Effect of Financial Structure and Macroeconomic Fundamentals on Firm Profitability

International Journal of Research and Scientific Innovation (IJRSI) | Volume VII, Issue II, February 2020 | ISSN 2321–2705

Effect of Financial Structure and Macroeconomic Fundamentals on Firm Profitability

Gbalam Peter Eze^1*, Ekokeme, Tamaroukro Timipere^2*
1Department of Banking and Finance, Niger Delta University, Wilberforce Island, Bayelsa State, Nigeria
²University of Africa, Toru-Orua, Sagbama, Bayelsa State, Nigeria
*Corresponding Author

Abstract: – The study examined the impact of financial structure and macroeconomic fundamentals on firm profitability. This was aimed at ascertaining how financial structure and macroeconomic fundamentals influence firm profitability. The after effect research design was adopted to examine the dependent and independent variables in retrospect. Historical data spanning 2001 to 2015 was collated and estimated employing the Least Square, Fixed Effects and Random Effects estimations. The empirical results show that debt equity ratio (DER), long term debt equity ratio (LTDER), short term debt equity ratio (STDER), real GDP growth rate (RGDP), and interest rate (IntR) play critical roles in profitability of the firms. In addition, effects of financial structure are more effective when ascertaining the sensitivity of macroeconomic variables that have the potential to improve or degrade the profitability of the firms. Also the effects of firm- specific variables (SIZE and AGE) are more significant given the place of macroeconomic environment in the life of the firms. Although further observations indicate that GDP and interest rate as indicators of overall economy in relatively to their impact on firm profitability, the authors recorded insignificant impact. The result shows that both economic indicators are negatively related with the profitability of firm in a case of non-financial sector. The study conclude that, in uncertain and turbulence economy, financial structure effects on firm profitability is found to be relatively dynamic and affects other corporate decision making process differently.

Keywords: Financial Structure; Firm profitability; Macroeconomic Fundamentals; Firm-Specific Factors; Asymmetric Information.

I. INTRODUCTION

Financial structure is the combination of debt and equity capital to undertake firm’s investment decisions. The level of firm’s financial structure measured by debt ratio or debt equity ratio indicates the firm’s risk exposure (Chen & Chuang, 2009), and an unbalanced ratio may be prone to default risk (Nwude, Itiri, Agbadua & Udeh, 2016). Therefore, in financial structure decisions, there is need to ensure that marginal benefit accrued from use of debt capital outweigh marginal cost of debt. A proper balancing of debt and equity is imperative in order to ensure a better trade- off between risks and return (Khadka, 2006). In the spirit of Nwude, Itiri & Udeh (2016), most claims in financial structure decisions are hold on risks and returns inherent in employment of each financing mix available to the firm. The authors stressed further that firm’s debt equity ratio is one of the firm-specific strategies used by managers in the search for improved performance. This was also supported by the argument put forward by Afrasiabi & Ahmadina (2011) that “an issue that is strictly connected with the choice of financing sources is risk and return”.

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