51 (pv=0.613) and 1.46 (pv=0.144) respectively. The wald test showed statistic value of 103.11 (pv=0.000) indicated that all capital structure variables have significant impact on EBITDA. The study concluded that capital structure mix have significant influence on the financial performance of the selected listed manufacturing companies in Nigeria. The study therefore recommended that listed manufacturing firms should optimally utilize the capital structures mix in order to improve their financial performance.

Organ et al (2024), examine the effect of Capital Structure on Corporate Performance of Quoted manufacturing firms in Nigerian  from  2019-2023.  Capital structure was  proxied  by  total  debt  to  total  asset,  total  debt  to  total  equity, short-term debtto total asset and long-term debt to total asset, while corporate performance was proxy by return on asset. The study adopted ex-post facto research design. Descriptive statistics, correlation, and regression analysis were used. Descriptive statistics was used to evaluate the characteristics  of  the  data:  and  checks  for  normality.  The correlation analysis was used to  evaluate  the  relationship  between  the  variables  and  to  check  for Multicollinearity.  The multiple regression analysis was used to evaluate the effect  of  the  independent  variables  on  the  dependent  variable.  The study findings, reveals that  total  debt  to  total  asset  structure,  short-term  debt  to  total  asset,  and  long-term  debt  to  total  asset structure have an insignificant effect on the corporate performance of quoted manufacturing firms in Nigeria at 5% level of  significant. While only total debt  to  total  equity  has  significant  effect  on  corporate  performance  of  quoted manufacturing firms in Nigeria at 5% level of significance.  The study concludes that total debt to total asset, total debt to total equity, short-term debt to total asset structure and long-term debt to total asset of structure of quoted manufacturing firms provided insights but statistically insignificant, while  total  debt  to  total equity  structure  of  quoted  manufacturing firms  proved  relevant  in  determining  corporate  performance  of  manufacturing  firms  in  Nigeria.  The study recommends that Managers of manufacturing firms should invest more in building their total debt to total debt structure. The study also recommends that attention should be given by  managers  to  equity  capital  structure.  Since it is positive and significant because serve as the major source of capital.

Evinemi, & Emengini. (2024). investigates the effect of firm liquidity on capital structure of manufacturing firms in Nigeria. Annual data was obtained from reports of thirty-one (35) manufacturing firms covering the period 2007-2021. The effects of liquidity on capital structure were examined using the panel Fixed/Random effect methods. The summary statistics, correlation analysis, slope heterogeneity and cross-sectional dependence were conducted as pre-estimation procedures. The study employed debt-to-equity and debt-to-asset ratios to capture capital structure, while cash conversion cycle in days was used to measure liquidity. The findings show that liquidity has negative significant relationship in explaining the debt-to-asset of manufacturing firms and no significant effect in explaining the debt-to-equity of manufacturing firms in Nigeria. The study recommends that manufacturing firms embrace innovation as a way of increasing the efficiency of the total assets. Also, manufacturing firms should formulate main policies, which support the implementation of positive cash flow.

Madumere (2023), investigated the effect of capital structure on financial performance of listed industrial goods manufacturing firms in Nigeria. The study developed three specific objectives, three research questions as well as three hypotheses. The study adopted ex-post facto research design and population of the study consists of Twelve (12) industrial goods manufacturing firms listed on the Nigerian Exchange group as at 31stDecember 2022. Ten (10) listed industrial goods manufacturing firms were selected to constitute the sample size employing purposive sampling technique for a period of years (2013 – 2022) was collated. The source of data collection was secondary data sources which were extracted from the annual reports and accounts of the firms studied. The data collected was analysed using descriptive statistics, unit root test, diagnosis test and Panel least square regression analysis with the help of eviews 12. The regression results showed that, there is a significant effect of equity capital, debt capital and retained earnings on earnings per share of listed industrial goods manufacturing firms in Nigeria. The study generally concluded that there is a significant effect of capital structure and financial performance of listed industrial goods manufacturing firms in Nigeria from 2013 to 2022. The study recommended amongst others that listed industrial goods manufacturing firms in Nigeria should use more of debt capital because it increases their financial performance in term of earnings per share.

Olaniyi et al, (2023). studied the link between capital structure and financial performance of Nigerian manufacturers. It evaluated the nexus between total debt and financial performance of listed manufacturing companies in Nigeria, the nexus between equity and financial performance of listed manufacturing firms in Nigeria Stock Exchange. The study used ex-post-facto data to investigate variable relationships. Nigerian manufacturing firms were studied. The data was taken from the company’s (2005-2020). Both descriptive and inferential statistics, such as Pearson correlation and panel regression, were used to examine the data. Return on equity, equity capital has a substantial influence on the performance of Nigerian manufacturing companies. 6.34 and 0.26 Total debt assessed by asset debt-to-equity ratio has no influence on stock market performance (p>0.6580). Sand return on equity has a positive significant influence on financial performance of Nigerian manufacturing firms by 6.331 (p=0.0000.05) and 0.117 (p=0.0070.05); long-term debt also has a positive significant effect.The study found that equity capital, total debt, and long-term debt have the potential to positively and significantly influence the financial performance of manufacturing firms in Nigeria, whereas short term debt has the potential to positively and insignificantly influence financial performance. Total asset has the potential to positively and significantly influence financial performance.

Akinrinola et al (2023), explored the effects of capital structure on financial performance of quoted manufacturing firms in Nigeria. The study used panel least square multiple regression to examine secondary data gathered from the 14 sampled organizations’ financial statements from 2011 to 2020. The null hypothesis that there is no statistically significant link between total-debt-to-total-equity and return on assets of manufacturing entities in Nigeria was accepted. The study rejected the second hypothesis relating to long-term-debt -to-total-assets. The study recommended that management of manufacturing corporations that are active on the stock market should strive to increase their long-term-debt-to-total-assets so as to improve their business operations and by extension, their financial performance. The study established that there is a beneficial link between capital structure and financial performance of manufacturing companies.

Olaoye, C. O., & Adesina, O. D. (2022), effect of capital mix on the financial performance of ten chosen manufacturing firms among companies listed on the Nigerian Exchange (NGX) for twelve years period, 2009 to 2020. Secondary data were extracted from the audited accounts and reports of the chosen firms. This research employed descriptive and inferential statistical analyses for data estimation. The results of this work reveal that debt in relation to equity (DER) has insignificant adverse effect on return on asset (ROA) of the selected firms. Contrarily, DER has a direct significant effect on return on equity (ROE) and a direct insignificant effect on the net profit margin (NPM) of the sampled manufacturing companies. Total debt to total assets (TDTA) has positive but insignificant effect on all the financial performance indicators. The study also found that short-term debt to total assets (SDTA) and long-term debt to total assets (LDTA) have negative negligble effect on all the dependent variables. The outcomes of the study imply that the management of these companies need to always be guided appropriately in their capital mix decisions in order to optimize their financial performance. Therefore, the main thrust of this study is that optimal capital structure is essential for the profitability of manufacturing companies in Nigeria.

Olayemi, O. O., & Fakayode, O. P. (2021), examined the effect of capital structure on financial performance of quoted manufacturing companies in Nigeria. The study covered ten companies for a period of seven years from 2013 to 2019. Panel data analysis was used to test the hypothesis. The independent variables used are total debt to total asset ratio (TDTAR), long-term debt to total assets (LDTAR), short-term debt to total assets (SDTAR) and total debt to total equity (TDTER) while the dependent variables are return on asset (ROA) and return on equity (ROE). The results of the study showed that SDTAR and LDTAR have positive but insignificant effects on ROA, and TDTAR has a negative significant effect on ROA and ROE respectively. Also, TDTAR and TDTER have negative insignificant effect on ROE. The study concluded that SDTAR, LDTAR, TDTER have no significant effect on ROA and ROE but TDTAR have effect on ROA. This study therefore recommended that firms should be cautious in accumulating debt that could eventually have adverse effects on their value and financial performance.

Nwala, Gimba and Oyedokun (2020) examined the impact of corporate financial policy on firm value of insurance firms in Nigeria for the period 2011 to 2017. In carrying out this study, expost-facto research design was employed and secondary data sourced from 25 insurance annual report and Nigeria Stock Exchange factbook for the period of 7 years. Pool time series data were extracted related to dividend payout, equity issuance, debt asset, equity asset, return on asset and Tobin Q was used as proxies for firm value in this study. The findings indicate that dividend payout and equity issuance have significantly impacted on firm performance (Tobin Q), the study also stated that ROA has no significant relationship with dividend payout, equity asset, debt assets and equity issuance during the period under study. It was recommended that insurance managers should devote adequate time in designing a dividend policy that will enhance firm’s performance (ROA) and shareholder value. Again, the company should review its dividend policy in order to reduce agency cost and maximize the value of the company.

Usman M. (2019), examine the impact of capital structure on the financial performance of the consumer goods industry in Nigeria. The population of the study comprised of the consumer goods companies listed on the Nigerian Stock exchange with a Sample size of six (6) companies, using filter as a sampling technique of which a period of five (5) years was used from 2012-2016. The Dependent variable of the study is financial performance proxied by return on asset (ROA), while the independent variables of the study are: Long term debt (LTD), Short term debt (STD) and shareholders’ funds (ROE). The data generated from annual report and accounts of the selected companies were analyzed by means of descriptive statistics, correlation and regression analysis using E-views 8.0. The result of the analysis was tested at 0.05 (5%) level of significance. The findings of the study show that short term debts have no significant impact on the financial performance of listed firms in the Nigeria consumer goods industry. It was also discovered that long term debts have no significant impact on the financial performance of listed firms in the Nigeria consumer goods industry. It was also discovered that Equity has significant impact on the financial performance of listed firms in the Nigeria consumer goods industry. The study recommended that in making a decision on what the composition of their capital structure will be, companies should look critically and make comparison between the cost of obtaining a particular source of capital and the benefit that can be derived from it instead of making capital structure decisions on baseless generalizations. This will help managers ensure that there will be a gain at the end of the day.

Theoretical Framework

Several theories provide insights into the relationship between capital structure and firm performance:

Trade-Off Theory

The trade-off theory is to a large extent based on the Modigliani & Miller (1963) proposition. This proposition suggests that firm value is maximized with 100% of debt-financed capital. However, such an extreme prediction is often unachievable, making the model incomplete in its predictions. Obviously, there are other factors that limit the amount of debt in a firm’s capital structure. One such factor is bankruptcy costs. Using these offsetting costs, Lopez and Vishny (2000) proposed a model where the optimal level of debt is defined by the trade-off between the tax shield from debt financing and the costs associated with riskier activity due to increased financial leverage. According to this model, the value of a firm increases as long as the marginal tax benefits are higher than marginal bankruptcy costs, yielding the optimal debt to equity ratio at the point where these two factors are equal. Myers (1984) further investigates this issue and proposes the existence of a target debt to value ratio, which is gradually pursued by a firm. Hence, Myers (1984) hypothesizes that the choice between debt and equity is not only a static process, but can rather have dynamic characteristics where firms adjust their capital structures over several periods. Under the static trade-off theory, any increase in the bankruptcy costs is associated with a reduction in the optimal level of debt, while an increase in the personal tax rate on equity, positively relates to the optimal debt level (Bradley et al., 1984). Although these propositions sound logically correct, the empirical test of this model is problematic. In the real market environment, firms operate over several periods, making the model hold only under specific assumptions. One such assumption is the absence of retained earnings that play a crucial role in capital structure decision making. In the dynamic environment on the other hand, these assumptions can be relaxed. Brennan & Schwartz (1984) and Kane et al. (1984) introduced continuous time models, where a firm is deciding on its financing across several periods.

Assuming no transaction costs but accounting for taxes, bankruptcy costs and uncertainty, such a firm would react to increased (decreased) profitability or any other adverse shock immediately and readjust its capital structure. Fischer et al. (1989) propose a more realistic theory that accounts for transaction costs, making capital structure adjustment costly. According to this model, the recapitalization process follows adrift based on the financial performance of a firm. Brennan & Schwartz (1984) showed that even a small transaction cost detains capital structure rebalancing, which explains empirical variations in the debt ratios. Different versions of the trade-off theory employ different assumptions. While one version considers the firm’s cash flow to be exogenous (Kane et al., 1984), others assume that the firm’s financing choices are related to its cash flows, and thereby consider investment and financing choices simultaneously (Brennan & Schwartz, 1984; Mello & Parsons, 1992; Titman & Wessels, 1984). Hennessy & Whited, 2005; Tserlukevich, 2008). Dividend payout policy, as well as taxation regimes, on the other hand, may also be crucial assumptions in financing decisions (Stiglitz & Weiss, 1981, Hennessy & Whited, 2005). Nevertheless, Hackbarth et al. (2007) showed that the trade-off theory is quite sufficient in explaining corporate capital structures; the fact that the dynamic trade-off theory has been modified and revised for the past 30 years raises the discussion of its reliability for modern financial markets. By relaxing different assumptions on taxes, transaction costs, payout policy, etc., different dynamic trade-off models yield somewhat different conclusions. However, while a consensus on the optimal capital structure is not reached, much of the work is still in progress, which indicates the on-going importance of the issue for modern financial theory.

Pecking Order Theory

An alternative explanation of the empirical capital structure distribution is suggested by Myers (1984), who argues over the hierarchical distribution of capital sources. In particular, he claims that firms would often prefer to utilize internal sources of financing rather than external. Debt financing, in turn, is also superior to equity, as equity issuance is least preferable for a profitable firm. Such a pecking order of funding is able to explain empirical variation in the capital structures. Profitable firms that do not issue debt as recommended by the trade-off theory, simply generate sufficient internal resources to finance their investments. Moreover, the theory of a pecking order is rather simple for understanding signaling hypotheses based on adverse selection and agency cost issues. These models suggest that a firm’s decision to issue debt or equity is dependent not only on internal costs and tax advantages, but also on the investors’ reaction and managerial incentives. Myers and Majluf (1984) suggested that asymmetric information between managers and investors would require a firm to follow the pecking order of capital structure if it wants to signal its attractiveness to the market. Any positive net present value (NPV) project that would result in increased firm growth and improved profitability would rarely be financed by new equity issues, as the current stakeholders would not like to split future profits with new ones. In contrast, if the project that requires financing may cause an increase in riskiness and higher costs, then existing shareholders would rather reallocate this risk among new stakeholders.

However, the pecking order is not as simple as it seems due to certain limitations. For example, Myers (1984) argued that in case of risk free debt, it is similar to internal sources of financing, while with introduction of risk, the debt falls somewhere in between internal and equity financing. This same proposition is described by Viswanath (1993) and Ravid & Spiegel (1997). At the same time, as suggested by Pandey (2009) there are actually multiple equilibria in the case of risky debt and the choice between them is not that obvious. A similar case with multiple equilibria arises when the information asymmetry is two-sided (Eckbo et al., 1990). Ravid and Spiegel (1997) in turn argue that a well-designed managerial contract, which is tied to the firm value, could resolve the adverse selection problem but then the question of optimal contract arises. Another possible solution for the adverse selection problem is to allow present equity holders to participate in the new equity issues, as suggested in the model of Eckbo & Masulis (1992).

METHODOLOGY

Research Design

This study employs a quantitative research design using a panel data analysis approach. The study is descriptive and explanatory in nature, aiming to describe capital structure trends in Nigerian manufacturing firms and explain the relationship between capital structure and firm performance.

Population and Sample

The population consists of all manufacturing firms listed on the Nigerian Exchange Group (NGX) as of 2024. A purposive sampling technique is adopted to select firms with complete and consistent financial data over a 10-year period (2014–2023). A total of 15 manufacturing firms are selected across various subsectors, including food and beverages, building materials, and industrial goods.

Data Source

The study relies on secondary data, which is extracted from the annual financial reports of the selected firms, as well as the Nigerian Exchange Group (NGX) Factbook, and databases such as Proshare and Bloomberg. Variables are collected for a 10-year period to ensure sufficient data points for reliable analysis.

Variables and Measurement

Model Specification

The relationship between capital structure and firm performance is modeled using panel regression analysis. The general model is specified as:

FPit​ = β0 ​+ β1​DERit ​+ β2​DARit ​+ β3​LTDRit ​+ β4​SIZEit ​+ β5​LIQit ​+ μit​

Where:

FPit​ = Financial performance of firm iii in year ttt

DER = Debt-to-equity ratio

DAR = Debt-to-asset ratio

LTDR = Long-term debt ratio

SIZE = Log of total assets

LIQ = Current ratio (liquidity)

μit​ = Error term

Estimation Technique

The study uses panel least squares regression for the analysis. The Hausman test is conducted to determine whether a fixed effects model or a random effects model is more appropriate. Multicollinearity is tested using the Variance Inflation Factor (VIF), and heteroskedasticity is addressed using robust standard errors.

Validity and Reliability

To ensure reliability, the data is sourced from audited financial reports. The models are tested for statistical assumptions, including normality, linearity, and homoscedasticity. The consistency of findings across different performance metrics (ROA, ROE, EPS) also contributes to construct validity.

Ethical Considerations

Since the study uses publicly available data, there are no direct ethical concerns. However, care is taken to accurately represent data and findings without manipulation or misrepresentation.

Descriptive Statistics

Table 1 presents the descriptive statistics for the variables used in the study across the 15 manufacturing firms from 2015 to 2024 (150 firm-year observations).

The descriptive statistics indicate moderate profitability levels across the sampled firms, with an average ROA of 8.2% and ROE of 15.6%. The average debt-to-equity ratio (DER) of 1.67 suggests that many firms rely significantly on debt financing.

Correlation Matrix

A Pearson correlation analysis was conducted to examine the preliminary relationship between variables.

The results reveal a negative and statistically significant correlation between capital structure proxies (DER, DAR, LTDR) and performance metrics (ROA, ROE, EPS), indicating that higher leverage is generally associated with lower firm performance.

Regression Results

The panel regression analysis was performed using a fixed effects model (confirmed by the Hausman test). The regression results for ROA, ROE, and EPS as dependent variables are summarized below.

Model 1: ROA as Dependent Variable

ROA = 0.112 − 0.023DER∗ − 0.017DAR∗ − 0.009LTDR + 0.004SIZE∗ + 0.008LIQ R2 = 0.47, p<0.01

Model 2: ROE as Dependent Variable

ROE = 0.194 − 0.031DER∗ − 0.012DAR − 0.014LTDR + 0.006SIZE∗ + 0.007LIQ R2 = 0.43, p<0.01

Model 3: EPS as Dependent Variable

EPS = 3.91 − 0.68DER∗ − 0.55DAR∗ − 0.39LTDR + 0.11SIZE∗ + 0.09LIQ R2 = 0.52, p<0.01

(*) Statistically significant at 5% level

DISCUSSION OF FINDINGS

The regression analysis provides strong evidence that capital structure significantly affects the financial performance of manufacturing firms in Nigeria, particularly through the debt-to-equity ratio (DER) and debt-to-asset ratio (DAR).

Negative Effect of Debt: Across all models, the coefficients for DER and DAR were negative and significant, suggesting that high leverage levels reduce profitability (ROA), shareholder returns (ROE), and earnings (EPS). This supports the Trade-Off Theory, which warns that excessive debt increases financial distress risk and lowers performance.

Long-Term Debt: Although long-term debt (LTDR) was negatively related to performance, it was not statistically significant in most models, indicating that the maturity of debt might have a weaker impact compared to total leverage levels.

Firm Size: The positive and significant coefficients for firm size indicate that larger firms tend to perform better, possibly due to economies of scale, better access to capital markets, and more diversified operations.

Liquidity: While liquidity had a positive sign, its effect was not statistically significant, suggesting it may not directly drive profitability, though it might impact financing flexibility.

These findings are consistent with prior studies such as Ojomolade et al. (2023) and Yinusa et al. (2019), which also found a negative relationship between excessive leverage and performance. The results emphasize the need for manufacturing firms in Nigeria to manage their capital structures carefully and avoid overreliance on debt financing.

CONCLUSION AND RECOMMENDATIONS

Conclusion

This study set out to examine the effect of capital structure on the financial performance of manufacturing firms in Nigeria over a ten-year period (2014–2023). The research employed panel data from 15 listed manufacturing firms, using financial ratios such as return on assets (ROA), return on equity (ROE), and earnings per share (EPS) as performance indicators, and leverage ratios such as debt-to-equity (DER), debt-to-assets (DAR), and long-term debt ratio (LTDR) as capital structure proxies.

The empirical results revealed a statistically significant and negative relationship between capital structure and firm performance. Specifically, higher levels of debt financing were associated with reduced profitability, shareholder returns, and earnings, confirming the potential risks of excessive leverage in the manufacturing sector. These findings are consistent with the trade-off and agency cost theories, which suggest that while debt can provide tax benefits, it also introduces financial risk and potential agency conflicts.

The study further observed that firm size had a positive influence on performance, indicating that larger firms may benefit from greater financial stability and operational efficiency. However, liquidity did not exhibit a statistically significant impact, suggesting that the ability to meet short-term obligations does not necessarily translate to higher profitability.

In conclusion, capital structure decisions play a critical role in shaping the financial health and competitiveness of manufacturing firms in Nigeria. Prudent management of debt levels is essential for sustaining firm performance in a dynamic and often unstable economic environment.

Recommendations

Based on the findings, the following recommendations are proposed:

Moderate Use of Debt Financing: Manufacturing firms should avoid excessive reliance on debt capital. Instead, they should aim for a balanced mix of debt and equity to optimize their cost of capital and minimize financial risk.

Strengthening Internal Financing: Firms should enhance internal financing capabilities through retained earnings and operational efficiency, reducing dependence on external debt sources.

Capital Structure Planning: Corporate financial managers should implement long-term capital structure planning that takes into account firm-specific characteristics such as size, industry dynamics, and macroeconomic factors.

Policy Incentives: Regulatory bodies such as the Central Bank of Nigeria (CBN) and the Nigerian Exchange Group (NGX) should develop policies that promote access to long-term and low-interest financing for the manufacturing sector, enabling firms to invest without excessive financial burden.

Investor Awareness: Shareholders and investors should scrutinize firms’ capital structure decisions as part of their investment evaluations, given the impact of leverage on firm value and profitability.

Further Research: Future studies can explore the role of macroeconomic variables (e.g., inflation, exchange rate volatility) and industry-specific factors on the capital structure-performance relationship. Comparative studies across different sectors would also enrich understanding.

REFERENCE

1. Akinrinola, O. O., Tomori, O. G., & Audu, S. I. (2023). Capital structure and financial performance of quoted manufacturing firms in Nigeria. International Journal of Business and Management Review, 11(3), 29-47.
2. ‘Evinemi, A. O., & Emengini, S. E. (2024). Liquidity and capital structure of quoted manufacturing firms in Nigeria. International Journal of Economics and Financial Issues, 14(1), 30–39. https://www.econjournals.com/index.php/ijefi/article/view/15946
3. Madumere, I., & Ukaegbu, G. E. (2023). CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE OF LISTED INDUSTRIAL GOODS MANUFACTURING FIRMS IN NIGERIA. BW Academic Journal, 17-17.
4. Ogan, F. E., Kalu, U. E., & Joseph, N. (2024). Effect of capital structure on financial performance of quoted manufacturing firms in Nigeria. Zede Journal of Contemporary Knowledge Development, 2(1), 113–125. https://zkdx.ch/journal/zkdx/article/view/210
5. Olaoye, C. O., & Adesina, O. D. (2022). Capital Structure and Financial Performance of Manufacturing Companies in Nigeria. Journal of Applied And Theoretical Social Sciences, 4(4), 471-491.
6. Olaniyi, T. A., Olayemi, T. A., & Adewale, A. A. (2023). Equity capital and firm performance: Evidence from the Nigerian manufacturing industry. Annals of Spiru Haret University. Economic Series, 23(1), 19–34. https://anale.spiruharet.ro/economics/article/view/1253
7. Olayemi, O. O., & Fakayode, O. P. (2021). Effect of Capital Structure on Financial Performance of Quotes Manufacturing Companies in Nigeria. European Journal of Accounting, Auditing and Finance Research, 9(5), 73-89.
8. Ojomolade, P. B., Adewale, O. A., & Olaniran, S. O. (2023). Capital structure and financial performance: Panel evidence from quoted manufacturing firms in Nigeria. African Journal of Accounting and Financial Research, 6(3), 55–70. https://abjournals.org/ajafr/papers/volume-6/issue-3/capital-structure-and-financial-performance-panel-evidence-from-quoted-manufacturing-firms-in-nigeria/
9. Olusuyi, A. E., & Felix, A. E. (2017). The Effect of Capital Structure on the Financial Performance of Manufacturing Firm’s in Nigeria (2008-2014). Journal of Accounting and Financial Management ISSN, 3(3), 2017.
10. Yinusa, O. G., Akinola, A. T., & Ogundipe, L. O. (2019). Capital structure and firm performance in Nigeria: Evidence from dynamic panel model. African Journal of Economic Review, 7(2), 40–56. https://www.ajol.info/index.php/ajer/article/view/182550